TD Bank
Annual Report 2018

Plain-text annual report

T D B A N K G R O U P 2 0 1 8 A N N U A L R E P O R T Own the future 2018 Annual Report 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. 1 9 5 0 4 OUR STRATEGY Proven business model Purpose-driven Forward-focused 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 6 8 9 13 118 127 215 219 221 For more information, see the interactive TD Annual Report online by visiting www.td.com/investor-relations/ ir-homepage/annual-reports/2018 For information on TD’s commitment to the community and our environment, see the Corporate Responsibility Report online by visiting www.td.com/responsibility 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 2018 Ernst & Young LLP DIVIDENDS Direct dividend depositing: Registered 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. Beneficial shareholders should contact their intermediary. U.S. dollar dividends: For registered shareholders, 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. Registered shareholders whose dividends are sent to non-U.S. addresses can also 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 daily average exchange rate published at 16:30 (Eastern) on the fifth business day after the record date, or as otherwise advised by the Bank. Beneficial shareholders should contact their intermediary. 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: AST Trust Company (Canada) P.O. Box 700, Station B Montréal, Québec H3B 3K3 1-800-387-0825 (Canada and U.S. only) or 416-682-3860 Facsimile: 1-888-249-6189 inquiries@astfinancial.com or www.astfinancial.com/ca-en Co-Transfer Agent and Registrar: Computershare P.O. Box 505000 Louisville, KY 40233 or 462 South 4th Street, Suite 1600 Louisville, KY 40202 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/investor 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 1-866-222-3456 In the U.S. contact TD Bank, America’s Most Convenient Bank® 1-888-751-9000 French: 1-800-895-4463 Cantonese/Mandarin: 1-800-387-2828 Telephone device for the hearing impaired: 1-800-361-1180 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 Thursday, April 4, 2019 9:30 a.m. (Eastern) Design Exchange Toronto, Ontario 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 GR OUP ANNUAL REPORT 20 18 SHAREHO LDER AND INVESTOR INFO RMATI ON 221 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 Our strategy As a top 10 North American bank, TD aims to stand out from its peers by having a differentiated brand – anchored in our proven business model, and rooted in a desire to give our customers, communities and colleagues the confidence to thrive in a changing world. Proven business model Deliver consistent earnings growth, underpinned by a strong risk culture Purpose-driven Centre everything we do on our vision, purpose, and shared commitments Forward-focused Shape the future of banking in the digital age This is brought to life by the TD Framework, which embodies our culture and guides our behaviour as we execute on our business strategy of being a premier Canadian retail bank, a top U.S. retail bank, and a leading Wholesale business aligned with our retail franchise. Execute Own Innovate Think Customer Develop Our vision Be the better bank Our purpose Enrich the lives of our customers, communities and colleagues TD Framework Our shared commitments Think like a customer; provide legendary experiences and trusted advice Act like an owner; lead with integrity to drive business results and contribute to communities Execute with speed and impact; only take risks we can understand and manage Innovate with purpose; simplify the way we work Develop our colleagues; embrace diversity and respect one another TD BANK GROUP ANNUAL REP O RT 201 8 OUR STR ATEGY 1 OUR STRATEGY Proven business model Deliver consistent earnings growth, underpinned by a strong risk culture Our diversified, retail-focused business model and North American scale are powerful enablers – delivering strong results today, while allowing us to reinvest in our competitive advantages, as we build and operate businesses of the future. Our balanced approach to managing risk is evident in strong balance sheet metrics and reflects our commitment to sustaining the trust of those we serve. TD’S PREMIUM RETAIL EARNINGS MIX 1 TD’s premium earnings mix reflects our North American retail focus – lower-risk businesses with stable, consistent earnings 58% 34% 8% Canadian Retail U.S. Retail Wholesale 92% Retail 8% Wholesale Record Reported Earnings of $11.3 billion in 2018 Total Shareholder Return2 (5-year CAGR) 12.8% Safest Bank in North America, according to Global Finance $12.2 billion Adjusted earnings 9.4% Canadian peers DIVIDEND HISTORY $ 3.00 2.50 2.00 1.50 1.00 0.50 0.00 $0.19 11% Annualized Growth $2.61 3.5% 2018 Dividend Yield 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 1 Reported basis excluding Corporate segment. 2 5-year CAGR is the compound annual growth rate calculated from 2013 to 2018. Source: Bloomberg. Canadian peers include Bank of Montreal, Canadian Imperial Bank of Commerce, Royal Bank of Canada, and Scotiabank. Refer to footnotes on page 14 for information on how the results on this page are calculated. 2 TD BANK GROU P AN NUAL REPO RT 20 18 OUR STR ATE GY 2018 Snapshot NET INCOME available to common shareholders (millions of Canadian dollars) Reported Adjusted DILUTED EARNINGS PER SHARE (Canadian dollars) Reported Adjusted RETURN ON COMMON EQUITY (percent) Reported Adjusted $12,000 10,000 8,000 6,000 4,000 2,000 0 $7 6 5 4 3 2 1 0 17.0% 16.0 15.0 14.0 13.0 12.0 11.0 10.0 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 TD’s 5-year CAGR TD’s 5-year CAGR TD’s 2018 ROE 11.7% Reported & Adjusted 11.8% Reported & Adjusted 15.7% Reported 16.9% Adjusted Performance indicators focus effort, communicate our priorities, and benchmark TD’s performance as we strive to be the even Better Bank. 2018 PERFORMANCE INDICATORS RESULTS 1 • Deliver above-peer-average total shareholder return • Grow earnings per share (EPS) by 7 to 10% • Deliver above-peer-average return on risk-weighted assets • Grow revenue2 faster than expenses • 3.1% vs. Canadian peer average of -1.2% • 16.8% EPS growth • 2.75% vs. Canadian peer average of 2.36% • Total revenue growth of 8% vs. total expense growth of 4% Assets $1.3 trillion Deposits $0.9 trillion CET1 Ratio 12% Up 4.4% YoY Up 2.2% YoY Up 130 bps YoY 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 14. For peers, earnings have been adjusted on a comparable basis to exclude identified non-underlying items. 2 Revenue is net of insurance claims and related expenses. Refer to footnotes on page 14 for information on how the results on this page are calculated. TD BANK GROUP ANNUAL REP O RT 201 8 OUR STR ATEGY 3 OUR STRATEGY Purpose-driven Centre everything we do on our vision, purpose, and shared commitments Our customers are at the heart of everything we do. It’s our job to make it easy for them to bank with us – when and how they want. To deliver on this, we’re focused on providing them personalized, connected, and seamless experiences; bringing the whole bank to them with proactive advice and solutions that meet their needs and make them feel confident. Customers are navigating an increasingly complex world. We’re on a mission to deliver highly personalized advice and services to help our customers thrive. Customers now have the tools, analytics, and resources they need to make informed trading decisions and execute personalized trading strategies with the launch of the TD Wealth advanced trading dashboard and income projection tool. Making life easier for Small Business Owners With the launch of the Digital Application for Small Business Loans up to $100K in the U.S., small business owners who often are too pressed for time to come into a store now have the convenience to apply anytime, from any computer, tablet, or mobile device. All submitted applications are assigned immediately and customers receive a decision on their application in two business days. Buying a home is one of the biggest life decisions a customer will make Giving customers the confidence they need to make such an important decision is central to our end-to-end homeowner’s journey. In Canada this year we launched pre-approval and pre-qualification tools, alongside a mortgage concierge service, so we can be there for our customers from beginning to end. Our Legendary Experience Index is the survey measurement program we use to track customers’ experiences with TD. In 2018, Canadian Branch Banking achieved a score of 70.2, 2 points above target. 4 TD BANK GROU P AN NUAL REPO RT 20 18 OUR STR ATE GY When the community thrives, we all thrive. We continue to work together with our communities to drive positive change and help make an impact in ways both big and small. Supporting the transition to a low-carbon economy Research shows that climate change is a top concern across North America, and for nearly a decade, TD has been a leader in supporting the transition to a low-carbon economy. We’ve set a goal of targeting a total of $100 billion by 2030 to support the transition to a low-carbon economy through our investing and financing activities, and other programs. For the fifth consecutive year, we’re proud to be listed in the Dow Jones Sustainability World Index, which benchmarks the sustainability performance of leading companies based on environmental, social and economic performance, and we remain the only Canadian bank in the index. The Ready Commitment TD Ready Challenge Under The Ready Commitment, TD established the TD Ready Challenge – an annual initiative to identify and support scalable solutions to help drive social innovation. The inaugural challenge focused on financial security, providing a total of $10 million to ten not-for-profit organizations in Canada and the United States whose programs seek to help workers transform their existing skills and build new ones, help reduce barriers to STEM (Science, Technology, Engineering, Mathematics) training for underrepresented groups, and help harness the power of Artificial Intelligence – all aimed at preparing Canadians and Americans for the economy of the future. This year TD launched The Ready Commitment, an ambitious multi-year enterprise initiative to help open doors for a more inclusive and sustainable tomorrow. As part of this, TD is targeting a total of $1 billion by 2030 toward four critical areas: Financial Security, a more Vibrant Planet, Connected Communities and Better Health. TD aspires to link its business, philanthropy and human capital to help people feel more confident about achieving their personal goals in a changing world. Financial Security Helping increase access to the opportunities people need to improve their financial security Vibrant Planet Helping elevate the quality of our environment to ensure both people and economies can thrive Connected Communities Creating opportunities for everyone to participate and be included in their community Better Health Supporting more equitable health outcomes through investing in innovative solutions Our unique and inclusive culture is what makes TD special. We know that our people are key to our success. We aim to attract and retain the best employees, and we invest in tools and resources to help simplify their lives so they can focus on work that matters. This year we launched TD Thrive, an online platform that curates content, courses, and training to help colleagues develop skills they need to succeed in a changing world. Named Best Workplace in Canada 2018 by Great Place to Work Scored 100% for the third consecutive year on the Disability Equality Index TD recognized by the Bloomberg Gender Equality Index for the second consecutive year TD Bank named one of Forbes’ Best Employers for Diversity for 2018 TD BANK GROUP ANNUAL REP O RT 201 8 OUR STR ATEGY 5 OUR STRATEGY Forward-focused Shape the future of banking in the digital age Our goal is always to find the better way, adapting and reinventing ourselves to add value for our customers. In today’s digital age we’re focused on re-imagining the banking experience and driving engagement across our digital and physical platforms to meet our customers’ needs and expectations. Enhancing how customers get information, interact with us, and manage their money. We are investing heavily in digital platforms to deliver best-in-class experiences and drive high levels of engagement. More than 12.5 million digital customers on both sides of the border 1.1 billion total digital transactions in North America 7.5 million total active mobile customers as at August 30, 2018 Advances in technology are changing our lives, creating new opportunities for our customers, communities, and colleagues. We continue to build a talented team that has a deep understanding of technology’s potential. TD expanded its collaboration this year with University of Toronto’s Rotman School of Management with an additional $4 million to fund exploration of real-world data and analytics, and announced the opening of the TD Management Data and Analytics Lab. The success of young, innovative startups is key to our economic future, which is why TD launched a Patents for Startups Program, welcoming four initial startups to join. The patent program supports promising organizations and is the latest step towards helping young innovators thrive. Tapping into the power of Artificial Intelligence In 2018, TD acquired Layer 6, a world-renowned artificial intelligence company to help us deploy new solutions and deepen our relationship with customers. We’re already seeing the benefits and value to our community. This year we announced that Layer 6 will collaborate with University of Toronto medical researchers on developing deep learning models for population health data. Healthcare is one of the next frontiers for artificial intelligence to make a meaningful and positive impact on the lives of people across North America. 6 TD BANK GROU P AN NUAL REPO RT 20 18 OUR STR ATE GY Customers want to bank when it’s convenient for them, in the moment, and through any channel, and with the protection they’ve come to trust from TD. We take the trust customers place in us seriously, and work hard to protect their privacy. But this shouldn’t come at the cost of their time. This year, TD became the first bank in Canada to introduce Two-Step Verification, which provides an added layer of security by sending customers a unique security code via SMS (text) or voice message to their mobile device or landline when they need to verify their identity online. With this, we’ve created a better deterrent for would-be hackers. TD Voiceprint is a new technology that is being rolled out across our contact centres, using the customer’s voice to authenticate their identity more quickly and securely. Innovating to improve the experience for colleagues We’re reducing manual and repetitive tasks through innovative automation and process enhancements. For example, Financial Planners can now create client information packages in less than a minute, compared to what previously took about 20 minutes – giving them more time to focus on advice and help clients achieve their goals. TD’s mobile banking app #1 TD’s mobile banking app consistently holds top spot in the finance category on both the Google and Apple App stores (Canada) and ranks #1 among Canadian retail banking apps according to Silicon Valley-based app analytics and market data firm, App Annie. TD has the highest digital reach of any bank in Canada, the U.K., France, Spain and the U.S.1 Our mobile banking audience is up 70% YoY2 Reshaping the process to simplify our customers’ online experience Opening a direct investing account is now faster and easier than ever. Our new online account opening platform saves customers time and eliminates the need to visit a branch – onboarding a customer can now be done fully online, within 24 hours, and trading can start within 48 hours. Delivering innovative experiences our customers can trust and rely on. We are building a forward-focused bank for the modern customer. As the digital landscape evolves, we will continue to invest in technology partnerships and talent so we can deliver innovative experiences that our customers can rely on. To this end, TD announced this year it will become a founding corporate member – and first Canadian bank – to join the Canadian Institute for Cybersecurity, a hub for cyber technology research and collaboration based at the University of New Brunswick. 1 ComScore Media Metrix Multi-Platform, Canada, United States, Great Britain, Spain, France, 3 Mo. Avg. Ending July 2018. 2 Based on average monthly visitors and according to ComScore May to July third quarter 2017 vs. third quarter 2018. TD BANK GROUP ANNUAL REP O RT 201 8 OUR STR ATEGY 7 Group President and CEO’s Message the very best people. Being recognized as one of Canada’s best Diversity Employers, and home to some of the most powerful women in U.S. banking according to American Banker, reflects the results we are all aiming for at TD. TD delivered record results in 2018. Earnings surpassed $11 billion – up approximately 8 percent from last year. Revenue growth was impressive. And, as a result, we achieved nearly 16 percent in Return on Equity.1 Each business contributed to our overall success. Canadian Retail earnings were up 10 per cent – surpassing $7 billion for the first time. U.S. Retail earnings were over US$3 billion – up 28 percent.1 And once again TD Securities earned more than $1 billion. We made substantial progress in areas of strategic importance. We devoted significant investments to our omni channel strategy, including building out our digital capabilities and end-to-end customer journeys, facilitating seamless customer experiences across the Bank. We made significant operational improvements, simplifying processes to make it easier and faster for customers to do business with us – and for our colleagues to serve them better. And we improved delivery of our most significant projects, adopting agile methodologies, and executing faster and with greater impact. Our shareholders benefited from TD’s performance. The Bank’s dividend increased by 11 per cent on a full-year basis. We delivered above-average total shareholder return for the current fiscal year and lead our Canadian peers for Total Shareholder Return over the 3, 5 and 10-year periods. So, it was a terrific year for TD and for our shareholders. What sets TD apart TD has proven that it can grow year after year on a consistent basis. I believe these factors help TD stand out in the marketplace. Everything we do is centred on achieving our vision of being the Better Bank and fulfilling our purpose to enrich the lives of our customers, communities and colleagues. Customers. We know, for example, our business is not built around a mortgage; it’s built around a homeowner, who might also be a parent, an entrepreneur and an avid traveller. By knowing our customers better and understanding their needs more comprehensively, we are in a better position to bring the whole Bank to our customers and deliver real value for their entire needs. Communities. Great people want to work for companies that do great things. In 2018, we launched The Ready Commitment, our corporate citizenship platform, which is helping people and communities thrive in a changing world. This initiative is helping us forge deeper community connections as we invest and actively support a target of $1 billion in programs by 2030. We also continued to move forward with existing commitments, such as those focused on transitioning to the low-carbon economy of the future. These initiatives include a target of $100 billion in low-carbon lending, financing, asset management and other programs by 2030. Colleagues. We encourage and support our people to be their best selves and do their best work. In 2018, we established a learning platform aligned with how people develop and grow to help ensure our people are armed with the know-how they need to succeed well into the future. We also promote the principles and practices of inclusion and diversity, so we can attract and retain Our proven business model enables us to deliver consistent earnings growth, underpinned by a strong risk culture. As a top 10 bank in North America, we have diversification and scale, in a unique geographic footprint. We have a strong balance sheet, anchored by high quality assets and a rich base of customer deposits that serve as a stable source of low-cost funding. And we have a well-defined risk culture, grounded in our shared commitment to sustaining the trust of those we serve. We are forward focused, shaping the future of banking by innovating, modernizing our operations, and investing in new capabilities. Staying power does not mean staying the same. We are constantly looking for ways to adapt and reinvent ourselves while always keeping the customer at the centre of what we do. And while we have always been at the forefront of innovation, the proliferation of digital technologies provides us with opportunities to redefine how our customers see TD and the role we play in their lives. As further described in our Annual Report, we are proud that certain respected industry sources have ranked TD first in digital banking in Canada as well as having the number one banking app. We will continue to innovate across all our channels, not just online and mobile but also in our contact centres and retail footprint where we are re-imagining and re-designing the banking experience. The aim is to provide our customers and clients with the support and services they need, anytime, anywhere. We are also investing in new tools and processes to enhance our capabilities and modernize and simplify our operations, so we can make things faster, safer and easier for both our customers and colleagues. TD plans to build on our momentum in a number of ways. We will accelerate the development of digital capabilities that enable TD to deliver legendary customer experiences. We will continue re-imagine the entire experience for key customer journeys, from research to advice to fulfillment and servicing. And we will continue to enhance our capabilities so that our business decisions and processes are informed by our customers’ wants and needs. We will not only focus on what we deliver – but also on how we deliver it. This includes optimizing and simplifying end-to-end business processes and delivering business outcomes more quickly. And, of course, we will continue to empower our colleagues, so that they have the skills to adapt, develop and succeed. Helping our customers own their future All our efforts will help customers gain control of their finances, fulfill their aspirations and look forward with confidence. We are proud of the role we play in helping them own their future. The skill and passion of our more than 85,000 TD bankers around the globe was on full display in 2018. Together, we delivered for our customers, colleagues and communities while, at the same time, shaping the Better Bank of the future. We look forward to finding new and exciting ways to create value for all our key stakeholders, including our investors, in the new year and beyond. Bharat Masrani Group President and Chief Executive Officer 1 Total adjusted earnings of $12 billion, up 15 percent from 2017. Total adjusted return on equity of 17 percent. U.S. Retail adjusted earnings of US$3.4 billion, up 33 percent from 2017. Refer to footnote 1 on page 14 for information on how adjusted results are calculated. 8 TD BANK GROU P AN NUAL REPO RT 20 18 GROU P PR ESID ENT AND CE O’S M ESSA GE Chairman of the Board’s Message TD demonstrated the strength of its business model by delivering a strong financial performance this year, with reported earnings of $11.3 billion. TD also continued to deliver shareholder value, raising its dividend by more than 11% on a full-year basis, repurchasing 20 million common shares and delivering above peer average Total Shareholder Return among its major competitors in fiscal 2018, and leading TSR for the last 3, 5 and 10 years. This year TD was once again named the safest bank in North America by Global Finance, a further testament to the soundness of its business model, culture and risk management practices. Committed to keeping customers top of mind in everything it does, fostering a unique and inclusive employee culture, and working to be an environmental leader, the Bank recognizes that its success is directly tied to the success of the people and communities it serves. This orientation is reflected in the launch of The Ready Commitment; a multi-year program to help open doors for a more inclusive tomorrow by targeting four critical areas. The sustainability practices embedded in the Bank’s business model, resulted in TD being listed on the Dow Jones Sustainability World Index for the fifth consecutive year, and we remain the only Canadian bank in the index. In keeping with the Bank’s focus on customers and the Board’s commitment to leadership in corporate governance, this year TD became the first bank to consolidate oversight of conduct risk policies and practices in a single board committee. On behalf of the Board I would like to thank our Group President and CEO, Bharat Masrani, and his leadership team, as well as each of our more than 85,000 employees for their continued hard work and commitment to providing legendary service to our customers every year. I also want to thank our shareholders for their ongoing support and our customers for the opportunity to serve them every day. We look forward to continuing to earn and sustain your trust in 2019. Brian M. Levitt Chairman of the Board THE BOARD OF DIRECTORS AND ITS COMMITTEES The Board of Directors as at November 28, 2018, its committees and key committees’ responsibilities are listed below. Our Proxy Circular for the 2018 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, 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 Amy W. Brinkley Consultant, AWB Consulting, LLC, Charlotte, North Carolina Brian C. Ferguson Corporate Director and former 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, Saint-Laurent, Québec Alan N. MacGibbon Corporate Director and retired Managing Partner and Chief Executive of Deloitte LLP (Canada), Oakville, Ontario David E. Kepler Corporate Director and retired Executive Vice President, The Dow Chemical Company, Sanford, Michigan Karen E. Maidment Corporate Director and former Chief Financial and Administrative Officer, BMO Financial Group, Cambridge, Ontario Brian M. Levitt Chairman of the Board, The Toronto-Dominion Bank Lac Brome, Québec 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 Corporate Director and former President and Chief Executive Officer, Canadian National Railway Company, Montréal, Québec TD BANK GROUP ANNUAL RE POR T 2 0 18 CHA IR MA N OF THE BOARD’S MESSAGE 9 COMMITTEE MEMBERS1 KEY RESPONSIBILITIES1 Corporate Governance Committee Brian M. Levitt (Chair) William E. Bennett Karen E. Maidment Alan N. MacGibbon Responsibility for corporate governance of TD: • Identify individuals qualified to become Board members and recommend to the Board the director nominees 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 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 the Bank; • Satisfy itself that the Bank communicates effectively, both proactively and responsively, with its shareholders, other interested parties, and the public; • Oversee the Bank’s strategy and reporting on corporate responsibility for environmental and social matters; • Act as the conduct review committee for the Bank and certain of its Canadian subsidiaries that are federally regulated financial institutions, including providing oversight of conduct risk; and • Oversee the evaluation of the Board and Committees. Human Resources Committee Karen E. Maidment (Chair) Amy W. Brinkley Mary Jo Haddad Brian M. Levitt Nadir H. Mohamed 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 the Bank’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; • Monitor the Bank’s compensation strategy, plans, policies, and practices for alignment to the Financial Stability Board Principles for Sound Compensation Practices and Implementation Standards, including the appropriate consideration of risk; • 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 and recommend the CEO succession plan to the Board of Directors for approval; • Produce a report on compensation which is published in the Bank’s annual proxy circular, and review, as appropriate, any other related major public disclosures concerning compensation; and • Oversee strategy, design and management of the Bank’s employee pension, retirement savings, and benefit plans. Risk Committee William E. Bennett (Chair) Amy W. Brinkley Colleen A. Goggins David E. Kepler Alan N. MacGibbon Karen E. Maidment Supervising the management of risk of the Bank: • 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 the Bank is exposed; • Review and recommend the Bank’s Enterprise Risk Appetite Statement and related measures for approval by the Board and oversee the Bank’s major risks as set out in the ERF; • Review the Bank’s risk profile against Risk Appetite measures; and • Provide a forum for “big-picture” analysis of an enterprise view of risk, including considering trends, and current and emerging risks. Audit Committee Alan N. MacGibbon2 (Chair) William E. Bennett2 Brian C. Ferguson2 Jean-René Halde Irene R. Miller2 Claude Mongeau2 Supervising the quality and integrity of the Bank’s financial reporting and compliance requirements: • Oversee reliable, accurate, and clear financial reporting to shareholders; • Oversee the effectiveness of internal controls, including internal controls over financial reporting; • Directly responsible for the selection, compensation, retention and oversight of the work of the shareholders’ auditor – the shareholders’ auditor reports directly to this Committee; • Receive reports from the shareholders’ auditor, Chief Financial Officer, Chief Auditor, Chief Compliance Officer, Chief Anti-Money Laundering Officer, and Bank Secrecy Act Officer, and evaluate the effectiveness and independence of each; • Oversee the establishment and maintenance of policies and programs reasonably designed to achieve and maintain the Bank’s compliance with the laws and regulations that apply to it; and • Act as the Audit Committee for certain subsidiaries of the Bank that are federally regulated financial institutions. 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 2018 Annual Information Form. 1 As at November 28, 2018 2 Designated Audit Committee Financial Expert 10 TD BANK GROU P AN NUAL REPO RT 20 18 CHAIR MA N OF THE BOA RD ’S M ESS AGE  Enhanced Disclosure Task Force The Enhanced Disclosure Task Force (EDTF) was established by the Financial Stability Board in 2012 to identify fundamental disclosure principles, recommendations and leading practices to enhance risk disclosures of banks. The index below includes the recommendations (as published by the EDTF) and lists the location of the related EDTF disclosures presented in the 2018 Annual Report or the 2018 fourth quarter Supplemental Financial Information (SFI), or Supplemental Regulatory Disclosures (SRD). Information on TD’s website, SFI, and SRD is not and should not be considered incorporated herein by reference into the 2018 Annual Report, Management’s Discussion and Analysis, or the Consolidated Financial Statements. TYPE OF RISK TOPIC EDTF DISCLOSURE ANNUAL REPORT PAGE SFI SRD General Risk Governance and Risk Management and Business Model Capital Adequacy and Risk Weighted Assets Liquidity 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Present all related risk information together in any particular report. Refer to below for location of disclosures The bank’s risk terminology and risk measures and present key parameter values used. Describe and discuss top and emerging risks. Outline plans to meet each new key regulatory ratio once applicable rules are finalized. Summarize the bank’s risk management organization, processes, and key functions. Description of the bank’s risk culture and procedures applied to support the culture. Description of key risks that arise from the bank’s business models and activities. Description of stress testing within the bank’s risk governance and capital frameworks. 71-76, 81, 87, 89-91, 101-103 67-71 62-63, 95-96, 98 72-75 71-72 61, 71, 76-103 60, 75-76, 84, 101 Pillar 1 capital requirements and the impact for global systemically important banks. 57-59, 63, 211 Composition of capital and reconciliation of accounting balance sheet to the regulatory balance sheet. 57 Flow statement of the movements in regulatory capital. Discussion of capital planning within a more general discussion of management’s strategic planning. 58-60, 101 Analysis of how RWA relate to business activities and related risks. 60-61 4-7 Analysis of capital requirements for each method used for calculating RWA. 77-79, 81, 83-84 Tabulate credit risk in the banking book for Basel asset classes and major portfolios. Flow statement reconciling the movements of RWA by risk type. Discussion of Basel III back-testing requirements. The bank’s management of liquidity needs and liquidity reserves. 80, 84, 89 91-93 1-2, 5 1-2, 4 3 6 15-18, 20 7-8 24-27 TD BANK GROUP ANNUAL RE POR T 2 0 18 ENH AN C ED DIS CLOSURE TASK FORCE 11 TYPE OF RISK TOPIC EDTF DISCLOSURE ANNUAL REPORT PAGE SFI SRD Funding Market Risk Credit Risk Other Risks 19 20 21 22 23 24 25 26 27 28 29 30 31 Encumbered and unencumbered assets in a table by balance sheet category. Tabulate consolidated total assets, liabilities and off-balance sheet commitments by remaining contractual maturity at the balance sheet date. Discussion of the bank’s funding sources and the bank’s funding strategy. Linkage of market risk measures for trading and non-trading portfolio and balance sheet. Breakdown of significant trading and non-trading market risk factors. Significant market risk measurement model limitations and validation procedures. Primary risk management techniques beyond reported risk measures and parameters. Provide information that facilitates users’ understanding of the bank’s credit risk profile, including any significant credit risk concentrations. Description of the bank’s policies for identifying impaired loans. Reconciliation of the opening and closing balances of impaired loans in the period and the allowance for loan losses. Analysis of the bank’s counterparty credit risks that arises from derivative transactions. Discussion of credit risk mitigation, including collateral held for all sources of credit risk. Description of ‘other risk’ types based on management’s classifications and discuss how each one is identified, governed, measured and managed. 94, 204 98-100 97-98 82 82, 84-87 83-87, 89 83-87 44-57, 76-81, 162-169, 178, 180-182, 209-210 52, 130-131, 137-138, 168 15-33 1-27 49, 165-167 19, 23-24 79-80, 147, 174-175, 178, 180-182 80, 134, 147 87-90, 101-103 19, 21 32 Discuss publicly known risk events related to other risks. 70-71, 202-204 12 TD BANK GROU P AN NUAL REPO RT 20 18 ENH ANCE D DIS CLOS URE TASK F ORC E 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, 2018, 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, 2018. This MD&A is dated November 28, 2018. 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 period. Caution Regarding Forward-Looking Statements 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 2017 FINANCIAL RESULTS OVERVIEW Summary of 2017 Performance 2017 Financial Performance by Business Line 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 Policies and Estimates Current and Future Changes in Accounting Policies Controls and Procedures ADDITIONAL FINANCIAL INFORMATION 13 19 20 21 22 23 23 25 28 32 36 39 40 41 43 44 57 64 66 67 67 71 104 108 109 110 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, the Management’s Discussion and Analysis (“2018 MD&A”) in the Bank’s 2018 Annual Report under the heading “Economic Summary and Outlook”, for the Canadian Retail, U.S. Retail, and Wholesale Banking segments under headings “Business Outlook and Focus for 2019”, and for the Corporate segment, “Focus for 2019”, and in other statements regarding the Bank’s objectives and priorities for 2019 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”, “would”, “should”, “believe”, “expect”, “anticipate”, “intend”, “estimate”, “plan”, “goal”, “target”, “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, interest rate, and credit spreads), 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 long-term and shorter-term strategic priorities, including the successful completion of acquisitions and strategic plans; the ability of the Bank 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 communications 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, capital guidelines and liquidity regulatory guidance, and the Bank recapitalization “bail-in” regime; exposure related to significant litigation and regulatory matters; increased competition from incumbents and non-traditional competitors, including Fintech and big technology competitors; changes to the Bank’s credit ratings; changes in currency and interest rates (including the possibility of negative 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 2018 MD&A, as may be updated in subsequently filed quarterly reports to shareholders and news releases (as applicable) related to any events or transactions or events discussed under the heading “Significant and Subsequent Events, and Pending Acquisitions” 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 2018 MD&A under the headings “Economic Summary and Outlook”, for the Canadian Retail, U.S. Retail, and Wholesale Banking segments, “Business Outlook and Focus for 2019”, and for the Corporate segment, “Focus for 2019”, each as may be 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. 13 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 1 FINANCIAL HIGHLIGHTS (millions of Canadian dollars, except where noted) Results of operations Total revenues – reported Total revenues – adjusted1 Provision for credit losses2 Insurance claims and related expenses Non-interest expenses – reported Non-interest expenses – adjusted1 Net income – reported Net income – adjusted1 Financial positions (billions of Canadian dollars) Total loans net of allowance for loan losses Total assets Total deposits Total equity Total Common Equity Tier 1 Capital risk-weighted assets3 Financial ratios Return on common equity – reported Return on common equity – adjusted1,4 Efficiency ratio – reported Efficiency ratio – adjusted1 Provision for credit losses as a % of net average loans and acceptances5 Common share information – reported (Canadian dollars) Per share earnings Basic Diluted Dividends per common share Book value per share Closing share price6 Shares outstanding (millions) Average basic Average diluted End of period Market capitalization (billions of Canadian dollars) Dividend yield7 Dividend payout ratio Price-earnings ratio Total shareholder return (1-year)8 Common share information – adjusted (Canadian dollars)1 Per share earnings Basic Diluted Dividend payout ratio Price-earnings ratio Capital ratios Common Equity Tier 1 Capital ratio3 Tier 1 Capital ratio3 Total Capital ratio3 Leverage ratio 2018 2017 2016 $ 38,834 38,923 2,480 2,444 20,137 19,885 11,334 12,183 $ 646.4 1,334.9 851.4 80.0 435.6 $ 36,149 35,946 2,216 2,246 19,366 19,092 10,517 10,587 $ 612.6 1,279.0 832.8 75.2 435.8 $ 34,315 34,308 2,330 2,462 18,877 18,496 8,936 9,292 $ 585.7 1,177.0 773.7 74.2 405.8 15.7% 16.9 51.9% 51.1 0.39 14.9% 15.0 53.6% 53.1 0.37 13.3% 13.9 55.0% 53.9 0.41 $ 6.02 6.01 2.61 40.50 73.03 1,835.4 1,839.5 1,828.3 $ 133.5 $ 3.5% 43.3 12.2 3.1 6.48 6.47 40.2% 11.3 12.0% 13.7 16.2 4.2 $ 5.51 5.50 2.35 37.76 73.34 1,850.6 1,854.8 1,839.6 $ 134.9 $ 3.6% 42.6 13.3 24.8 5.55 5.54 42.3% 13.2 10.7% 12.3 14.9 3.9 $ 4.68 4.67 2.16 36.71 60.86 1,853.4 1,856.8 1,857.2 $ 113.0 $ 3.9% 46.1 13.0 17.9 4.88 4.87 44.3% 12.5 10.4% 12.2 15.2 4.0 1 The Toronto-Dominion Bank (“TD” or the “Bank”) prepares its Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS), the current Generally Accepted Accounting Principles (GAAP), and refers to results prepared in accordance with IFRS as the “reported” results. The Bank also utilizes non-GAAP financial measures to arrive at “adjusted” results to assess each of its businesses and to measure overall Bank performance. To arrive at adjusted results, the Bank removes “items of note”, from reported results. Refer to the “Financial Results Overview” in 2018 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. 2 Effective November 1, 2017, amounts were prepared in accordance with IFRS 9, Financial Instruments (IFRS 9). Prior period comparatives were prepared in accordance with IAS 39. Financial Instruments: Recognition and Measurement (IAS 39) and have not been restated. scalars for inclusion of CVA for Common Equity Tier 1 (CET1), Tier 1, and Total Capital RWA are 80%, 83%, and 86%, respectively. For fiscal 2017, the scalars were 72%, 77%, and 81%, respectively. For fiscal 2016, the scalars were 64%, 71%, and 77%, respectively. For fiscal 2016 and 2017, RWA for all ratios were the same due to the regulatory floor which was based on Basel I risk weights. For fiscal 2018, the regulatory floor is based on Basel II standardized risk weights and is no longer triggered resulting in a separate RWA for each ratio due to the CVA scalar. 4 Adjusted return on common equity is a non-GAAP financial measure. Refer to the “Return on Common Equity” section of this document for an explanation. 5 Excludes acquired credit-impaired (ACI) loans, debt securities classified as loans (DSCL) under IAS 39, and debt securities at amortized cost (DSAC) and debt securities at fair value through other comprehensive income (DSOCI) under IFRS 9. 6 Toronto Stock Exchange (TSX) closing market price. 7 Dividend yield is calculated as the dividend per common share paid during the year 3 Each capital ratio has its own risk-weighted assets (RWA) measure due to the divided by the daily average closing stock price during the year. Office of the Superintendent of Financial Institutions Canada (OSFI)-prescribed scalar for inclusion of the Credit Valuation Adjustment (CVA). For fiscal 2018, the 8 TSR is calculated based on share price movement and dividends reinvested over a trailing one-year period. 14 TD BANK GROUP ANNUAL REPORT 2018 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” or the “Bank”). TD is the sixth largest bank in North America by branches and serves more than 25 million customers in three key businesses operating in a number of locations in financial centres around the globe: Canadian Retail, which includes the results of the Canadian personal and commercial banking, wealth and insurance businesses; U.S. Retail, which includes the results of the U.S. personal and business banking operations, wealth management services, and the Bank’s investment in TD Ameritrade; and Wholesale Banking. TD also ranks among the world’s leading online financial services firms, with more than 12 million active online and mobile customers. TD had $1.3 trillion in assets on October 31, 2018, and 84,383 average full-time equivalent employees in fiscal 2018. The Toronto-Dominion Bank trades under the symbol “TD” on the Toronto and New York Stock Exchanges. HOW THE BANK REPORTS The Bank prepares its Consolidated Financial Statements in accordance with IFRS, the current generally accepted accounting principles (GAAP), and refers to results prepared in accordance with IFRS as “reported” results. The Bank also utilizes non-GAAP financial measures referred to as “adjusted” results to assess each of its businesses and to measure the Bank’s overall performance. To arrive at adjusted results, the Bank removes “items of note”, 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 in Table 3. As explained, adjusted results differ 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’s U.S. strategic cards portfolio comprises of agreements with certain U.S. retailers pursuant to which TD is the U.S. issuer of private label and co-branded consumer credit cards to their U.S. customers. Under the terms of the individual agreements, the Bank and the retailers share in the profits generated by the relevant portfolios after credit losses. Under IFRS, TD is required to present the gross amount of revenue and provisions for credit losses related to these portfolios in the Bank’s Consolidated Statement of Income. At the segment level, the retailer program partners’ share of revenues and credit losses is presented in the Corporate segment, with an offsetting amount (representing the partners’ net share) recorded in Non-interest expenses, resulting in no impact to Corporate’s reported Net income (loss). The Net income (loss) included in the U.S. Retail segment includes only the portion of revenue and credit losses attributable to TD under the agreements. Effective November 1, 2017, the Bank adopted IFRS 9, which replaces the guidance in IAS 39. Refer to Note 2 and Note 4 of the 2018 Consolidated Financial Statements for a summary of the Bank’s accounting policies as it relates to IFRS 9. Under IFRS 9, the current period provision for credit losses (PCL) for performing (Stage 1 and Stage 2) and impaired (Stage 3) financial assets, loan commitments, and financial guarantees is recorded within the respective segment. Under IAS 39 and prior to November 1, 2017, the PCL related to the collectively assessed allowance for incurred but not identified credit losses that related to the Canadian Retail and Wholesale Banking segments was recorded in the Corporate segment. Prior period results have not been restated. PCL on impaired financial assets includes Stage 3 PCL under IFRS 9 and counterparty-specific and individually insignificant PCL under IAS 39. PCL on performing financial assets, loan commitments, and financial guarantees include Stage 1 and Stage 2 PCL under IFRS 9 and incurred but not identified losses under IAS 39. 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. The Bank has made the decision not to restate comparative period financial information and has recognized any measurement differences between the previous carrying amount and the new carrying amount on November 1, 2017 through an adjustment to opening retained earnings. As such, fiscal 2018 results reflect the adoption of IFRS 9, while prior periods reflect results under IAS 39. U.S. Tax Reform On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “U.S. Tax Act”) which made broad and complex changes to the U.S. tax code. The reduction of the U.S. federal corporate tax rate enacted by the U.S. Tax Act resulted in an adjustment during 2018 to the Bank’s U.S. deferred tax assets and liabilities to the lower base rate of 21% as well as an adjustment to the Bank’s carrying balances of certain tax credit- related investments and its investment in TD Ameritrade. The Bank finalized its assessment of the implications of the U.S. Tax Act during 2018 and recorded a net charge to earnings of $392 million (US$319 million) for the year ended October 31, 2018. The lower corporate tax rate had and will have a positive effect on TD’s current year and future earnings. The amount of the benefit may vary due to, among other things, changes in interpretations and assumptions the Bank has made, guidance that may be issued by applicable regulatory authorities, and actions the Bank may take to reinvest some of the savings in its operations. The following table provides the operating results on a reported basis for the Bank. T A B L E 2 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 TD Ameritrade Provision for income taxes Equity in net income of an investment in TD Ameritrade Net income – reported Preferred dividends Net income available to common shareholders and non-controlling interests in subsidiaries Attributable to: Common shareholders Non-controlling interests 2018 $ 22,239 16,595 38,834 2,480 2,444 20,137 13,773 3,182 743 11,334 214 $ 11,120 2017 $ 20,847 15,302 36,149 2,216 2,246 19,366 12,321 2,253 449 10,517 193 $ 10,324 2016 $ 19,923 14,392 34,315 2,330 2,462 18,877 10,646 2,143 433 8,936 141 $ 8,795 $ 11,048 72 $ 10,203 121 $ 8,680 115 15 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 3 NON-GAAP FINANCIAL MEASURES – Reconciliation of Adjusted to Reported Net Income (millions of Canadian dollars) 2018 2017 2016 Operating results – adjusted Net interest income Non-interest income1 Total revenue Provision for credit losses Insurance claims and related expenses Non-interest expenses2 Income before income taxes and equity in net income of an investment in TD Ameritrade Provision for (recovery of) income taxes Equity in net income of an investment in TD Ameritrade3 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 Pre-tax adjustments of items of note Amortization of intangibles4 Charges associated with the Scottrade transaction5 Impact from U.S. tax reform6 Dilution gain on the Scottrade transaction7 Loss on sale of the Direct Investing business in Europe8 Fair value of derivatives hedging the reclassified available-for-sale securities portfolio9 Impairment of goodwill, non-financial assets, and other charges10 Provision for (recovery of) income taxes for items of note Amortization of intangibles4,11 Charges associated with the Scottrade transaction5 Impact from U.S. tax reform6 Dilution gain on the Scottrade transaction7 Loss on sale of the Direct Investing business in Europe8 Fair value of derivatives hedging the reclassified available-for-sale securities portfolio9 Impairment of goodwill, non-financial assets, and other charges10 Total adjustments for items of note Net income available to common shareholders – reported $ 22,239 16,684 38,923 2,480 2,444 19,885 14,114 2,898 967 12,183 214 11,969 72 11,897 (324) (193) (48) – – – – (55) (5) 344 – – – – (849) $ 11,048 $ 20,847 15,099 35,946 2,216 2,246 19,092 12,392 2,336 531 10,587 193 10,394 121 10,273 (310) (46) – 204 (42) 41 – (78) (10) – – (2) 7 – (70) $ 10,203 $ 19,923 14,385 34,308 2,330 2,462 18,496 11,020 2,226 498 9,292 141 9,151 115 9,036 (335) – – – – 7 (111) (89) – – – – 1 5 (356) $ 8,680 1 Adjusted non-interest income excludes the following items of note: Adjustment to 6 The reduction of the U.S. federal corporate tax rate enacted by the U.S. Tax Act the carrying balances of certain tax credit-related investments as explained in footnote 6 – 2018 – $(89) million. Dilution gain on the Scottrade transaction, as explained in footnote 7 – 2017 – $204 million. Loss on sale of the Direct Investing business in Europe, as explained in footnote 8 – 2017 – $42 million. Gain on fair value of derivatives hedging the reclassified available-for-sale (AFS) securities portfolio, as explained in footnote 9 – 2017 – $41 million and 2016 – $7 million. These amounts were reported in the Corporate segment. 2 Adjusted non-interest expenses exclude the following items of note: Amortization of intangibles, as explained in footnote 4 – 2018 – $231 million, 2017 – $248 million, 2016 – $270 million, reported in the Corporate segment. Charges associated with the Bank’s acquisition of Scottrade Bank, as explained in footnote 5 – 2018 – $21 million and 2017 – $26 million, reported in the U.S. Retail segment. Impairment of goodwill, non-financial assets, and other charges as explained in footnote 10 – 2016 – $111 million, reported in Corporate segment. 3 Adjusted equity in net income of an investment in TD Ameritrade excludes the following items of note: Amortization of intangibles as explained in footnote 4 – 2018 – $93 million, 2017 – $62 million and 2016 – $65 million; and the Bank’s share of TD Ameritrade’s deferred tax balances adjustment, as explained in footnote 6 – 2018 – $(41) million. The earnings impact of both of these items was reported in the Corporate segment. The Bank’s share of charges associated with TD Ameritrade’s acquisition of Scottrade Financial Services Inc. (Scottrade), as explained in footnote 5 – 2018 – $172 million and 2017 – $20 million. This item was reported in the U.S. Retail segment. 4 Amortization of intangibles relates to intangibles acquired as a result of asset acquisitions and business combinations, including the after tax amounts for amortization of intangibles relating to the Equity in net income of the investment in TD Ameritrade. 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. 5 On September 18, 2017, the Bank acquired Scottrade Bank and TD Ameritrade acquired Scottrade, together with the Bank’s purchase of TD Ameritrade shares issued in connection with TD Ameritrade’s acquisition of Scottrade (the “Scottrade transaction”). Scottrade Bank merged with TD Bank, N.A. The Bank and TD Ameritrade incurred acquisition related charges including employee severance, contract termination fees, direct transaction costs, and other one-time charges. These amounts have been recorded as an adjustment to net income and include charges associated with the Bank’s acquisition of Scottrade Bank and the after tax amounts for the Bank’s share of charges associated with TD Ameritrade’s acquisition of Scottrade. These amounts were reported in the U.S. Retail segment. resulted in a net charge to earnings during 2018 of $392 million, comprising a net $48 million pre-tax charge related to the write-down of certain tax credit-related investments, partially offset by the favourable impact of the Bank’s share of TD Ameritrade’s remeasurement of its deferred income tax balances, and a net $344 million income tax expense resulting from the remeasurement of the Bank’s deferred tax assets and liabilities to the lower base rate of 21% and other related tax adjustments. The earnings impact was reported in the Corporate segment. 7 In connection with TD Ameritrade’s acquisition of Scottrade on September 18, 2017, TD Ameritrade issued 38.8 million shares, of which the Bank purchased 11.1 million pursuant to its pre-emptive rights. As a result of the share issuances, the Bank’s common stock ownership percentage in TD Ameritrade decreased and the Bank realized a dilution gain of $204 million reported in the Corporate segment. 8 On June 2, 2017, the Bank completed the sale of its Direct Investing business in Europe to Interactive Investor PLC. A loss of $40 million after tax was recorded in the Corporate segment in other income (loss). The loss is not considered to be in the normal course of business for the Bank. 9 The Bank changed its trading strategy with respect to certain trading debt securities and reclassified these securities from trading to AFS under IAS 39 (classified as fair value through other comprehensive income (FVOCI) under IFRS 9) effective August 1, 2008. These debt securities are economically hedged, primarily with credit default swap (CDS) and interest rate swap contracts which are recorded on a fair value basis with changes in fair value recorded in the period’s earnings. As a result the derivatives were accounted for on an accrual basis in Wholesale Banking and the gains and losses related to the derivatives in excess of the accrued amounts were reported in the Corporate segment. Adjusted results of the Bank in prior periods exclude the gains and losses of the derivatives in excess of the accrued amount. Effective February 1, 2017, the total gains and losses as a result of changes in fair value of these derivatives are recorded in Wholesale Banking. 10 In the second quarter of 2016, the Bank recorded impairment losses on goodwill, certain intangibles, other non-financial assets, and deferred tax assets, as well as other charges relating to the Direct Investing business in Europe that had been experiencing continued losses. These amounts are reported in the Corporate segment. 11 The amount reported in 2018 excludes $31 million relating to the one-time adjustment of associated deferred tax liability balances as a result of the U.S. Tax Act. The impact of this adjustment is included in the Impact from U.S. tax reform item of note. 16 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 4 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 2018 $ 6.02 0.46 $ 6.48 $ 6.01 0.46 $ 6.47 2017 $ 5.51 0.04 $ 5.55 $ 5.50 0.04 $ 5.54 2016 $ 4.68 0.20 $ 4.88 $ 4.67 0.20 $ 4.87 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 5 AMORTIZATION OF INTANGIBLES, NET OF INCOME TAXES1,2 (millions of Canadian dollars) TD Bank, National Association (TD Bank, N.A.) TD Ameritrade Holding Corporation (TD Ameritrade)3 MBNA Canada Aeroplan Other Software and asset servicing rights Amortization of intangibles, net of income taxes 2018 $ 87 93 49 17 23 269 464 $ 733 2017 $ 91 62 42 17 20 232 351 $ 583 2016 $ 108 65 36 17 20 246 340 $ 586 1 The amount reported in 2018 excludes $31 million relating to the one-time 2 Amortization of intangibles, with the exception of software and asset servicing adjustment of associated deferred tax liability balances as a result of the U.S. Tax Act. The impact of this adjustment is included in the Impact from U.S. tax reform item of note. 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. 3 Included in equity in net income of an investment in TD Ameritrade. 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. The capital allocated to the business segments is based on 9% CET1 Capital. Adjusted ROE is a non-GAAP financial measure and 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. Adjusted ROE is adjusted net income available to common shareholders as a percentage of average common equity. T A B L E 6 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 – reported 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. 2018 $ 70,499 11,048 849 $ 11,897 2017 $ 68,349 10,203 70 $ 10,273 2016 $ 65,121 8,680 356 $ 9,036 15.7% 16.9 14.9% 15.0 13.3% 13.9 RETURN ON TANGIBLE COMMON EQUITY Tangible common equity (TCE) is calculated as common shareholders’ equity less goodwill, imputed goodwill and intangibles on an investment in TD Ameritrade and other acquired intangible assets, net of related deferred tax liabilities. Return on tangible common equity (ROTCE) is calculated as reported net income available to common shareholders after adjusting for the after-tax amortization of acquired intangibles, which are treated as an item of note, as a percentage of average TCE. Adjusted ROTCE is calculated using reported net income available to common shareholders, adjusted for items of note, as a percentage of average TCE. Adjusted ROTCE provides a useful measure of the performance of the Bank’s income producing assets, independent of whether or not they were acquired or developed internally. TCE, ROTCE, and adjusted ROTCE are each non-GAAP financial measures and are not defined terms under IFRS. Readers are cautioned that earnings and other measures adjusted to a basis other than IFRS do not have standardized meanings under IFRS and, therefore, may not be comparable to similar terms used by other issuers. 17 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 7 RETURN ON TANGIBLE COMMON EQUITY (millions of Canadian dollars, except as noted) Average common equity Average goodwill Average imputed goodwill and intangibles on an investment in TD Ameritrade Average other acquired intangibles1 Average related deferred tax liabilities Average tangible common equity Net income available to common shareholders – reported Amortization of acquired intangibles, net of income taxes2 Net income available to common shareholders after adjusting for after-tax amortization of acquired intangibles Other items of note, net of income taxes2 Net income available to common shareholders – adjusted Return on tangible common equity Return on tangible common equity – adjusted 2018 2017 $ 70,499 16,197 4,100 676 (240) 49,766 11,048 269 11,317 580 $ 11,897 $ 68,349 16,335 3,899 917 (343) 47,541 10,203 232 10,435 (162) $ 10,273 2016 $ 65,121 16,489 3,996 1,141 (398) 43,893 8,680 246 8,926 110 $ 9,036 22.7% 23.9 21.9% 21.6 20.3% 20.6 1 Excludes intangibles relating to software and asset servicing rights. 2 For explanations of items of note, refer to the “Non-GAAP Financial Measures – SIGNIFICANT AND SUBSEQUENT EVENTS, AND PENDING ACQUISITIONS Acquisition of Greystone Managed Investments Inc. On November 1, 2018, the Bank acquired 100% of the outstanding equity of Greystone Capital Management Inc., the parent company of Greystone Managed Investments Inc. (Greystone) for consideration of $817 million, of which $475 million was paid in cash and $342 million was paid in the Bank’s common shares. The value of 4.7 million common shares issued as consideration was based on the volume weighted-average market price of the Bank’s common shares over the 10 trading day period immediately preceding the fifth business day prior to the acquisition date and was recorded based on market price at close. Common shares of $167 million issued to employee shareholders in respect of the purchase price will be held in escrow for two years post-acquisition, subject to their continued employment, and will be recorded as a compensation expense over the two-year escrow period. The acquisition is accounted for as a business combination under the purchase method. As at November 1, 2018, the acquisition contributed $169 million of assets and $55 million of liabilities. The excess of accounting consideration over the fair value of the identifiable net assets is allocated to customer relationship intangibles of $140 million, deferred tax liability of $37 million and goodwill of $433 million. Goodwill is not deductible for tax purposes. The results of the acquisition will be consolidated from the acquisition date and reported in the Canadian Retail segment. The purchase price allocation is subject to refinement and may be adjusted to reflect new information about facts and circumstances that existed at the acquisition date during the measurement period. Agreement for Air Canada Credit Card Loyalty Program On November 26, 2018, the Bank finalized a long-term loyalty program agreement (the “Loyalty Agreement”) with Air Canada. Under the terms of the Loyalty Agreement, the Bank will become the primary credit card issuer for Air Canada’s new loyalty program when it launches in 2020 through to 2030. The Loyalty Agreement was finalized in conjunction with Air Canada entering into a definitive share purchase agreement with Aimia Inc. (“Aimia”) for the acquisition of Aimia Canada Inc., which operates the Aeroplan loyalty business (the “Transaction”), for an aggregate purchase price of $450 million in cash Reconciliation of Adjusted to Reported Net Income” table in the “Financial Results Overview” section of this document. and the assumption of approximately $1.9 billion of Aeroplan Miles liability. The closing of the Transaction is subject to the satisfaction of certain conditions, including receipt of Aimia shareholder approval and customary regulatory approvals. The Loyalty Agreement will become effective upon the closing of the Transaction and TD Aeroplan cardholders will become members of Air Canada’s new loyalty program and their miles will be transitioned when Air Canada’s new loyalty program launches in 2020. If the proposed Transaction is completed, the Bank will pay $622 million plus applicable sales tax to Air Canada, of which $547 million ($446 million after sales and income taxes) will be recognized as an expense during the first quarter of 2019 to be reported in the Canadian Retail segment, and $75 million will be recognized as an intangible asset amortized over the Loyalty Agreement term, both of which are expected to be reported as items of note. In addition, the Bank will prepay $308 million plus applicable sales tax for the future purchase of loyalty points over a ten year period. The Bank also expects to incur additional pre-tax costs of approximately $100 million over two years to build the functionality required to facilitate the new program. The proposed Transaction is expected to reduce the Bank’s CET1 ratio on close by approximately 13 basis points (bps). Normal Course Issuer Bid As approved by the Board on November 28, 2018, the Bank announced its intention to amend its normal course issuer bid (NCIB) for up to an additional 20 million of its common shares, 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. Redemption of TD CaTS III Securities On November 26, 2018, TD Capital Trust III announced its intention to redeem all of the outstanding TD Capital Trust III Securities – Series 2008 (TD CaTS III) on December 31, 2018, at a redemption price per TD CaTS III of $1,000, plus the unpaid distribution payable on the redemption date of December 31, 2018. 18 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS FINANCIAL RESULTS OVERVIEW Net Income Reported net income for the year was $11,334 million, an increase of $817 million, or 8%, compared with last year. The increase reflects revenue growth and a higher contribution from TD Ameritrade, partially offset by higher PCL, now reflecting the Bank’s adoption of IFRS 9, an increase in non-interest expenses, and a higher effective tax rate. The reported ROE for the year was 15.7%, compared with 14.9% last year. Adjusted net income of $12,183 million increased $1,596 million, or 15%, compared with last year. By segment, the increase in reported net income was due to an increase in U.S. Retail of $866 million, or 26%, an increase in Canadian Retail of $658 million, or 10%, and an increase in Wholesale Banking2 of $15 million, or 1%, partially offset by a higher net loss in the Corporate segment of $722 million. Reported diluted EPS for the year was $6.01, an increase of 9%, compared with $5.50 last year. Adjusted diluted EPS for the year was $6.47, a 17% increase, compared with $5.54 last year. Impact of Foreign Exchange Rate on U.S. Retail Segment Translated Earnings U.S. Retail segment earnings, including the contribution from the Bank’s investment in TD Ameritrade, reflect 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 the U.S. Retail segment earnings for the year ended October 31, 2018, compared with last year, as shown in the following table. T A B L E 8 IMPACT OF FOREIGN EXCHANGE RATE ON U.S. RETAIL SEGMENT TRANSLATED EARNINGS (millions of Canadian dollars, except as noted) U.S. Retail Bank Total revenue Non-interest expenses – reported Non-interest expenses – adjusted Net income – reported, after tax Net income – adjusted, after tax Equity in net income of an investment in TD Ameritrade – reported Equity in net income of an investment in TD Ameritrade – adjusted U.S. Retail segment increased net income – reported, after tax U.S. Retail segment increased net income – adjusted, after tax Earnings per share (Canadian dollars) Basic – reported Basic – adjusted Diluted – reported Diluted – adjusted 2018 vs. 2017 Increase (Decrease) 2017 vs. 2016 Increase (Decrease) $ (173) (94) (93) (57) (58) $ (151) (90) (89) (39) (40) (12) (10) (68) (68) (4) (7) (43) (47) $ (0.04) (0.04) (0.04) (0.04) $ (0.02) (0.03) (0.02) (0.03) On a trailing twelve-month basis, a one cent appreciation/depreciation in the U.S. dollar to Canadian dollar average exchange rate would have increased/decreased U.S. Retail segment net income by approximately $57 million. 1 Amounts exclude Corporate Segment. 2 Net interest income within Wholesale Banking is calculated on a tax equivalent basis (TEB). Refer to the “Business Segment Analysis” section in this document for additional details. NET INCOME – REPORTED BY BUSINESS SEGMENT (as a percentage of total net income) 1 70% 60 50 40 30 20 10 0 2016 2017 2018 2016 2017 2018 2016 2017 2018 NET INCOME – ADJUSTED BY BUSINESS SEGMENT (as a percentage of total net income) 1 70% 60 50 40 30 20 10 0 2016 2017 2018 2016 2017 2018 2016 2017 2018 Canadian Retail U.S. Retail Wholesale Banking 19 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS FINANCIAL RESULTS OVERVIEW Revenue Reported revenue was $38,834 million, an increase of $2,685 million, or 7%, compared with last year. Adjusted revenue was $38,923 million, an increase of $2,977 million, or 8%, compared with last year. NET INTEREST INCOME Net interest income for the year was $22,239 million, an increase of $1,392 million, or 7%, compared with last year. The increase reflects loan and deposit volume growth and higher margins in the Canadian and U.S. Retail segments, and the benefit of the Scottrade transaction, partially offset by the impact of foreign currency translation. By segment, the increase in reported net interest income was due to an increase in Canadian Retail of $965 million, or 9%, an increase in U.S. Retail of $690 million, or 9%, and an increase in the Corporate segment of $391 million, or 41%, partially offset by a decrease in Wholesale Banking of $654 million, or 36%. The decrease in net interest income taxable equivalent basis (TEB) in Wholesale Banking reflects a change in business mix in the second quarter last year as a result of an increase in client activity in equity trading. The TEB adjustment is offset in Corporate segment. NET INTEREST MARGIN Net interest margin declined by 1 basis point during the year to 1.95%, compared with 1.96% last year, primarily due to changes in non-retail product mix, partially offset by margin expansion in the Canadian and U.S. Retail segments. NON-INTEREST INCOME Reported non-interest income for the year was $16,595 million, an increase of $1,293 million, or 8%, compared with last year. The increase reflects higher non-interest income in Wholesale Banking, fee-based income in the Canadian and U.S. Retail segments, wealth asset growth, an increase in revenues from the insurance business, T A B L E 9 NON-INTEREST INCOME (millions of Canadian dollars, except as noted) Investment and securities services Broker dealer fees and commissions Full-service brokerage and other securities services Underwriting and advisory Investment management fees Mutual fund management Trust fees Total investment and securities services Credit fees Net securities gains (losses) Trading income (losses) Service charges Card services Insurance revenue Other income (loss) Total and higher trading volumes in the direct investing business in the Canadian Retail segment. The increase was partially offset by the dilution gain on the Scottrade transaction last year and losses on certain tax credit-related investments in the current year. By segment, the increase in reported non-interest income was due to an increase in Wholesale of $842 million, or 57%, an increase in Canadian Retail of $686 million, or 7%, and an increase in U.S. Retail of $33 million, or 1%, partially offset by a decrease in Corporate of $268 million, or 41%. NET INTEREST INCOME (millions of Canadian dollars) $24,000 21,000 18,000 15,000 12,000 9,000 6,000 3,000 0 2016 2017 2018 2018 2017 2016 % change 2018 vs. 2017 $ 577 1,041 566 546 1,790 136 4,656 1,210 111 1,052 2,716 2,376 4,045 429 $ 16,595 $ 493 960 589 534 1,738 145 4,459 1,130 128 303 2,648 2,388 3,760 486 $ 15,302 $ 463 853 546 505 1,623 153 4,143 1,048 54 395 2,571 2,313 3,796 72 $ 14,392 17 8 (4) 2 3 (6) 4 7 (13) 247 3 (1) 8 (12) 8 20 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS 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. 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. Trading-related income excludes underwriting fees and commissions on securities transactions. Management believes that the total trading- related income is the appropriate measure of trading performance. Trading-related income by product line depicts trading income for each major trading category. T A B L E 1 0 TRADING-RELATED INCOME (millions of Canadian dollars) Net interest income (loss)1 Trading income (loss) Financial instruments designated at fair value through profit or loss2 Total By product Interest rate and credit Foreign exchange Equity and other1 Financial instruments designated at fair value through profit or loss2 Total 1 Excludes TEB. 2 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. FINANCIAL RESULTS OVERVIEW Provision for Credit Losses PCL for the year was $2,480 million, an increase of $264 million, or 12%, compared with last year. PCL – impaired was $2,166 million, an increase of $176 million, or 9%, primarily reflecting U.S. credit card and U.S. auto portfolio volume growth, seasoning and mix, partially offset by strong credit performance in Canadian Retail. PCL – performing was $314 million, an increase of $88 million, or 39%, primarily reflecting the impact of methodology changes related to the adoption of IFRS 9 including where Stage 2 loans are now measured based on a lifetime expected credit loss (ECL). Total PCL year to date as an annualized percentage of credit volume was 0.39%. By segment, the increase in PCL was due to an increase in U.S. Retail of $125 million, or 16%, an increase in the Corporate segment of $96 million, or 21% (largely reflecting PCL for the U.S. strategic cards portfolio, which is offset in Corporate segment non-interest expenses), an increase in Wholesale Banking of $31 million, and an increase in Canadian Retail of $12 million, or 1%. 2018 $ 495 1,052 10 $ 1,557 $ 535 680 332 10 $ 1,557 For the years ended October 31 2017 $ 770 303 11 $ 1,084 $ 668 673 (268) 11 $ 1,084 2016 $ 934 395 6 $ 1,335 $ 742 622 (35) 6 $ 1,335 PROVISION FOR CREDIT LOSSES (millions of Canadian dollars) $3,000 2,500 2,000 1,500 1,000 500 0 2016 2017 2018 21 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS FINANCIAL RESULTS OVERVIEW Expenses NON-INTEREST EXPENSES Reported non-interest expenses for the year were $20,137 million, an increase of $771 million, or 4%, compared with last year. The increase was primarily due to an increase in employee-related expenses including revenue-based variable compensation expenses, business and volume growth, and higher spend related to strategic initiatives, partially offset by productivity savings. By segment, the increase in non-interest expenses was due to an increase in Canadian Retail of $539 million, or 6%, an increase in U.S. Retail of $222 million, or 4%, an increase in Wholesale of $138 million, or 7%, partially offset by a decrease in the Corporate segment of $128 million, or 5%. Adjusted non-interest expenses were $19,885 million, an increase of $793 million, or 4%, compared with last year. INSURANCE CLAIMS AND RELATED EXPENSES Insurance claims and related expenses were $2,444 million, an increase of $198 million, or 9%, compared with last year, reflecting an increase in reinsurance liabilities assumed, more severe weather-related events, higher current year claims, and changes in the fair value of investments supporting claims liabilities which resulted in a similar increase to non-interest income, partially offset by more favourable prior years’ claims development, and the impact of changes to forward-looking actuarial assumptions. 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 51.9%, compared with 53.6% last year. T A B L E 1 1 NON-INTEREST EXPENSES AND EFFICIENCY RATIO (millions of Canadian dollars, except as noted) Salaries and employee benefits Salaries Incentive compensation Pension and other employee benefits Total salaries and employee benefits Occupancy Rent Depreciation 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 Other expenses Total expenses Efficiency ratio – reported Efficiency ratio – adjusted1 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. 22 NON-INTEREST EXPENSES (millions of Canadian dollars) EFFICIENCY RATIO (percent) $25,000 60% 20,000 15,000 10,000 5,000 0 50 40 30 20 10 0 2016 2017 2018 2016 2017 2018 Reported Adjusted Reported Adjusted 2018 2017 2016 % change 2018 vs. 2017 $ 6,162 2,592 1,623 10,377 913 371 481 1,765 207 205 661 1,073 815 803 73 306 1,247 3,678 $ 20,137 $ 5,839 2,454 1,725 10,018 917 402 475 1,794 184 201 607 992 704 726 2 314 1,165 3,651 $ 19,366 $ 5,576 2,170 1,552 9,298 915 427 483 1,825 182 202 560 944 708 743 (18) 316 1,232 3,829 $ 18,877 6 6 (6) 4 – (8) 1 (2) 13 2 9 8 16 11 3,550 (3) 7 1 4 51.9% 51.1 53.6% 53.1 55.0% 53.9 (170)bps (200) TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS FINANCIAL RESULTS OVERVIEW Taxes Reported total income and other taxes increased $1,022 million, or 28.6%, compared with last year, reflecting an increase in income tax expense of $929 million, or 41.2%, and an increase in other taxes of $93 million, or 7.1%. Adjusted total income and other taxes were up $655 million from last year, or 17.9%, reflecting an increase in income tax expense of $562 million. The Bank’s reported effective tax rate was 23.1% for 2018, compared with 18.3% last year. The year-over-year increase was largely due to higher income before taxes, lower tax-exempt dividend income, the impact of U.S. tax reform on U.S. deferred tax assets and liabilities and a prior year non-taxable dilution gain on the Scottrade transaction, partially offset by the lower U.S. federal tax rate associated with U.S. tax reform. For a reconciliation of the Bank’s effective income tax rate with the Canadian statutory income tax rate, refer to Note 25 of the 2018 Consolidated Financial Statements. The Bank’s adjusted effective income tax rate for 2018 was 20.5%, compared with 18.9% last year. The year-over-year increase was largely due to higher income before taxes and lower tax-exempt dividend income, partially offset by the lower U.S. federal tax rate associated with U.S. tax reform. The Bank reports its investment in TD Ameritrade using the equity method of accounting. TD Ameritrade’s tax expense of $206 million in 2018, compared with $268 million last year, was not part of the Bank’s effective tax rate. T A B L E 1 2 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 Total adjustments for items of note1,2 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 – reported Effective income tax rate – adjusted4 2018 $ 3,182 (284) 2,898 538 148 487 237 1,410 $ 4,308 2017 $ 2,253 83 2,336 517 136 462 202 1,317 $ 3,653 2016 $ 2,143 83 2,226 502 169 461 203 1,335 $ 3,561 23.1% 20.5 18.3% 18.9 20.1% 20.2 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 The tax effect for each item of note is calculated using the statutory income tax rate of the applicable legal entity. 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. FINANCIAL RESULTS OVERVIEW Quarterly Financial Information FOURTH QUARTER 2018 PERFORMANCE SUMMARY Reported net income for the quarter was $2,960 million, an increase of $248 million, or 9%, compared with fourth quarter last year. The increase reflects revenue growth, partially offset by growth in non-interest expenses, higher PCL and higher insurance claims. Adjusted net income for the quarter was $3,048 million, an increase of $445 million, or 17%, compared with the fourth quarter last year. Reported diluted EPS for the quarter was $1.58, an increase of 11%, compared with $1.42 in the fourth quarter of last year. Adjusted diluted EPS for the quarter was $1.63, an increase of 20%, compared with $1.36 in the fourth quarter of last year. Reported revenue for the quarter was $10,122 million, an increase of $852 million, or 9%, compared with the fourth quarter last year. Net interest income for the quarter was $5,756 million, an increase of $426 million, or 8%, primarily due to loan and deposit volume growth, and higher deposit margins due to a more favourable interest rate environment in the Canadian and U.S. Retail segments, and the impact of foreign currency translation. By segment, the increase in reported net interest income was due to an increase in U.S. Retail of $273 million, or 15%, and an increase in Canadian Retail of $249 million, or 9%, partially offset by a decrease in the Corporate segment of $92 million, or 23%, and a decrease in Wholesale Banking of $4 million, or 1%. Adjusted net interest income for the quarter was $5,756 million, an increase of $426 million, or 8%, compared with the fourth quarter last year. Non-interest income for the quarter was $4,366 million, an increase of $426 million, or 11% reflecting higher trading-related revenue, fee-based income growth in the Canadian and U.S. Retail segments, and an increase in revenues from the insurance business, partially offset by the dilution gain on the Scottrade transaction in the same quarter last year. By segment, the increase in reported non-interest income was due to an increase in Wholesale Banking of $227 million, or 54%, an increase in Canadian Retail of $205 million, or 8%, an increase in U.S. Retail of $44 million, or 7%, partially offset by a decrease in the Corporate segment of $50 million, or 22%. Adjusted non-interest income for the quarter was $4,366 million, an increase of $630 million, or 17%, compared with fourth quarter last year. PCL for the quarter was $670 million, an increase of $92 million, or 16%, compared with the fourth quarter last year. PCL – impaired was $559 million, an increase of $12 million, or 2%. PCL – performing was $111 million, an increase of $80 million, reflecting the impact of methodology changes related to the adoption of IFRS 9 including where Stage 2 loans are now measured based on a lifetime ECL. Total PCL for the quarter as an annualized percentage of credit volume was 0.40%. 23 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS By segment, the increase in PCL was due to an increase in U.S. Retail of $41 million, or 20%, an increase in the Corporate segment of $24 million, or 18%, an increase in Canadian Retail of $19 million, or 8%, and an increase in Wholesale Banking of $8 million. Insurance claims and related expenses for the quarter were $684 million, an increase of $69 million, or 11%, compared with the fourth quarter last year, reflecting an increase in reinsurance liabilities assumed, more severe weather-related events, less favourable prior years’ claims development, and the impact of changes to forward- looking assumptions, partially offset by changes in the fair value of investments supporting claims liabilities which resulted in a similar decrease to non-interest income. Reported non-interest expenses for the quarter were $5,352 million, an increase of $524 million, or 11%, compared with the fourth quarter last year, reflecting business and volume growth, higher spend related to strategic initiatives, an increase in employee-related expenses including revenue-based variable compensation expenses, and the impact of foreign currency translation. By segment, the increase in reported non-interest expenses was due to an increase in Canadian Retail of $258 million, or 11%, an increase in Wholesale Banking of $117 million or 28%, an increase in U.S. Retail of $108 million, or 7%, and an increase in the Corporate segment of $41 million, or 7%. Adjusted non-interest expenses for the quarter were $5,299 million, an increase of $560 million, or 12%, compared with fourth quarter last year. The Bank’s reported effective tax rate was 20.2% for the quarter, compared with 19.7% in the same quarter last year. The increase was largely due to higher income before taxes in the current period and a non-taxable dilution gain on the Scottrade transaction included in the prior period, partially offset by the lower U.S. federal tax rate associated with U.S. tax reform and business mix. The Bank’s adjusted effective tax rate was 20.3% for the quarter, compared with 21.3% in the same quarter last year. The decrease was largely due to the lower U.S. federal tax rate associated with U.S. tax reform, partially offset by higher income before taxes. QUARTERLY TREND ANALYSIS Subject to the impact of seasonal trends and items of note, the Bank has increased reported earnings over the past eight quarters reflecting a consistent strategy, revenue growth, expense discipline, and investments to support future growth. The Bank’s earnings reflect increasing revenue from loan and deposit volume growth, increasing margins, and wealth asset growth in the Canadian and U.S. Retail segments, as well as growth in trading revenue, fee income, and advisory activity in the Wholesale Banking segment. Revenue growth is partially offset by moderate expense growth in all business segments. The Bank’s quarterly earnings are impacted by seasonality, the number of days in a quarter, the economic environment in Canada and the U.S., and foreign currency translation. T A B L E 1 3 QUARTERLY RESULTS (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 TD Ameritrade Net income – reported Pre-tax adjustments for items of note1 Amortization of intangibles Charges associated with the Scottrade transaction Impact from U.S. tax reform Dilution gain on the Scottrade transaction Loss on sale of TD Direct Investment business in Europe Fair value of derivatives hedging the reclassified available-for-sale securities portfolio Total pre-tax adjustments for items of note Provision for (recovery of) income taxes items of note Net income – adjusted Preferred dividends Net income available to common shareholders and non-controlling interests in subsidiaries – adjusted Attributable to: Common shareholders – adjusted Non-controlling interests – 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) 2018 For the three months ended 2017 Oct. 31 Jul. 31 Apr. 30 Jan. 31 Oct. 31 Jul. 31 Apr. 30 Jan. 31 $ 5,756 4,366 10,122 670 684 5,352 691 235 2,960 $ 5,655 4,230 9,885 561 627 5,117 705 230 3,105 $ 5,398 4,069 9,467 556 558 4,822 746 131 2,916 $ 5,430 3,930 9,360 693 575 4,846 1,040 147 2,353 $ 5,330 3,940 9,270 578 615 4,828 640 103 2,712 $ 5,267 4,019 9,286 505 519 4,855 760 122 2,769 $ 5,109 3,364 8,473 500 538 4,786 257 111 2,503 $ 5,141 3,979 9,120 633 574 4,897 596 113 2,533 76 25 – – – – 101 13 3,048 51 77 18 – – – – 95 73 3,127 59 86 77 – – – – 163 17 3,062 52 85 73 48 – – – 206 (387) 2,946 52 78 46 – (204) – – (80) 29 2,603 50 74 – – – 42 – 116 20 2,865 47 78 – – – – – 78 20 2,561 48 80 – – – – (41) 39 14 2,558 48 $ 2,997 $ 3,068 $ 3,010 $ 2,894 $ 2,553 $ 2,818 $ 2,513 $ 2,510 $ 2,979 18 $ 3,050 18 $ 2,992 18 $ 2,876 18 $ 2,518 35 $ 2,789 29 $ 2,485 28 $ 2,481 29 $ 1.58 1.63 $ 1.65 1.67 $ 1.54 1.62 $ 1.24 1.56 $ 1.42 1.36 $ 1.46 1.51 $ 1.31 1.34 $ 1.32 1.34 1.58 1.63 15.8% 16.3 1.65 1.66 16.9% 17.1 1.54 1.62 16.8% 17.6 1.24 1.56 13.2% 16.6 1.42 1.36 15.4% 14.7 1.46 1.51 15.5% 16.1 1.31 1.34 14.4% 14.8 1.32 1.33 14.4% 14.5 Average earning assets Net interest margin as a percentage of average earning assets $ 1,183 $ 1,152 $ 1,124 $ 1,116 $ 1,077 $ 1,077 1.93% 1.95% 1.97% 1.93% 1.96% 1.94% $ 1,056 1.98% $ 1,041 1.96% 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. 24 TD BANK GROUP ANNUAL REPORT 2018 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 three key business segments: Canadian Retail, U.S. Retail, and Wholesale Banking. The Bank’s other activities are grouped into the Corporate segment. Canadian Retail serves over 15 million customers in the Canadian personal and commercial banking, wealth, and insurance businesses. Personal Banking provides a full range of financial products and services through its network of 1,098 branches, 3,394 automated teller machines (ATM), telephone, internet, and mobile banking. Auto Finance provides flexible financing options to customers at point of sale for automotive and recreational vehicle purchases. The credit cards business provides a comprehensive line-up of credit cards including proprietary, co-branded, and affinity credit card programs. Merchant Solutions provides point-of-sale payment solutions for large and small businesses. Business Banking offers 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. 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 through the direct investing, advice- based, and asset management businesses. The insurance business offers property and casualty insurance, as well as life and health insurance products in Canada. U.S. Retail comprises the Bank’s personal and business banking operations under the brand TD Bank, America’s Most Convenient Bank,® and wealth management in the U.S. Personal banking provides a full range of financial products and services to over 8 million retail customers through multiple delivery channels, including a network of 1,257 stores located along the east coast from Maine to Florida, mobile and internet banking, ATM, and telephone. Business banking serves the needs of businesses, through a diversified range of products and services to meet their financing, investment, cash management, international trade, and day-to-day banking needs. Wealth management offers a range of wealth products and services to retail and institutional 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 in TD Ameritrade. Wholesale Banking offers a wide range of capital markets and corporate and investment banking 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. Corporate segment is comprised of a number of service and control groups such as technology solutions, treasury and balance sheet management, direct channels, marketing, human resources, finance, risk management, compliance, legal, anti-money laundering, and others. Certain costs relating to these functions are allocated to operating business segments. The basis of allocation and methodologies are reviewed periodically to align with management’s evaluation of the Bank’s business segments. Results of each business segment reflect revenue, expenses, assets, and liabilities generated by the businesses in that segment. Where applicable, the Bank measures and evaluates the performance of each segment based on adjusted results and ROE, and for those segments the Bank indicates that the measure is adjusted. Net income for the operating business segments is presented before any items of note not attributed to the operating segments. For further details, refer to the “How the Bank Reports” section of this document and Note 29 of the 2018 Consolidated Financial Statements. For information concerning the Bank’s measure of ROE, which is a non-GAAP financial measure, refer to the “Return on Common Equity” section. Upon adoption of IFRS 9, the current period PCL related to performing (Stage 1 and Stage 2) and impaired (Stage 3) financial assets, loan commitments, and financial guarantees is recorded within the respective segment. Under IAS 39 and prior to November 1, 2017, the PCL related to the collectively assessed allowance for incurred but not identified credit losses that related to Canadian Retail and Wholesale Banking segments was recorded in the Corporate segment. Prior period results have not been restated. PCL on impaired financial assets includes Stage 3 PCL under IFRS 9 and counterparty-specific and individually insignificant PCL under IAS 39. PCL on performing financial assets, loan commitments, and financial guarantees include Stage 1 and Stage 2 PCL under IFRS 9 and incurred but not identified credit losses under IAS 39. The reduction of the U.S. federal corporate tax rate enacted by the U.S. Tax Act resulted in an adjustment to the Bank’s U.S. deferred tax assets and liabilities to the lower base rate of 21% as well as an adjustment to the Bank’s carrying balances of certain tax credit-related investments and its investment in TD Ameritrade. The earnings impact of these adjustments was reported in the Corporate segment. The lower corporate tax rate had, and will have, a positive effect on TD’s current and future earnings, which are and will be reflected in the results of the affected segments. The amount of the benefit may vary due to, among other things, changes in interpretations and assumptions the Bank has made, guidance that may be issued by applicable regulatory authorities, and actions the Bank may take to reinvest some of the savings in its operations. The effective tax rate for the U.S. Retail Bank declined in proportion to the reduction in the federal rate. For additional details, refer to “How the Bank Reports” and “Non-GAAP Financial Measures – Reconciliation of Adjusted to Reported Net Income” table in the “How We Performed” section of this document. Net interest income within Wholesale Banking is calculated on a 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 $176 million, compared with $654 million last year. The “Business Outlook and Focus for 2019” section for each business 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. 25 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIST A B L E 1 4 RESULTS BY SEGMENT1 (millions of Canadian dollars) Canadian Retail U.S. Retail Net interest income (loss) Non-interest income (loss) Total revenue4 Provision for (recovery of) credit losses – impaired5 Provision for (recovery of) credit losses – performing6 Total provision for (recovery 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 TD Ameritrade Net income (loss) – reported Pre-tax adjustments for items of note7 Amortization of intangibles Charges associated with the Scottrade transaction Impact from U.S. tax reform Dilution gain on the Scottrade transaction Loss on sale of the Direct Investing business in Europe Fair value of derivatives hedging the reclassified available-for-sale securities portfolio Total pre-tax adjustments for items of note Provision for (recovery of) income taxes for items of note Wholesale Banking2,3 2017 Corporate2,3 2018 2017 2018 Total 2017 2018 2017 2018 2017 2018 $ 11,576 $ 10,611 $ 8,176 $ 7,486 $ 1,150 $ 1,804 $ 1,337 $ 10,451 11,137 2,735 21,062 10,944 10,221 22,713 2,309 3,459 1,467 3,271 381 1,718 2,768 946 $ 22,239 $ 20,847 649 16,595 15,302 1,595 38,834 36,149 927 986 776 648 (8) (28) 471 384 2,166 1,990 71 998 2,444 9,473 9,798 2,615 – 7,183 – 986 2,246 8,934 8,896 2,371 141 917 – 6,100 3,927 432 144 792 – 5,878 3,551 671 11 3 – 2,067 1,389 335 – (28) – 1,929 1,370 331 – 6,525 693 4,188 442 3,322 – 1,054 – 1,039 91 562 – 2,497 (1,341) (200) 50 (1,091) 82 466 – 314 2,480 2,444 226 2,216 2,246 2,625 20,137 19,366 (1,496) 13,773 12,321 2,253 (1,120) 3,182 7 449 (369) 11,334 10,517 743 – – – – – – – – – – – – – – – – – 193 – – – – 193 5 – 46 – – – – 46 10 – – – – – – – – – – – – – – – – 324 310 324 310 – 48 – – – 372 – – (204) 193 48 – 46 – (204) 42 – 42 (41) 107 – 565 (41) 153 (289) (430) $ 73 83 (284) (335) $ 12,183 $ 10,587 Net income (loss) – adjusted $ 7,183 $ 6,525 $ 4,376 $ 3,358 $ 1,054 $ 1,039 $ Average common equity CET1 Capital risk-weighted assets8 $ 15,018 $ 14,434 $ 34,260 $ 34,278 $ 5,954 $ 5,979 $ 15,267 $ 13,658 $ 70,499 $ 68,349 45,958 435,632 435,750 108,526 99,693 243,655 227,671 13,347 70,104 62,428 1 The retailer program partners’ share of revenues and credit losses is presented 5 PCL − impaired represents Stage 3 PCL under IFRS 9 and counterparty-specific and in the Corporate segment, with an offsetting amount (representing the partners’ net share) recorded in Non-interest expenses, resulting in no impact to Corporate reported Net income (loss). The Net income (loss) included in the U.S. Retail segment includes only the portion of revenue and credit losses attributable to the Bank under the agreements. individually insignificant PCL under IAS 39 on financial assets. 6 PCL − performing represents Stage 1 and Stage 2 PCL under IFRS 9 and incurred but not identified PCL under IAS 39 on financial assets, loan commitments, and financial guarantees. 7 For explanations of items of note, refer to the “Non-GAAP Financial Measures − 2 Net interest income within Wholesale Banking is calculated on a TEB. The TEB adjustment reflected in Wholesale Banking is reversed in the Corporate segment. 3 Effective February 1, 2017, the total gains and losses as a result of changes in fair Reconciliation of Adjusted to Reported Net Income” table in the “Financial Results Overview” section of this document. 8 Each capital ratio has its own RWA measure due to OSFI-prescribed scalar for value of the credit default swap and interest rate swap contracts hedging the reclassified financial assets at FVOCI (available-for-sale securities under IAS 39) portfolio are recorded in Wholesale Banking. Previously, these derivatives were accounted for on an accrual basis in Wholesale Banking and the gains and losses related to the derivatives, in excess of the accrued costs were reported in Corporate segment. Refer to Note 8 of the 2018 Consolidated Financial Statements for additional details. 4 The impact from certain treasury and balance sheet management activities relating to the U.S. Retail segment is recorded in the Corporate segment. inclusion of the CVA. For fiscal 2018 the scalars for inclusion of CVA for CET1, Tier 1 and Total Capital RWA are 80%, 83%, and 86%, respectively. For fiscal 2017, the scalars were 72%, 77%, and 81%, respectively. As at October 31, 2017, RWA for all ratios were the same due to the regulatory floor which was based on Basel I risk weights. As at October 31, 2018, the regulatory floor is based on Basel II standardized risk weights and is no longer triggered resulting in a separate RWA for each ratio due to the CVA scalar. 26 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS ECONOMIC SUMMARY AND OUTLOOK Global economic growth is slowing and so far remains in line with expectations. After peaking in the first half of calendar 2018 at 3.9%, global growth is projected to average roughly 3.7% in both 2018 and 2019 calendar years. An important element of this deceleration is China’s ongoing economic rebalancing, which is leaving a mark on trading partners via supply chain effects, as well as financial market volatility. For emerging markets, the challenges are enhanced by an elevated U.S. dollar and rising U.S. interest rates that have prompted investor capital outflows. In contrast, advanced economies continue to perform well, although the pace of growth in the euro area has moderated slightly. Nevertheless, the bias within these economies remains tilted towards reducing monetary stimulus. The U.S. has been leading the way, but as long as inflation continues to edge higher, other major central banks are expected to follow at a gradual pace. The United States has benefited from strong economic momentum in calendar 2018, supported by tax cuts and increased government spending. Together these are estimated to have added 0.6 percentage points to growth. Real gross domestic product (GDP) advanced by 4.2% and 3.5% annualized in the second and third calendar quarters, respectively. Robust consumer spending, in the neighborhood of 4% annualized, was the main driver. U.S. economic growth will likely remain above-trend in the coming quarters, but should steadily decelerate closer to the 2% mark by the latter half of calendar 2019, due to the impacts of fading fiscal stimulus and higher interest rates. Still, rising incomes generated by a tight labour market suggest that consumer spending should remain a key underpinning for growth. With the unemployment rate near a 50-year low and inflation hovering at the central bank’s 2% target, the Federal Reserve is forecasted to increase its policy interest rate from its current range of 2.0% to 2.25%, to 3.0% to 3.25% by the end of the 2019 calendar year. Canada’s economy produced a robust 2.9% expansion in the second calendar quarter of 2018, but current indicators suggest a more sustainable pace of roughly 2.0% unfolded in the third calendar quarter. Both export and import volumes have pulled back, due in part to supply chain disruptions in the energy and automotive sectors. Fortunately, these disruptions appear mostly temporary and trade flows may also benefit from the United States-Mexico-Canada Agreement (USMCA) struck in early October. Although it remains to be ratified by all three national governments, we consider that the agreement marks an important and necessary step towards normalized trading arrangements in North America. On a less positive note, recent developments in oil markets have resulted in record price discounts for Western Canadian energy products. Income impacts and announced production cuts will weigh on near-term economic activity in the western provinces. Some of the negative price dynamics, notably refinery outages, should resolve over the first half of the 2019 calendar year, thereby narrowing the magnitude of the discount and bring shuttered production back online. However, other factors will persist, such as limited transportation capacity. These pressures are expected to maintain a wider-than-historical spread on Canadian producer prices. Canadian housing markets continue to recover in the wake of changes to mortgage underwriting rules implemented at the beginning of calendar 2018. Activity in the Greater Toronto Area has stabilized, albeit at a slower pace than the past several years. In contrast, Vancouver activity remains modest, impacted by additional measures enacted in the February 2018 provincial budget. Outside of these areas, the housing data are mixed. Activity in oil-related provinces is still negatively impacted by excess housing supply, while other major urban centres like Montreal and Ottawa are proving resilient. Housing demand should remain supported by the upswing in population growth alongside solid household income and job growth. However, rising borrowing costs are likely to temper the speed of adjustment. On October 24, 2018, the Bank of Canada raised its policy interest rate by 25 bps to 1.75%. This marked the fifth increase since July 2017, and central bank communication maintains a bias towards further rate increases. The Bank of Canada has indicated that it will remain mindful of the risks posed by highly-indebted households that can leave them more sensitive to rising interest rates. As such, the central bank is expected to maintain a gradual approach to rate increases. TD Economics anticipates only three more 25 bps increases in the overnight rate by the end of calendar year 2019. This implies a terminal rate of 2.50%, which is well below that of its U.S. counterpart. Yields in Canada should thus remain lower than those in the U.S., and the currency is forecasted to hold within a range of US78 cents to US79 cents in calendar year 2019. Downside risks remain. Should recent price developments in Canadian heavy oil markets fail to improve as expected, further declines in output may occur, imparting larger negative impacts on Canadian incomes and spending. This outcome would moderate expectations for the Bank of Canada’s policy interest rate path. Despite achieving an important milestone with the USMCA, it must still be ratified by all three countries, including new governments in both the U.S. and Mexico. Canada’s central bank will also need to remain watchful of the possibility of a renewed slowdown in housing activity and a period of household deleveraging. In addition, trade tensions have intensified between U.S. and China in recent months, with the potential to disrupt globally integrated supply chains. Such an outcome presents a downside risk to the outlook for both the U.S. and Canada. Likewise, it is possible that inflationary pressures will unexpectedly heat-up in light of escalating global trade tensions coupled with greater labour scarcity within both countries. In addition, despite some progress in recent weeks, a number of issues remain unresolved with the United Kingdom’s exit from the European Union. Lastly, other areas that continue to present a downside risk include ongoing tensions in the Middle East, and populist threats to established political and economic systems. These all keep global uncertainty elevated and may drive periods of financial market volatility. 27 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSISBUSINESS SEGMENT ANALYSIS Canadian Retail Canadian Retail offers a full range of financial products and services to over 15 million customers in the Canadian personal and commercial banking, wealth, and insurance businesses. NET INCOME (millions of Canadian dollars) TOTAL REVENUE (millions of Canadian dollars) AVERAGE DEPOSITS (billions of Canadian dollars) $8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 $24,000 20,000 16,000 12,000 8,000 4,000 0 $350 300 250 200 150 100 50 0 2016 2017 2018 2016 2017 2018 2016 2017 2018 Personal Business Wealth T A B L E 1 5 REVENUE (millions of Canadian dollars) Personal banking Business banking Wealth Insurance Total 2018 $ 11,463 2,990 4,185 4,075 $ 22,713 2017 $ 10,706 2,702 3,838 3,816 $ 21,062 2016 $ 10,157 2,454 3,640 3,958 $ 20,209 28 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS BUSINESS HIGHLIGHTS • Continued to put our customers at the centre of everything CHALLENGES IN 2018 • Competitive pressures contributed to lower margins on we do by investing in our omni-channel experience, optimizing our branch network, and enhancing the value proposition of our products, including our mortgage concierge service which connects customers with mobile mortgage specialists who are nearby and available. • Continued to shape the future of retail banking by introducing new digital capabilities, including online pre-approval in the real estate secured lending business, Easy Apply for chequing and savings accounts, auto quoters in our insurance business, and one-time password authentication making login faster and easier, and reducing fraud. • Recognized as a leader in customer service, including being honored as an award winner among the Big 5 Canadian Retail Banks3 for “Customer Service Excellence”4, “Recommend to Friends & Family”5, “Branch Service”6, “ATM Banking”7, and “Live Agent Telephone Banking”8 by the 2018 Ipsos Customer Service Index (CSI) study9. • Acknowledged for our forward focus in digital banking by multiple independent providers of industry market data including: – #1 Canadian banking app according to Silicon Valley-based firm App Annie10; – #1 in Canadian digital banking with the highest number of digital unique visitors and the most digital engagement according to comScore11; and – #1 digital reach of any bank in Canada, the United Kingdom, Spain, France, and the United States, according to comScore11. • Continued to win the trust of new and existing customers as evidenced by strong volume growth across key businesses: – Record originations in real estate secured lending and auto finance; – Personal chequing and savings deposit volume growth of 4%; – Strong growth in credit cards with 9% growth in TD proprietary cards and retail sales exceeding $100 billion; – Strong Business Banking loan volume growth of 10%; and – Record accumulation of assets across our wealth businesses including record assets under management in TD Asset Management (TDAM), record assets under administration in TD Direct Investing and Advice businesses, and record net asset acquisitions, trading volumes and accounts opened during the year in TD Direct Investing. • Advanced our proven business model maintaining strong market share12 positions across all businesses including: – #1 market share in personal deposit, credit card, and Direct Investing; lending products. • Strong competition for new and existing customers from the major Canadian banks and non-bank competitors. • Housing market was impacted by changes to federal and provincial policies and increases in interest rates. • Heightened level of investment across all businesses to respond to evolving customer needs and intense competition. INDUSTRY PROFILE The personal and business banking environment in Canada comprises large chartered banks with sizeable regional banks and a number of niche competitors providing strong competition in specific products and markets. Continued success depends upon delivering outstanding customer service and convenience, maintaining disciplined risk management practices, and prudent expense management. The Canadian wealth management industry includes banks, insurance companies, independent mutual fund companies, brokers, and independent asset management companies. Market share growth in the wealth management industry lies in the ability to differentiate by providing an integrated wealth solution and keeping pace with technological changes and the regulatory environment. This includes providing the right products, and legendary and consistent relationship-focused client experiences to serve their evolving needs and goals. The property and casualty industry in Canada is fragmented and competitive, consisting of personal and commercial lines writers, whereas the life and health insurance industry is made up of several large competitors. Success in the insurance business depends on offering a range of products that provide protection at competitive prices that properly reflect the level of risk assumed. These industries also include non-traditional competitors ranging from start-ups to established non-financial companies expanding into financial services. OVERALL BUSINESS STRATEGY The strategy for Canadian Retail is to: • Provide trusted advice to help our customers feel confident about their financial future. • Consistently deliver legendary personal connected customer experiences across all channels. • Deepen customer relationships by delivering One TD and growing in underrepresented products and markets. • Execute with speed and impact, taking only those risks we can • understand and manage. Innovate with purpose for our customers and colleagues, simplifying to make it easier to get things done. • Be recognized as an extraordinary place to work where diversity and inclusiveness are valued. – #2 market share in real estate secured lending, personal loan, • Contribute to the well-being of our communities. mutual funds, and Business Banking deposits and loans; – Largest direct distribution insurer13 and leader in the affinity market13 in Canadian insurance; and – Largest money manager in Canada (with the acquisition of Greystone, which closed on November 1, 2018) 14. 3 Big 5 Canadian Retail Banks consist of Bank of Montreal, Canadian Imperial Bank of Commerce, Royal Bank of Canada, Scotiabank, and The Toronto-Dominion Bank. 4 TD Canada Trust has shared in the award for Customer Service Excellence in the syndicated 11 Source: comScore MMX® Multi-Platform, Business/Finance – Banking, Total audience, 3 months average ending July 2018, Canada, United States, Great Britain, Spain, and France. Ipsos 2018 Financial Services Excellence Study (2018 Ipsos Study). 5 TD Canada Trust has shared in the award for Recommend to Family & Friends in the 2018 Ipsos Study. 6 TD Canada Trust has shared in the award for the Branch Service Excellence in the 2018 Ipsos Study. 7 TD Canada Trust has shared in the ATM Banking Excellence award in the 2018 Ipsos Study. 8 TD Canada Trust has shared in the Live Agent Telephone Banking Excellence award in the 2018 Ipsos Study. 9 Ipsos 2018 Financial Service Excellence Awards are based on continuous fielding CSI survey results. Sample size for the total 2018 CSI program year ended with the September 2018 survey which yielded 75,334 financial institution ratings nationally. Leadership is defined as either a statistically significant lead over the other Big 5 Canadian Retail Banks (at a 95% confidence interval) or a statistically equal tie with one or more of the Big 5 Canadian Retail Banks. 10 TD ranked first according to 2018 App Annie report, which measured smartphone monthly active users, downloads, average sessions per user, open rate, average review score, and average time spent for August 2018 among top retail banking apps by time spent on Android phone. 12 Market share ranking is based on most current data available from OSFI for personal deposits and loans as at August 2018, from The Nilson Report for credit cards as at December 2017, from the Canadian Bankers Association for Real Estate Secured Lending as at June 2018, from the Canadian Bankers Association for business deposits and loans as at March 2018, from Strategic Insight for Direct Investing asset, trades, and revenue metrics as at June 2018, and from Investment Funds Institute of Canada for mutual funds when compared to the Big 6 Banks as at August 2018. The Big 6 Banks consist of Bank of Montreal, Canadian Imperial Bank of Canada, National Bank of Canada, Royal Bank of Canada, Scotiabank, and The Toronto-Dominion Bank. 13 Based on Gross Written Premiums for Property and Casualty business. Ranks based on data available from OSFI, insurers, Insurance Bureau of Canada, and provincial regulators as at December 31, 2017. 14 Strategic Insight Managed Money Advisory Service – Canada (Spring 2018 report, AUM effective December 2017), Benefits Canada 2018 Top 40 Money Managers report (May 2018 report, AUM effective December 2017); Assets under management as of October 31, 2018 for Greystone. 29 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIST A B L E 1 6 CANADIAN RETAIL (millions of Canadian dollars, except as noted) Net interest income Non-interest income Total revenue Provision for credit losses – impaired1 Provision for credit losses – performing2 Total provision for credit losses3 Insurance claims and related expenses Non-interest expenses Provision for (recovery of) income taxes Net income Selected volumes and ratios Return on common equity4 Net interest margin (including on securitized assets) Efficiency ratio Assets under administration (billions of Canadian dollars) Assets under management (billions of Canadian dollars) Number of Canadian retail branches Average number of full-time equivalent staff 2018 $ 11,576 11,137 22,713 927 71 998 2,444 9,473 2,615 $ 7,183 2017 $ 10,611 10,451 21,062 986 – 986 2,246 8,934 2,371 $ 6,525 2016 $ 9,979 10,230 20,209 1,011 – 1,011 2,462 8,557 2,191 $ 5,988 $ 47.8% 2.91 41.7 389 289 1,098 38,560 $ 45.2% 2.83 42.4 387 283 1,128 38,880 $ 41.9% 2.78 42.3 379 271 1,156 38,575 1 PCL − impaired represents Stage 3 PCL under IFRS 9 and counterparty-specific and individually insignificant PCL under IAS 39 on financial assets. 2 PCL − performing represents Stage 1 and Stage 2 PCL under IFRS 9 and incurred but not identified PCL under IAS 39 on financial assets, loan commitments, and financial guarantees. 3 Effective November 1, 2017, the PCL related to the allowances for credit losses for all three stages are recorded within the respective segment. Under IAS 39 and prior to November 1, 2017, the PCL related to the incurred but not identified allowance for credit losses related to products in the Canadian Retail segment was recorded in the Corporate segment. 4 Capital allocated to the business segment was based on 9% CET1 Capital in fiscal 2018, 2017, and 2016. REVIEW OF FINANCIAL PERFORMANCE Canadian Retail net income for the year was $7,183 million, an increase of $658 million, or 10%, compared with last year. The increase in earnings reflects revenue growth, partially offset by higher non-interest expenses, insurance claims, and PCL. The ROE for the year was 47.8%, compared with 45.2% last year. Canadian Retail revenue is derived from Canadian personal and commercial banking, wealth, and insurance businesses. Revenue for the year was $22,713 million, an increase of $1,651 million, or 8%, compared with last year. Net interest income increased $965 million, or 9%, reflecting volume growth and higher margins. Average loan volumes increased $23 billion, or 6%, reflecting 5% growth in personal loans and 10% growth in business loans. Average deposit volumes increased $15 billion, or 5%, reflecting 4% growth in personal deposits and 8% growth in business deposits. Net interest margin was 2.91%, or an increase of 8 bps, reflecting rising interest rates, partially offset by competitive pricing in loans. Non-interest income increased $686 million, or 7%, reflecting wealth asset growth, an increase in revenues from the insurance business, higher fee-based revenue in the personal banking business, and higher trading volumes in the direct investing business. An increase in the fair value of investments supporting claims liabilities, which resulted in a similar increase to insurance claims, increased non-interest income by $41 million. Assets under administration (AUA) were $389 billion as at October 31, 2018, an increase of $2 billion, or 1%, compared with last year, reflecting new asset growth, partially offset by decreases in market value. Assets under management (AUM) were $289 billion as at October 31, 2018, an increase of $6 billion, or 2%, compared with last year, reflecting new asset growth. PCL for the twelve months ended October 31, 2018 was $998 million, an increase of $12 million, or 1% compared with last year. PCL – impaired was $927 million, a decrease of $59 million, or 6%, reflecting strong credit performance across all business lines. PCL – performing (recorded in the Corporate segment last year as incurred but not identified credit losses under IAS 39) was $71 million primarily reflecting the adoption of IFRS 9 including where Stage 2 loans are measured on a lifetime ECL. Full year PCL as a percentage of credit volume was 0.25%, a decrease of 1 basis point. Net impaired loans were $664 million, an increase of $109 million, or 20%. Net impaired loans as a percentage of total loans were 0.16%, compared with 0.15%, as at October 31, 2017. Insurance claims and related expenses for the year were $2,444 million, an increase of $198 million, or 9%, compared with last year, reflecting an increase in reinsurance liabilities assumed, more severe weather-related events, higher current year claims, and an increase in the fair value of investments supporting claims liabilities which resulted in a similar increase to non-interest income, partially offset by more favourable prior years’ claims development, and the impact of changes to forward-looking actuarial assumptions. Non-interest expenses for the year were $9,473 million, an increase of $539 million, or 6%, compared with last year, reflecting increased employee-related expenses including revenue-based variable compensation expenses in the wealth business, increased marketing and promotion costs, increased spend related to strategic initiatives, and restructuring costs across a number of businesses. The efficiency ratio was 41.7%, compared with 42.4% last year. 30 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS BUSINESS OUTLOOK AND FOCUS FOR 2019 The pace of economic expansion in Canada is expected to remain consistent with 2018. However, global uncertainties underlying the outcome of various international trade disputes and continued softness in Canadian oil prices could impact growth in 2019. While many factors affect margins and they will fluctuate from quarter-to-quarter, the environment is expected to support a positive trend for margins on a full year basis. We expect regulatory changes to continue, which combined with the high level of competition, including from market disruptors, will require continued investment in our products, channels, and infrastructure. We will maintain our disciplined approach to risk management, but credit losses may be impacted by volume growth and possible normalization of credit conditions. Overall, absent significant changes in the economic and operating environment, we expect to deliver strong results in 2019. Our key priorities for 2019 are as follows: • Enhance end-to-end omni-channel capabilities to support key customer journeys, enabling a seamless, simple, intuitive and legendary customer experience. • Grow our market share by providing best-in-class products and services, when and where our customers need them, with an emphasis on underrepresented products and markets. • Expand our advisory capabilities by focusing on helping our customers understand their financial needs and feel confident about their financial future. • Accelerate growth and distribution capabilities 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 products and services, ensuring that they are competitive, easy to understand, and provide the protection our clients need. • Invest in our business and infrastructure to keep pace with evolving customer expectations, regulatory requirements, and cyber risks. • Continue to evolve our brand as an employer of choice, where colleagues achieve their full potential and where diversity and inclusiveness are valued. KEY PRODUCT GROUPS Personal Banking • Personal Deposits – offers a comprehensive line-up of chequing, savings, and investment products to retail clients. • Consumer Lending – offers a diverse range of unsecured financing products to suit the needs of retail clients. • Real Estate Secured Lending – offers homeowners a wide range of lending products secured by residential properties. • Credit Cards and Merchant Solutions – offers a variety of credit card products including proprietary, co-branded, and affinity credit card programs, as well as point-of-sale technology and payment solutions for large and small businesses. • Auto Finance – offers retail automotive and recreational vehicle financing including promotional rate loans offered in cooperation with large automotive manufacturers. Business Banking • Commercial Banking – serves the borrowing, deposit and cash management needs of businesses across a wide range of industries including real estate, agriculture, automotive, and commercial mortgages. • Small Business Banking – offers a wide range of financial products and services to small businesses. Wealth • Direct Investing – Canada’s first and largest online brokerage for self-directed investors, Direct Investing empowers traders and investors with innovative trading tools, industry-leading market research, online education, and 24/7 telephone support. • Advice-based business – offers investment advice, financial planning and private wealth services to help clients protect, grow, and transition their wealth. The advice-based wealth business has a strong partnership with the Canadian personal and commercial banking businesses. • Asset Management – With the closing of the Greystone acquisition on November 1, 2018, TDAM is Canada’s largest money manager15 with deep retail and institutional capabilities. TD Mutual Funds is a leading mutual fund business, providing a broadly diversified range of mutual funds and professionally managed portfolios. All asset management units work in close partnership with other TD businesses. Insurance • Property and Casualty – TD is the largest direct distribution insurer16 and the fourth largest personal insurer16 in Canada. It is also the national leader in the affinity market16 offering home and auto insurance 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 through TD Canada Trust branches. Other simple life and health insurance products, credit card balance protection, and travel insurance products, are distributed through direct channels. 15 Strategic Insight Managed Money Advisory Service – Canada (Spring 2018 report, AUM effective December 2017), Benefits Canada 2018 Top 40 Money Managers report (May 2018 report, AUM effective December 2017); Assets under management as of October 31, 2018 for Greystone. 16 Based on Gross Written Premiums for Property and Casualty business. Ranks based on data available from OSFI, insurers, Insurance Bureau of Canada, and provincial regulators as at December 31, 2017. 31 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS BUSINESS SEGMENT ANALYSIS U.S. Retail Operating under the brand name, TD Bank, America’s Most Convenient Bank®, the U.S. Retail Bank offers a full range of financial products and services to over 9 million customers in the Bank’s U.S. personal and business banking operations, including wealth management. U.S. Retail includes an equity investment in TD Ameritrade. NET INCOME (millions of Canadian dollars) TOTAL REVENUE (millions of Canadian dollars) EFFICIENCY RATIO (percent) $4,800 4,200 3,600 3,000 2,400 1,800 1,200 600 0 $12,000 10,000 8,000 6,000 4,000 2,000 0 62% 60 58 56 54 2016 2017 2018 2016 2017 2018 2016 2017 2018 Reported Adjusted Reported Adjusted Reported Adjusted T A B L E 1 7 REVENUE – Reported 1 (millions of dollars) Personal Banking Business Banking Wealth Other2 Total Canadian dollars 2018 $ 6,140 3,527 511 766 $ 10,944 2017 $ 5,599 3,399 504 719 $ 10,221 2016 $ 5,153 3,173 455 678 $ 9,459 2018 $ 4,769 2,740 397 595 $ 8,501 2017 $ 4,283 2,600 386 549 $ 7,818 U.S. dollars 2016 $ 3,884 2,391 343 512 $ 7,130 1 Excludes equity in net income of an investment in TD Ameritrade. 2 Other revenue consists primarily of revenue from investing activities and an insured deposit account (IDA) agreement with TD Ameritrade. 32 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS BUSINESS HIGHLIGHTS • Record performance in: – Reported earnings of US$3,253 million, an increase of 28%, compared with last year; – Reported return on equity of 12.2%, an increase of 250 bps, compared with last year; and – Reported efficiency ratio of 55.7%, an improvement of 190 bps, compared with last year. • Continued to provide legendary customer service and convenience: – “Ranked Highest in Dealer Satisfaction with Floor Planning by J.D. Power”17. • Recognized as an extraordinary and inclusive place to work: – Named to DiversityInc.’s Top 50 Companies in the U.S. for diversity for the sixth year in a row; and – Recognized by American Banker – Most Powerful Women in Banking, where two members of the TD team were named to the Women to Watch list, and in addition, several of our TD Bank leaders were recognized as a Top Team in Banking this year for the first time. • Led our peers in loan and deposit growth, as well as household acquisition. • Deepened relationships with new and existing customers. • Continued focus on enhancements to our core capabilities and infrastructure, as well as building out digital capabilities. • TD Ameritrade had strong organic growth and successfully completed the integration of Scottrade. CHALLENGES IN 2018 • Moderating corporate loan growth. • Moderating residential real estate loan originations in the rising rate environment. • Slower deposit growth as a result of competitive environment and higher yielding alternatives. • Ongoing industry trend of assets under management moving from active to passive investment strategies. • Competition from U.S. banks and non-bank competitors (such as Fintech). INDUSTRY PROFILE The U.S. personal and business 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 includes national and regional banks, insurance companies, independent mutual fund companies, brokers, and independent asset management companies. The personal and business banking and wealth management industries also include non-traditional competitors ranging from start-ups to established non-financial companies expanding into financial services. These industries serve individuals, businesses, and governments. Products include deposit, lending, cash management, financial advice, and asset management. These products may be distributed through a single channel or an array of distribution channels such as physical locations, digital, and ATMs. Certain businesses also serve customers through indirect channels. Traditional competitors are embracing new technologies and strengthening their focus on the customer experience. Non-traditional competitors (such as Fintech) have continued to gain momentum and are increasingly collaborating with banks to evolve customer products and experience. The keys to profitability continue to be attracting and retaining customer relationships with legendary service and convenience, offering products and services through an array of distribution channels that meet customers’ evolving needs, making strategic investments while maintaining disciplined expense management over operating costs, and prudent risk management. OVERALL BUSINESS STRATEGY The strategy for U.S. Retail is to: • Deliver legendary omni-channel service and convenience. • Grow and deepen customer relationships. • Leverage our differentiated brand as the “human” bank. • Innovate with purpose to simplify processes and execute with speed and excellence. • Be a premier destination for top talent. • Maintain prudent risk management. • Actively support the communities where we operate. 17 TD Auto Finance received the highest score in the floor planning segment in the J.D. Power 2018 Dealer Financing Satisfaction Study of dealers’ satisfaction with automotive finance providers. Visit jdpower.com/awards. 33 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIST A B L E 1 8 U.S. RETAIL (millions of dollars, except as noted) Canadian Dollars Net interest income Non-interest income1 Total revenue – reported2 Provisions for credit losses – impaired3 Provisions for credit losses – performing4 Total provisions for credit losses Non-interest expenses – reported Non-interest expenses – adjusted5 Provisions for (recovery of) income taxes – reported1 Provisions for (recovery of) income taxes – adjusted1 U.S. Retail Bank net income – reported U.S. Retail Bank net income – adjusted5 Equity in net income of an investment in TD Ameritrade – reported1 Equity in net income of an investment in TD Ameritrade – adjusted1,6 Net income – reported Net income – adjusted U.S. Dollars Net interest income Non-interest income1 Total revenue – reported2 Provision for credit losses – impaired3 Provision for credit losses – performing4 Total provision for credit losses Non-interest expenses – reported Non-interest expenses – adjusted5 Provisions for (recovery of) income taxes – reported1 Provisions for (recovery of) income taxes – adjusted1 U.S. Retail Bank net income – reported U.S. Retail Bank net income – adjusted5 Equity in net income of an investment in TD Ameritrade – reported1 Equity in net income of an investment in TD Ameritrade – adjusted1,6 Net income – reported Net income – adjusted Selected volumes and ratios Return on common equity – reported7 Return on common equity – adjusted7 Net interest margin1,2,8 Efficiency ratio – reported Efficiency ratio – adjusted Assets under administration (billions of U.S. dollars) Assets under management (billions of U.S. dollars) Number of U.S. retail stores Average number of full-time equivalent staff 2018 2017 2016 $ 8,176 2,768 10,944 776 141 917 6,100 6,079 432 437 3,495 3,511 693 865 4,188 $ 4,376 $ 6,350 2,151 8,501 605 108 713 4,739 4,722 334 338 2,715 2,728 538 673 3,253 $ 3,401 $ 7,486 2,735 10,221 648 144 792 5,878 5,852 671 681 2,880 2,896 442 462 3,322 $ 3,358 $ 5,727 2,091 7,818 498 109 607 4,500 4,479 511 519 2,200 2,213 336 352 2,536 $ 2,565 $ 7,093 2,366 9,459 534 210 744 5,693 5,693 498 498 2,524 2,524 435 435 2,959 $ 2,959 $ 5,346 1,784 7,130 402 157 559 4,289 4,289 376 376 1,906 1,906 328 328 2,234 $ 2,234 12.2% 12.8 3.29 55.7 55.5 19 52 1,257 26,594 $ 9.7% 9.8 3.11 57.6 57.3 18 63 1,270 25,923 $ 8.8% 8.8 3.12 60.2 60.2 17 66 1,278 25,732 $ 1 The reduction of the U.S. federal corporate tax rate enacted by the U.S. Tax Act 5 Adjusted non-interest expense excludes the following items of note: Charges resulted in an adjustment during 2018 to the Bank’s U.S. deferred tax assets and liabilities to the lower base rate of 21% as well as an adjustment to the Bank’s carrying balances of certain tax credit-related investments and its investment in TD Ameritrade. This earnings impact was reported in the Corporate segment. For additional details, 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 the first quarter of 2017, the impact from certain treasury and balance sheet management activities relating to the U.S. Retail segment is recorded in the Corporate segment. 3 PCL − impaired represents Stage 3 PCL under IFRS 9 and counterparty-specific and individually insignificant PCL under IAS 39 on financial assets. 4 PCL − performing represents Stage 1 and Stage 2 PCL under IFRS 9 and incurred but not identified PCL under IAS 39 on financial assets, loan commitments, and financial guarantees. associated with the Bank’s acquisition of Scottrade Bank in 2018 – $21 million ($16 million after tax) or US$17 million ($13 million after tax), 2017 – $26 million ($16 million after tax) or US$21 million (US$13 million after tax). 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. 6 Adjusted equity in net income of an investment in TD Ameritrade excludes the following item of note: The Bank’s share of charges associated with TD Ameritrade’s acquisition of Scottrade in 2018 – $172 million or US$135 million after tax, 2017 – $20 million or US$16 million after tax. 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. 7 Capital allocated to the business segments was based on 9% CET1 Capital in fiscal 2018, 2017, and 2016. 8 Net interest margin excludes the impact related to the TD Ameritrade IDA and the impact of intercompany deposits and cash collateral. In addition, the value of tax-exempt interest income is adjusted to its equivalent before-tax value. 34 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS REVIEW OF FINANCIAL PERFORMANCE U.S. Retail reported net income for the year was $4,188 million (US$3,253 million), an increase of $866 million (US$717 million), or 26% (28% in U.S. dollars), compared with last year. On an adjusted basis, net income for the year was $4,376 million (US$3,401 million), an increase of $1,018 million (US$836 million), or 30% (33% in U.S. dollars). The reported and adjusted ROE for the year was 12.2% and 12.8%, respectively, compared with 9.7%, and 9.8%, respectively, in the prior year. U.S. Retail net income includes contributions from the U.S. Retail Bank and the Bank’s investment in TD Ameritrade. Reported net income for the year from the U.S. Retail Bank and the Bank’s investment in TD Ameritrade were $3,495 million (US$2,715 million) and $693 million (US$538 million), respectively. On an adjusted basis for the year, the U.S. Retail Bank and the Bank’s investment in TD Ameritrade contributed net income of $3,511 million (US$2,728 million) and $865 million (US$673 million), respectively. The reported contribution from TD Ameritrade of US$538 million increased US$202 million, or 60%, compared with last year, primarily due to the benefit of the Scottrade transaction, higher interest rates, increased trading volumes, and a lower corporate tax rate, partially offset by higher operating expenses and charges associated with the Scottrade transaction. On an adjusted basis, the contribution from TD Ameritrade increased US$321 million, or 91%. U.S. Retail Bank reported net income for the year was US$2,715 million, an increase of US$515 million, or 23%, compared with last year, primarily due to higher loan and deposit volumes, higher deposit margins, fee income growth, the benefit of the Scottrade transaction, and a lower corporate tax rate, partially offset by higher expenses and PCL. U.S. Retail Bank adjusted net income increased US$515 million, or 23%. U.S. Retail Bank revenue is derived from personal and business banking, and wealth management. Revenue for the year was US$8,501 million, an increase of US$683 million, or 9%, compared with last year. Net interest income increased US$623 million, or 11%, primarily due to a more favourable interest rate environment, growth in loan and deposit volumes, and the benefit of the Scottrade transaction. Net interest margin was 3.29%, an 18 bps increase primarily due to higher deposit margins and balance sheet mix. Non-interest income increased US$60 million, or 3%, reflecting fee income growth in personal and commercial banking, partially offset by losses on certain tax credit-related investments. Average loan volumes increased US$6 billion, or 4%, compared with last year, due to growth in personal and business loans of 6% and 3%, respectively. Average deposit volumes increased US$19 billion, or 8%, reflecting 1% growth in business deposit volumes, 4% growth in personal deposit volumes and a 15% increase in sweep deposit volume primarily due to the Scottrade transaction. AUA were US$19 billion as at October 31, 2018, relatively flat compared with the prior year. AUM were US$52 billion as at October 31, 2018, a decrease of 17%, reflecting net fund outflows. PCL was US$713 million, an increase of US$106 million, or 17%, compared with last year. PCL – impaired was US$605 million, an increase of US$107 million, or 21%, primarily reflecting volume growth, seasoning, and mix in the credit card and auto portfolios. PCL – performing was US$108 million, relatively flat compared to last year, primarily reflecting lower provisions for the commercial portfolios, offset by the impact of methodology changes related to the adoption of IFRS 9 where Stage 2 loans are now measured based on a lifetime ECL. U.S. Retail PCL including only the Bank’s contractual portion of credit losses in the U.S. strategic cards portfolio, as an annualized percentage of credit volume was 0.48%, or an increase of 6 bps. Net impaired loans, excluding ACI loans, were US$1.4 billion, a decrease of US$45 million, or 3%. Excluding ACI loans, net impaired loans as a percentage of total loans were 1% as at October 31, 2018. Reported non-interest expenses for the year were US$4,739 million, an increase of US$239 million, or 5%, compared with last year, reflecting higher investments in business initiatives, business and volume growth, and employee-related costs, partially offset by productivity savings. On an adjusted basis, non-interest expenses for the year were US$4,722 million, an increase of US$243 million, or 5%. The reported and adjusted efficiency ratios for the year were 55.7% and 55.5%, respectively, compared with 57.6% and 57.3%, respectively, 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 nationwide, retail partnerships to provide credit card products to their U.S. customers. • Auto Finance – offers indirect retail financing through a network of auto dealers, along with floorplan financing to automotive dealerships throughout the U.S. Business Banking • Small Business Banking – offers a range of financial products and services to small businesses. • Commercial Banking – serves the needs of U.S. businesses and governments across a wide range of industries. Wealth • Advice-based Business – provides private banking, investment advisory, and trust services to retail and institutional clients. 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 Epoch Investment Partners Inc. and the U.S. arm of TDAM’s investment business. BUSINESS OUTLOOK AND FOCUS FOR 2019 We anticipate the operating environment to remain stable in 2019, characterized by solid economic growth, continued rising interest rates, and fierce competition. This should support continuing loan and deposit growth and improving net interest margins on a full year basis. Volume growth and continued normalizing of credit conditions may lead to an increase in credit losses in 2019. Uncertainties over trade and tariffs could slow down growth and increase credit losses at the same time. We expect to maintain a disciplined expense management approach, while continuing to make strategic business investments. We expect expense growth to be similar to 2018 while generating positive operating leverage for the year as well as see further improvements in the efficiency ratio. Our key priorities for 2019 are as follows: • Deliver consistency and excellence in sales and service to drive more meaningful interactions and better serve the needs of our customers. • Deepen customer engagement through delivering a personalized and connected experience across all channels. • Leverage our infrastructure and capabilities to simplify and enhance the customer and employee experience. • Grow our market share by deepening customer relationships, growing underrepresented products, and expanding into attractive markets. • Continue to prudently manage risk and meet heightened regulatory expectations. • Continue to make progress on our talent strategy with a continuing focus on diversity and inclusion. TD AMERITRADE HOLDING CORPORATION Refer to Note 12 of the 2018 Consolidated Financial Statements for further information on TD Ameritrade. 35 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS BUSINESS SEGMENT ANALYSIS Wholesale Banking Operating under the brand name TD Securities, Wholesale Banking offers a wide range of capital markets and corporate and investment banking services to corporate, government, and institutional clients in key global financial centres. NET INCOME (millions of Canadian dollars) TOTAL REVENUE (millions of Canadian dollars) RETURN ON COMMON EQUITY (percent) $1,200 1,000 800 600 400 200 0 $3,500 3,000 2,500 2,000 1,500 1,000 500 0 19% 17 15 13 11 2016 2017 2018 2016 2017 2018 2016 2017 2018 T A B L E 1 9 REVENUE (millions of Canadian dollars) Global markets Corporate and investment banking Other Total 2018 $ 2,387 996 76 $ 3,459 2017 $ 2,348 860 63 $ 3,271 2016 $ 2,239 767 24 $ 3,030 36 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS CHALLENGES IN 2018 • Rising interest rate environment contributing to challenges in fixed income trading and equities markets. • Significantly reduced capital markets activity in the Canadian energy sector. Lower oil and gas pricing, and transportation issues caused a meaningful slowdown in industry investment and M&A activity. • NAFTA and general tariff uncertainty resulted in reduced global investor interest in Canada. • Slow overall global industry growth pressuring margins. • Investments and capital required to meet continued regulatory changes. INDUSTRY PROFILE The wholesale banking sector is a mature, highly competitive market with competition arising from banks, large global investment firms, and independent niche dealers. Wholesale Banking provides services to corporate, government, and institutional clients. Products include capital markets and corporate and investment banking services. Regulatory requirements for wholesale banking businesses have continued to evolve, impacting strategy and returns for the sector. Overall, wholesale banks have continued to shift their focus to client-driven trading revenue and fee income to reduce risk and to 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 • Solidify our leadership in Canada and be the top-ranked investment dealer with global execution capabilities. • Build our U.S. dollar capabilities by growing valued, trusted relationships with our banking and markets clients in sectors where we are well positioned and competitive. • Expand the client franchise organically by deepening client relationships, adding people, and investing in our products and services. • Leverage TD’s franchise, working to support our banking partners. • Foster our strong risk culture to enable growth while remaining within risk appetite. • Adapt our infrastructure to enable the investment dealer for tomorrow, focused on operational excellence to meet client and stakeholder needs. • Be an extraordinary and inclusive place to work by attracting, developing, and retaining the best talent. BUSINESS HIGHLIGHTS • Earnings of $1,054 million and a ROE of 17.7%. • Higher revenue, reflecting the strength in our business in Canada and the continued growth in the U.S. • Notable deals in the year: – Advised Thomson Reuters on the sale of a 55% interest in its Financial & Risk business to private equity funds managed by Blackstone and the creation of a strategic partnership for the business (now known as Refinitiv). This deal represented the largest corporate carve-out and leveraged buyout in Canadian history. The transaction demonstrates our leadership in the communications, media, and technology sector, and is important in building our Mergers and Acquisitions (M&A) franchise; – Demonstrated our leadership in the new Secured Overnight Financing Rate (SOFR) Index market, having been one of three managers on Fannie Mae’s US$6 billion floating rate note issuance using the SOFR Index, the first major test of this alternative to U.S. dollar London Interbank Offered Rate (LIBOR). Subsequently, TD Securities continued to play a leading role in this market’s growth, having been involved in over US$13 billion, or 79%, of the market’s SOFR-linked issuances; and – Continued to gain traction on our U.S. dollar strategy, delivering on some key mandates for both domestic and U.S. clients demonstrating our capabilities and expertise in U.S. markets. We were a joint book-runner on US$750 million issuance of 30-year notes for each of Bell Canada and Telus. We also delivered back-to-back mandates for Ford Motor Company, first on its US$1.8 billion loan asset backed securities (ABS) and second on its US$2 billion multi-tranche seven-year offering. • Continued to make investments to build our U.S. dollar business, strategically hiring people in our investment banking, underwriting, and trading teams, and enhancing our product offerings. • Continued to onboard clients to our TD Prime Services platform, our prime brokerage business based in New York that was acquired in 2017. • Top-two dealer status in Canada (for the ten-month period ended October 31, 2018)18: – #1 in equity options block trading; – #1 in syndicated loans (on a rolling twelve-month basis); – #1 in M&A announced (on a rolling twelve-month basis); – #1 in equity underwriting; – #2 in equity block trading; and – #2 in government debt and corporate debt underwriting. • TD Securities was recognized with awards, demonstrating our expertise and execution capabilities within Capital Markets: – For the first time, TD Securities tied for #1 as 2018 Greenwich Share Leaders for Overall Canadian Fixed Income Market Share and ranks #1 as the 2018 Greenwich Quality Leader for Canadian Fixed Income Sales; – TD Securities Equity Research was awarded the most Thomson Reuters Analyst Awards of any Canadian Broker, the fourth time within the last six years. These awards celebrate the world’s top individual sell-side analysts and sell-side firms; and – Recognized as the 2018 GlobalCapital Award winner for “Coming Force in FIG Bonds” and “Canada Derivatives House of the Year”. 18 Rankings reflect TD Securities’ position among Canadian peers in Canadian product markets. Equity options block trading: block trades by number of contracts on the Montreal Stock Exchange, Source: Montreal Exchange. Syndicated loans: deal volume awarded equally between the book-runners, Source: Bloomberg. M&A announced: Canadian targets, Source: Thomson Reuters. Equity underwriting, Source: Bloomberg. Equity block trading: block trades by value on all Canadian exchanges, Source: IRESS. Government and corporate debt underwriting: excludes self-led domestic bank deals and credit card deals, bonus credit to lead, Source: Bloomberg. 37 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIST A B L E 2 0 WHOLESALE BANKING (millions of Canadian dollars, except as noted) Net interest income (TEB) Non-interest income1,2 Total revenue Provision for (recovery of) credit losses – impaired2,3 Provision for (recovery of) credit losses – performing4 Total provision for (recovery of) credit losses5 Non-interest expenses Provision for (recovery of) income taxes (TEB)6 Net income Selected volumes and ratios Trading-related revenue (TEB) Gross drawn (billions of Canadian dollars)7 Return on common equity8 Efficiency ratio Average number of full-time equivalent staff 2018 $ 1,150 2,309 3,459 (8) 11 3 2,067 335 $ 1,054 2017 $ 1,804 1,467 3,271 (28) – (28) 1,929 331 $ 1,039 2016 $ 1,685 1,345 3,030 74 – 74 1,739 297 $ 920 $ 1,749 23.9 17.7% 59.8 4,187 $ 1,714 20.3 17.4% 59.0 3,989 $ 1,636 20.7 15.5% 57.4 3,766 1 Effective February 1, 2017, the total gains and losses on derivatives hedging the reclassified securities portfolio (classified as FVOCI under IFRS 9 and AFS portfolio under IAS 39) are recorded in Wholesale Banking, previously reported in the Corporate segment and treated as an item 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 November 1, 2017, the accrual costs related to CDS used to manage Wholesale Banking’s corporate lending exposure are recorded in non-interest income, previously reported as a component of PCL. The change in market value of the CDS, in excess of the accrual cost, continues to be reported in the Corporate segment. 3 PCL − impaired represents Stage 3 PCL under IFRS 9 and counterparty-specific and individually insignificant PCL under IAS 39 on financial assets. 4 PCL − performing represents Stage 1 and Stage 2 PCL under IFRS 9 and incurred but not identified PCL under IAS 39 on financial assets, loan commitments, and financial guarantees. 5 Effective November 1, 2017, the PCL related to the allowances for credit losses for all three stages are recorded within the respective segment. Under IAS 39 and prior to November 1, 2017, the PCL related to the incurred but not identified allowance for credit losses related to products in Wholesale Banking was recorded in the Corporate segment. 6 The reduction of the U.S. federal corporate tax rate enacted by the U.S. Tax Act resulted in a one-time adjustment during 2018 to Wholesale Banking’s U.S. deferred tax assets and liabilities to the lower base rate of 21%. The earnings impact was reported in the Corporate segment. For additional details, refer to the “Non-GAAP Financial Measures − Reconciliation of Adjusted to Reported Net Income” table in the “Financial Results Overview” section of this document. 7 Includes gross loans and bankers’ acceptances, excluding letters of credit, cash collateral, credit default swaps, and reserves for the corporate lending business. 8 Capital allocated to the business segments was based on 9% CET1 Capital in fiscal 2018, 2017, and 2016. BUSINESS OUTLOOK AND FOCUS FOR 2019 We are cautiously optimistic that capital markets revenues may improve in 2019, as we continue to build our U.S. dollar businesses. However, we remain watchful of market sentiment as a combination of global geo-political and trade uncertainties, recent market volatility, increased competition, and evolving capital and regulatory requirements, may continue to impact our business. While these factors may affect corporate and investor sentiment in the near term, we expect that our diversified, integrated, and client-focused business model will continue to deliver solid results and allow for growth in our business. Our key priorities for 2019 are as follows: • Continue to be a top-ranked investment dealer in Canada by deepening client relationships. • Grow our U.S. dollar business, focusing on opportunities in areas such as TD Prime Services, Debt Capital Markets (DCM), ABS, and Corporate and Investment Banking. • Focus on productivity and seamless execution in our end-to- end delivery of products and services. • Invest in an efficient and agile infrastructure to support growth and adapt to industry and regulatory changes. • Maintain our focus on managing risk, capital, balance sheet, and liquidity. • Continue to be an extraordinary place to work with a focus on inclusion and diversity. REVIEW OF FINANCIAL PERFORMANCE Wholesale Banking net income for the year was $1,054 million, an increase of $15 million, or 1%, compared with the prior year reflecting higher revenue, partially offset by higher non-interest expenses and PCL for the year compared to a net recovery of PCL in the prior year. The ROE for the year was 17.7%, compared with 17.4% in the prior year. Revenue for the year was $3,459 million, an increase of $188 million, or 6%, compared with the prior year reflecting increased corporate lending, advisory fees, and trading-related revenue. PCL for the year was $3 million, compared with a net recovery of $28 million in the prior year. PCL – impaired was a net recovery of $8 million, compared with a net recovery of $28 million in the prior year, reflecting a lower recovery of provisions in the oil and gas sector. PCL – performing (recorded in the Corporate segment last year as incurred but not identified credit losses under IAS 39) for the year was $11 million primarily reflecting the adoption of IFRS 9 including where Stage 2 loans are measured on a lifetime ECL. Non-interest expenses were $2,067 million, an increase of $138 million, or 7%, compared with the prior year reflecting continued investments in employees supporting the global expansion of Wholesale Banking’s U.S. dollar strategy, higher initiative spend to enhance new product capabilities and higher variable compensation commensurate with increased revenue, partially offset by the revaluation of certain liabilities for post-retirement benefits. LINES OF BUSINESS • Global Markets includes sales, trading and research, debt and equity underwriting, client securitization, trade finance, cash management, prime brokerage, and trade execution services19. • Corporate and Investment Banking includes corporate lending and syndications, debt and equity underwriting, and advisory services19. • Other includes the investment portfolio and other accounting adjustments. 19 Revenue is shared between Global Markets and Corporate and Investment Banking lines of business in accordance with an established agreement. 38 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS BUSINESS SEGMENT ANALYSIS Corporate Corporate segment is comprised of a number of service and control groups. Certain costs relating to these functions are allocated to operating business segments. The basis of allocation and methodologies are reviewed periodically to align with management’s evaluation of the Bank’s business segments. T A B L E 2 1 CORPORATE (millions of Canadian dollars) Net income (loss) – reported1,2,3,4 Pre-tax adjustments for items of note5 Amortization of intangibles Impact from U.S. tax reform4 Dilution gain on the Scottrade transaction Loss on sale of the Direct Investing business in Europe Fair value of derivatives hedging the reclassified available-for-sale securities portfolio1 Impairment of goodwill, non-financial assets, and other charges Total pre-tax adjustments for items of note Provision for (recovery of) income taxes for items of note4 Net income (loss) – adjusted Decomposition of items included in net income (loss) – adjusted Net corporate expenses Other Non-controlling interests Net income (loss) – adjusted Selected volumes Average number of full-time equivalent staff 1 Effective February 1, 2017, the total gains and losses on derivatives hedging the reclassified available-for-sale securities portfolio (classified as FVOCI under IFRS 9 and AFS under IAS 39) are recorded in Wholesale Banking, previously reported in the Corporate segment and treated as an item of note. Refer to the “Non-GAAP Financial Measures – Reconciliation of Adjusted to Reported Net Income” table in the “How We Performed” section of this document. 2 Effective the first quarter of 2017, the impact from certain treasury and balance sheet management activities relating to the U.S. Retail segment is recorded in the Corporate segment. 3 Effective November 1, 2017, the PCL related to the allowances for credit losses for all three stages are recorded within the respective segment. Under IAS 39 and prior to November 1, 2017, the PCL related to the incurred but not identified allowance for credit losses related to products in the Canadian Retail and Wholesale Banking segments were recorded in the Corporate segment. Corporate segment results include unallocated revenue and expenses, the impact of treasury and balance sheet management activities, tax items at an enterprise level, and intercompany adjustments such as elimination of taxable equivalent basis and the retailer program partners’ share relating to the U.S. strategic cards portfolio. The Corporate segment reported net loss for the year was $1,091 million, compared with a reported net loss of $369 million last year. The year-over-year increase in reported net loss was attributable to the impact from U.S. tax reform this year, the dilution gain on the Scottrade transaction last year, increased net corporate expenses and decreased non-controlling interests this year and the gain on fair value of derivatives hedging the reclassified available-for-sale securities portfolio last year. Net corporate expenses increased primarily due to the positive impact of tax adjustments last year, the impact of the reduction of the U.S. corporate tax rate on current year expenses and investments in advanced analytic and artificial intelligence capabilities in the current year. The adjusted net loss for the year was $430 million, compared with an adjusted net loss of $335 million last year. 2018 2017 2016 $ (1,091) $ (369) $ (931) 324 48 – – – – 372 (289) (430) (822) 320 72 (430) $ $ $ 310 – (204) 42 (41) – 107 73 (335) (767) 311 121 (335) $ $ $ 335 – – – (7) 111 439 83 (575) (836) 146 115 (575) $ $ $ 15,042 14,368 13,160 4 The reduction of the U.S. federal corporate tax rate enacted by the U.S. Tax Act resulted in a net charge to earnings during 2018 of $392 million, comprising a net $48 million pre-tax charge related to the write-down of certain tax credit-related investments, partially offset by the favourable impact of the Bank’s share of TD Ameritrade’s remeasurement of its deferred income tax balances and a net $344 million income tax expense resulting from the remeasurement of the Bank’s deferred tax assets and liabilities to the lower base rate of 21% and other related tax adjustments. 5 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. FOCUS FOR 2019 In 2019, service and control groups within the Corporate segment will continue supporting our Business segments as well as executing enterprise and regulatory initiatives and managing the Bank’s balance sheet and funding activities. We will continue to proactively address the complexities and challenges from changing demands and expectations of our customers, communities, colleagues, governments and regulators. We will maintain focus on the design, development, and implementation of processes, systems, technologies, enterprise and regulatory controls and initiatives to enable the Bank’s key businesses to operate efficiently, effectively, and to be in compliance with all applicable regulatory requirements. 39 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS 2017 FINANCIAL RESULTS OVERVIEW Summary of 2017 Performance T A B L E 2 2 REVIEW OF 2017 FINANCIAL PERFORMANCE1 (millions of Canadian dollars) Net interest income Non-interest income Total revenue Provision for (recovery of) credit losses – impaired2 Provision for (recovery of) credit losses – performing3 Total 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 TD Ameritrade Net income (loss) – reported Adjustments for items of note, net of income taxes Net income (loss) – adjusted Canadian Retail $ 10,611 10,451 21,062 986 – 986 2,246 8,934 8,896 2,371 – 6,525 – $ 6,525 U.S. Retail $ 7,486 2,735 10,221 648 144 792 – 5,878 3,551 671 442 3,322 36 $ 3,358 Wholesale Banking Corporate $ 1,804 1,467 3,271 (28) – (28) – 1,929 1,370 331 – 1,039 – $ 1,039 $ 946 649 1,595 384 82 466 – 2,625 (1,496) (1,120) 7 (369) 34 (335) $ Total $ 20,847 15,302 36,149 1,990 226 2,216 2,246 19,366 12,321 2,253 449 10,517 70 $ 10,587 1 Certain comparative amounts have been recast to conform with presentation adopted in the current period. For further details, refer to the “Business Focus” section of this document. 3 PCL − performing represents Stage 1 and Stage 2 PCL under IFRS 9 and incurred but not identified PCL under IAS 39 on financial assets, loan commitments, and financial guarantees. 2 PCL − impaired represents Stage 3 PCL under IFRS 9 and counterparty-specific and individually insignificant PCL under IAS 39 on financial assets. NET INCOME Reported net income for the year was $10,517 million, an increase of $1,581 million, or 18%, compared with the prior year. The increase reflects revenue growth, lower insurance claims, and PCL, partially offset by higher non-interest expenses. Reported diluted EPS for the year was $5.50, an increase of 18%, compared with $4.67 in the prior year. Adjusted diluted EPS for the year was $5.54, a 14% increase, compared with $4.87 in the prior year. Reported revenue was $36,149 million, an increase of $1,834 million, or 5%, compared with the prior year. Adjusted revenue was $35,946 million, an increase of $1,638 million, or 5%, compared with the prior year. NET INTEREST INCOME Net interest income for the year was $20,847 million, an increase of $924 million, or 5%, compared with the prior year. The increase reflects loan and deposit volume growth in the Canadian and U.S. Retail segments, and a more favourable interest rate environment. The increase was partially offset by a favourable accounting impact from balance sheet management activities in the prior year, which was largely offset in non-interest income. By segment, the increase in reported net interest income was due to an increase in Canadian Retail of $632 million, or 6%, an increase in U.S. Retail of $393 million, or 6%, and an increase in Wholesale Banking of $119 million, or 7%, partially offset by a decrease in the Corporate segment of $220 million, or 19%. NON-INTEREST INCOME Reported non-interest income for the year was $15,302 million, an increase of $910 million, or 6%, compared with the prior year. The increase reflects fee growth in the Canadian and U.S. Retail segments, a dilution gain on the Scottrade transaction, an unfavourable accounting impact from balance sheet management activities in the prior year, which was largely offset in net interest income, and increased corporate lending fees in Wholesale Banking, partially offset by changes in the fair value of investments supporting claims liabilities which resulted in a similar decrease to insurance claims. Adjusted non-interest income for the year was $15,099 million, an increase of $714 million, or 5%, compared with the prior year. 40 By segment, the increase in reported non-interest income was due to an increase in U.S. Retail of $369 million, or 16%, an increase in Canadian Retail of $221 million, or 2%, an increase in the Corporate segment of $198 million, or 44%, and an increase in Wholesale Banking of $122 million, or 9%. PROVISION FOR CREDIT LOSSES PCL for the year was $2,216 million, a decrease of $114 million, or 5%, compared with the prior year. The decrease primarily reflects higher provisions for incurred but not identified credit losses recognized in the prior year, the recovery of specific provisions in the oil and gas sector, and lower provisions in the Canadian Retail segment. The decrease is partially offset by higher provisions in the U.S. Retail segment due to volume growth, mix change in auto loans and credit cards, and seasoning in credit cards. By segment, the decrease in PCL was due to a decrease in Wholesale Banking of $102 million, a decrease in the Corporate segment of $35 million, or 7%, and a decrease in Canadian Retail of $25 million, or 2%, partially offset by an increase in U.S. Retail of $48 million, or 6%. INSURANCE CLAIMS AND RELATED EXPENSES Insurance claims and related expenses were $2,246 million, a decrease of $216 million, or 9%, compared with the prior year, reflecting changes in the fair value of investments supporting claims liabilities which resulted in a similar decrease in non-interest income, less weather related events, and more favourable prior years’ claims development, partially offset by higher current year claims. NON-INTEREST EXPENSES Reported non-interest expenses for the year were $19,366 million, an increase of $489 million, or 3%, compared with the prior year. The increase was primarily due to higher employee-related expenses including variable compensation, and investments in technology modernization and customer-focused initiatives. These increases were partially offset by productivity savings and the positive impact of tax adjustments in the current year. By segment, the increase in reported non-interest expenses was due to an increase in Canadian Retail of $377 million, or 4%, an increase in Wholesale Banking of $190 million, or 11%, and an increase in U.S. Retail of $185 million, or 3%, partially TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS offset by a decrease in the Corporate segment of $263 million, or 9%. Adjusted non-interest expenses were $19,092 million, an increase of $596 million, or 3%, compared with the prior year. PROVISION FOR INCOME TAXES Reported total income and other taxes increased $92 million, or 3%, compared with the prior year, reflecting an increase in income tax expense of $110 million, or 5%, and a decrease in other taxes of $18 million, or 1%. Adjusted total income and other taxes were up $92 million from the prior year, reflecting an increase in income tax expense of $110 million, or 5%. The Bank’s reported effective tax rate was 18.3% for 2017, compared with 20.1% in the prior year. The year-over-year decrease was largely due to higher tax-exempt dividend income, and a non-taxable dilution gain on the Scottrade transaction. For a reconciliation of the Bank’s effective income tax rate with the Canadian statutory income tax rate, refer to Note 25 of the 2017 Consolidated Financial Statements. The Bank’s adjusted effective income tax rate for 2017 was 18.9%, compared with 20.2% in the prior year. The year-over-year decrease was largely due to higher tax-exempt dividend income. The Bank reports its investment in TD Ameritrade using the equity method of accounting. TD Ameritrade’s tax expense of $268 million in 2017, compared with $214 million in the prior year, was not part of the Bank’s effective tax rate. BALANCE SHEET Total assets were $1,279 billion as at October 31, 2017, an increase of $102 billion, or 9%, from October 31, 2016. The increase was primarily in securities purchased under reverse repurchase agreements of $48 billion, available-for-sale securities of $39 billion, loans net of allowances for loan losses of $27 billion, other amounts received from brokers, dealers, and clients of $13 billion, trading loans, securities, and other of $5 billion, partially offset by a decrease in derivatives of $16 billion and held-to-maturity securities of $13 billion. The foreign currency translation impact on total assets as at October 31, 2017, primarily in the U.S. Retail segment, was a decrease of approximately $20 billion, or 2%. Total liabilities were $1,204 billion as at October 31, 2017, an increase of $101 billion, or 9%, from October 31, 2016. The increase was primarily due to an increase in deposits of $59 billion, obligations related to securities sold under repurchase agreements of $40 billion, amounts payable to brokers, dealers, and clients of $15 billion, partially offset by a decrease in derivatives of $14 billion. The foreign currency translation impact on total liabilities as at October 31, 2017, primarily in the U.S. Retail segment, was a decrease of approximately $20 billion, or 2%. Equity was $75 billion as at October 31, 2017, an increase of $1 billion, or 1%, from October 31, 2016. The increase was primarily due to higher retained earnings, partially offset by a decrease in other comprehensive income due to losses on cash flow hedges and foreign exchange translation. 2017 FINANCIAL RESULTS OVERVIEW 2017 Financial Performance by Business Line Canadian Retail net income for the year was $6,525 million, an increase of $537 million, or 9%, compared with last year. The increase in earnings reflected revenue growth, lower insurance claims and PCL, partially offset by higher non-interest expenses. The ROE for the year was 45.2%, compared with 41.9% last year. Canadian Retail revenue is derived from the Canadian personal and commercial banking, wealth, and insurance businesses. Revenue for the year was $21,062 million, an increase of $853 million, or 4%, compared with last year. Net interest income increased $632 million, or 6%, reflecting deposit and loan volume growth. Average loan volumes increased $16 billion, or 5%, compared with last year, comprised of 4% growth in personal loan volumes and 9% growth in business loan volumes. Average deposit volumes increased $29 billion, or 10%, compared with last year, comprised of 7% growth in personal deposit volumes, 15% growth in business deposit volumes and 15% growth in wealth deposit volumes. Margin on average earning assets was 2.83%, a 5 bps increase, primarily due to rising interest rates and favourable balance sheet mix. Non-interest income increased $221 million, or 2%, reflecting higher fee-based revenue in the banking businesses and wealth asset growth, partially offset by a decrease in the fair value of investments supporting claims liabilities which resulted in a similar decrease in insurance claims and higher liabilities associated with increased customer engagement in credit card loyalty programs. AUA were $387 billion as at October 31, 2017, an increase of $8 billion, or 2%, and AUM were $283 billion as at October 31, 2017, an increase of $12 billion, or 4%, compared with last year, both reflecting new asset growth and increases in market value. PCL for the year was $986 million, a decrease of $25 million, or 2% compared with last year. Personal banking PCL was $952 million, a decrease of $18 million, or 2%. Business banking PCL was $34 million, a decrease of $7 million. Annualized PCL as a percentage of credit volume was 0.26%, or a decrease of 2 bps, compared with last year. Net impaired loans were $555 million, a decrease of $150 million, or 21%, compared with last year. Insurance claims and related expenses for the year were $2,246 million, a decrease of $216 million, or 9%, compared with last year, reflecting a decrease in the fair value of investments supporting claims liabilities which resulted in a similar decrease in non-interest income, less weather related events, and more favourable prior years’ claims development, partially offset by higher current year claims. Non-interest expenses for the year were $8,934 million, an increase of $377 million, or 4%, compared with last year. The increase reflected higher employee-related expenses including revenue-based variable expenses in the wealth business, and higher investment in technology initiatives, partially offset by productivity savings and the sale of the Direct Investing business in Europe. The efficiency ratio was 42.4%, compared with 42.3% last year. U.S. Retail reported net income for the year was $3,322 million (US$2,536 million), an increase of $363 million (US$302 million), or 12% (14% in U.S. dollars), compared with the prior year. On an adjusted basis, net income for the year was $3,358 million (US$2,565 million), an increase of $399 million (US$331 million), or 13% (15% in U.S. dollars). The reported and adjusted ROE for the year was 9.7% and 9.8%, respectively, compared with 8.8% in the prior year. 41 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSISU.S. Retail net income includes contributions from the U.S. Retail Bank and the Bank’s investment in TD Ameritrade. Reported net income for the year from the U.S. Retail Bank and the Bank’s investment in TD Ameritrade were $2,880 million (US$2,200 million) and $442 million (US$336 million), respectively. On an adjusted basis for the year, the U.S. Retail Bank and the Bank’s investment in TD Ameritrade contributed net income of $2,896 million (US$2,213 million) and $462 million (US$352 million), respectively. The reported contribution from TD Ameritrade of US$336 million increased US$8 million, or 2%, compared with the prior year, primarily due to higher asset-based revenue, partially offset by higher operating expenses and charges associated with the Scottrade transaction. On an adjusted basis, the contribution from TD Ameritrade increased US$24 million, or 7%. U.S. Retail Bank reported net income for the year was US$2,200 million, an increase of US$294 million, or 15%, compared with the prior year, primarily due to a more favourable interest rate environment, higher loan and deposit volumes, and fee income growth, partially offset by higher expenses. U.S. Retail Bank adjusted net income increased US$307 million, or 16%. U.S. Retail Bank revenue is derived from personal and business banking, and wealth management. Revenue for the year was US$7,818 million, an increase of US$688 million, or 10%, compared with the prior year. Net interest income increased US$381 million, or 7%, primarily due to a more favourable interest rate environment and growth in loan and deposit volumes, partially offset by the prior year accounting impact from balance sheet management activities, which was largely offset in non-interest income. Margin on average earning assets was 3.11%, a 1 basis point decrease due to the same prior year accounting impact. Excluding this impact, margin increased 8 bps, primarily due to higher interest rates. Non-interest income increased US$307 million, or 17%, reflecting fee income growth in personal banking and wealth management, and the prior year accounting impact from balance sheet management activities. Average loan volumes increased US$8 billion, or 6%, compared with the prior year, due to growth in personal and business loans of 5% and 7%, respectively. Average deposit volumes increased US$19 billion, or 9%, reflecting 5% growth in business deposit volumes, 8% growth in personal deposit volumes and a 12% increase in sweep deposit volume from TD Ameritrade. AUA were US$18 billion as at October 31, 2017, an increase of 5%, compared with the prior year, primarily due to higher private banking balances. AUM were US$63 billion as at October 31, 2017, a decrease of 5%, primarily due to the previously disclosed outflow from an institutional account, partially offset by positive market returns. PCL was US$607 million, an increase of US$48 million, or 9%, compared with the prior year. Personal banking PCL was US$536 million, an increase of US$146 million, or 37%, primarily due to volume growth, mix change in auto loans and credit cards, and seasoning in credit cards, coupled with the prior year benefit related to the release of special reserves held for South Carolina flood (the “South Carolina flood release”). Business banking PCL was US$81 million, a decrease of US$84 million, primarily due to slower growth in business loans, and an allowance increase in the prior year, partially offset by the prior year benefit related to the South Carolina flood release. PCL associated with debt securities classified as loans was a benefit of US$10 million, a decrease of US$14 million, due to a recovery in the second quarter and improvement in cash flows associated with underlying mortgage assets. Annualized PCL as a percentage of credit volume for loans, excluding debt securities classified as loans, was relatively flat at 0.41%. Net impaired loans, excluding ACI loans and debt securities classified as loans, were US$1.4 billion, a decrease of US$54 million, or 4%. Excluding ACI loans and debt securities classified as loans, net impaired loans as a percentage of total loans were 0.9% as at October 31, 2017, a decrease of 0.1% compared with the prior year. Reported non-interest expenses for the year were US$4,500 million, an increase of US$211 million, or 5%, compared with the prior year, reflecting higher employee costs, volume growth, and investments in technology modernization and customer-focused initiatives, partially offset by productivity savings. On an adjusted basis, non-interest expenses for the year were US$4,479 million, an increase of US$190 million, or 4%. The reported and adjusted efficiency ratios for the year were 57.6% and 57.3%, respectively, compared with 60.2%, in the prior year. Wholesale Banking net income for the year was $1,039 million, an increase of $119 million, or 13%, compared with the prior year. The increase in earnings was due to higher revenue and a net recovery of credit losses, partially offset by higher non-interest expenses. The ROE for the year was 17.4%, compared with 15.5% in the prior year. Revenue for the year was $3,271 million, an increase of $241 million, or 8%, compared with the prior year reflecting increased client activity in equity trading, corporate lending fees, and underwriting. PCL is comprised of specific provisions for credit losses and accrual costs for credit protection. PCL for the year was a net recovery of $28 million as compared with a charge of $74 million in the prior year, reflecting the recovery of specific provisions in the oil and gas sector. Non-interest expenses for the year were $1,929 million, an increase of $190 million, or 11%, compared with the prior year reflecting higher variable compensation and higher technology costs as well as focused investments made in our U.S. businesses, including in client facing employees, enhanced product offerings, e-trading capabilities, and TD Prime Services. Corporate segment reported net loss for the year was $369 million, compared with a reported net loss of $931 million in the prior year. The year-over-year decrease in reported net loss was attributable to the dilution gain on the Scottrade transaction this year, impairment of goodwill, non-financial assets, and other charges in the prior year net of the loss on sale of the Direct Investing business in Europe this year, gain on fair value of derivatives hedging the reclassified available-for- sale securities portfolio this year, higher contribution from other items and lower net corporate expenses. Higher contribution from Other items was primarily due to provisions for incurred but not identified credit losses recognized in the prior year and higher revenue from treasury and balance sheet management activities this year. Net corporate expenses decreased primarily reflecting the positive impact of tax adjustments this year. The adjusted net loss for the year was $335 million, compared with an adjusted net loss of $575 million in the prior year. 42 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSISGROUP FINANCIAL CONDITION Balance Sheet Review AT A GLANCE OVERVIEW Total assets were $1,335 billion as at October 31, 2018, an increase of $56 billion, or 4%, compared with November 1, 2017. T A B L E 2 3 CONDENSED CONSOLIDATED BALANCE SHEET ITEMS1 (millions of Canadian dollars) Assets Cash and Interest-bearing deposits with banks Trading loans, securities, and other Non-trading financial assets at fair value through profit or loss Derivatives Financial assets designated at fair value through profit or loss Financial assets at fair value through other comprehensive income Available-for-sale securities Debt securities at amortized cost, net of allowance for credit losses 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 Obligations related to securities sold under repurchase agreements Subordinated notes and debentures Other Total liabilities Total equity Total liabilities and equity 1 Refer to Note 4 “Summary of impact upon adoption of IFRS 9” of the 2018 Consolidated Financial Statements for an explanation of changes to the balance sheet between October 31, 2017 and November 1, 2017. 2 Not applicable. Total assets were $1,335 billion as at October 31, 2018, an increase of $56 billion, or 4%, from November 1, 2017. The increase was primarily due to loans, net of allowance for loan losses of $43 billion, debt securities at amortized cost, net of allowance for credit losses of $31 billion, trading loans, securities, and other of $24 billion, and derivatives of $1 billion. The increase was partially offset by decreases in cash and interest-bearing deposits with banks of $20 billion, financial assets at FVOCI of $13 billion, securities purchased under reverse repurchase agreements of $7 billion, and non-trading financial assets at fair value through profit and loss of $5 billion. The foreign currency translation impact on total assets, primarily in the U.S. Retail segment, was an increase of approximately $10 billion, or 1%. Cash and interest-bearing deposits with banks decreased $20 billion primarily due to lower volumes. Trading loans, securities, and other increased by $24 billion primarily due to an increase in trading volume and higher securities positions. Non-trading financial assets at fair value through profit or loss decreased $5 billion primarily due to maturities and sale of investments. Derivatives increased $1 billion primarily due to the current interest rate environment, partially offset by netting of positions. October 31 2018 November 1 2017 October 31 2017 As at $ 35,455 127,897 4,015 56,996 3,618 130,600 n/a 107,171 n/a 127,379 646,393 95,379 $ 1,334,903 $ 114,704 48,270 851,439 93,389 8,740 138,321 1,254,863 80,040 $ 1,334,903 $ 55,156 103,832 9,272 56,195 3,150 143,107 n/a 76,157 n/a 134,429 603,041 94,882 $ 1,279,221 $ 79,940 51,214 832,824 88,591 9,528 141,958 1,204,055 75,166 $ 1,279,221 $ 55,156 103,918 n/a2 56,195 4,032 n/a 146,411 n/a 71,363 134,429 612,591 94,900 $ 1,278,995 $ 79,940 51,214 832,824 88,591 9,528 141,708 1,203,805 75,190 $ 1,278,995 Financial assets at fair value through other comprehensive income decreased $13 billion primarily due to sales and maturities, partially offset by new investments. Debt securities at amortized cost (net of allowance for credit losses) increased $31 billion primarily due to new investments, partially offset by sales and maturities. Securities purchased under reverse repurchase agreements decreased $7 billion primarily due to a decrease in trading volume. Loans (net of allowance for loan losses) increased $43 billion primarily due to growth in business and government loans across all segments, and consumer instalment and other personal loans in Canadian Retail. Total liabilities were $1,255 billion as at October 31, 2018, an increase of $51 billion, or 4%, from November 1, 2017. The increase was primarily due to trading deposits of $35 billion, deposits of $19 billion, and obligations related to securities sold under repurchase agreements of $5 billion. The increase was partially offset by decreases in derivatives of $3 billion, subordinated notes and debentures of $1 billion, and other liabilities of $4 billion. The foreign currency translation impact on total liabilities, primarily in the U.S. Retail segment, was an increase of approximately $10 billion, or 1%. 43 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS Trading deposits increased $35 billion primarily due to an increase in issuance of commercial paper. Derivatives decreased $3 billion primarily due to netting of positions, partially offset by the current interest rate environment. Deposits increased $19 billion primarily due to an increase in business and government deposits reflecting the issuance of senior debt and covered bonds, and an increase in personal deposits primarily in the Canadian and U.S. Retail segments, partially offset by a decrease in deposits with banks. Obligations related to securities sold under repurchase agreements increased $5 billion primarily due to an increase in trading volume. Subordinated notes and debentures decreased $1 billion primarily due to the Bank’s redemption of $0.65 billion of 5.828% subordinated debentures, and all of its outstanding $1.8 billion 5.763% subordinated debentures, partially offset by an issuance of $1.75 billion of medium term notes. Other liabilities decreased $4 billion primarily due to amounts payable to brokers, dealers, and clients due to unsettled and pending trades. Equity was $80 billion as at October 31, 2018, an increase of $5 billion, or 6%, from November 1, 2017. The increase was primarily due to higher retained earnings, partially offset by a decrease in other comprehensive income due to losses on cash flow hedges. GROUP FINANCIAL CONDITION Credit Portfolio Quality AT A GLANCE OVERVIEW • Loans and acceptances net of allowance for loan losses were $666 billion, an increase of $37 billion compared with last year. • Impaired loans net of Stage 3 allowances (counterparty- specific and individually insignificant allowances under IAS 39) were $2,468 million, an increase of $70 million compared with last year. • Provision for credit losses was $2,480 million, compared with $2,216 million last year. • Total allowance for loan losses decreased by $234 million to $3,549 million. Effective November 1, 2017, the Bank adopted IFRS 9, which replaces the guidance in IAS 39. The Bank periodically reviews the methodology for assessing significant increase in credit risk and ECLs. Forward- looking information is incorporated as appropriate where macroeconomic forecasts and associated probability weights are updated quarterly and incorporated to determine the probability- weighted ECLs. Refer to Notes 2, 3, and 4 of the Consolidated Financial Statements for a summary of the Bank’s accounting policies and significant accounting judgments, estimates, and assumptions as it relates to IFRS 9. As part of periodic review and updates, certain revisions may be made to reflect updates in statistically derived loss estimates for the Bank’s recent loss experience of its credit portfolios and forward-looking views, which may cause a change to the allowance for ECLs. Since the Bank’s adoption of IFRS 9, certain refinements were made to the methodology, the cumulative effect of which was not material and was included in the change during 2018. Allowance for credit losses are further described in Note 8 of the Consolidated Financial Statements. LOAN PORTFOLIO The Bank increased its credit portfolio by $37 billion, or 6%, from the prior year, largely due to volume growth in the business and government, consumer instalment and other personal, and residential mortgages portfolios in the Canadian Retail segment. The Bank’s credit quality remained strong. While the majority of the credit risk exposure is related to loans and acceptances, the Bank also engaged in activities that have off-balance sheet credit risk. These include credit instruments and derivative financial instruments, as explained in Note 31 of the 2018 Consolidated Financial Statements. 44 CONCENTRATION OF CREDIT RISK The Bank’s loan portfolio continued to be concentrated in Canadian and U.S. residential mortgages, consumer instalment and other personal loans, and credit card loans, representing 64% of total loans net of Stage 3 allowances (counterparty-specific and individually insignificant allowances under IAS 39), down by 1% from 2017. During the year, these portfolios increased by $20 billion, or 5%, and totalled $431 billion at year end. Residential mortgages represented 34% of the total loans net of Stage 3 allowances (counterparty-specific and individually insignificant allowances under IAS 39) in 2018, down 1% from 2017. Consumer instalment and other personal loans, and credit card loans were 31% of total loans net of Stage 3 allowances (counterparty-specific and individually insignificant allowances under IAS 39) in 2018, up 1% from 2017. The Bank’s business and government credit exposure was 35% of total loans net of Stage 3 allowances (counterparty-specific and individually insignificant allowances under IAS 39), up 1% from 2017. The largest business and government sector concentrations in Canada were the Real estate and Financial sectors, which comprised 5% and 3%, respectively. Real estate, the Government, public sector entities and education, and the Health and social services sectors were the leading U.S. sectors of concentration in 2018 representing 5%, 2%, and 2% of net loans, respectively. Geographically, the credit portfolio remained concentrated in Canada. In 2018, the percentage of loans net of Stage 3 allowances held in Canada was 67%, up 1% from 2017. The largest Canadian regional exposure was in Ontario, which represented 41% of total loans net of Stage 3 allowances (counterparty-specific and individually insignificant allowance for loan losses under IAS 39) for 2018, consistent with 2017. The balance of the credit portfolio was predominantly in the U.S., which represented 32% of loans net of Stage 3 allowances, down 1% from 2017. Exposures to ACI loans, and other geographic regions were relatively small. The largest U.S. regional exposures were in New England, New York, and New Jersey which represented 6%, 5%, and 5% of total loans net of Stage 3 allowances (counterparty-specific and individually insignificant allowances under IAS 39), respectively, compared with 6%, 6% and 5%, respectively, in the prior year. Under IFRS 9, the Bank now calculates allowances for expected credit losses on debt securities measured at amortized cost and FVOCI. The Bank has $232.9 billion in such debt securities of which $232.7 billion are performing securities (Stage 1 and 2) and $234 million are impaired (Stage 3). The allowance for credit losses on debt securities at amortized cost and debt securities at FVOCI was $75 million and $5 million, respectively. TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIST A B L E 2 4 LOANS AND ACCEPTANCES, NET OF STAGE 3 ALLOWANCE FOR LOAN LOSSES (NET OF COUNTERPARTY-SPECIFIC AND INDIVIDUALLY INSIGNIFICANT ALLOWANCES UNDER IAS 39) BY INDUSTRY SECTOR 1,2,3 (millions of Canadian dollars, except as noted) October 31 2018 October 31 2017 October 31 2016 October 31 2018 October 31 2017 October 31 2016 As at Percentage of total Stage 3 allowances for loan losses impaired Gross loans Net loans Net loans Net loans Canada Residential mortgages Consumer instalment and other personal HELOC4 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 $ 193,829 $ 18 $ 193,811 $ 190,308 $ 189,284 28.9% 30.1% 31.3% 86,159 24,216 18,574 18,046 340,824 18,364 13,635 31,999 7,461 6,918 19,313 2,331 544 4,177 6,670 3,173 1,750 3,915 2,897 4,479 3,207 2,938 3,136 1,862 4,375 111,145 $ 451,969 12 46 34 77 187 6 2 8 2 – – 1 – – 6 86,147 24,170 18,540 17,969 340,637 18,358 13,633 31,991 7,459 6,918 19,313 2,330 544 4,177 6,664 74,931 22,245 17,326 17,935 322,745 17,974 12,830 30,804 6,674 6,657 13,102 1,968 500 4,251 5,837 65,059 20,537 16,424 18,120 309,424 15,994 12,778 28,772 6,015 5,481 10,198 2,076 523 6,589 5,476 3 10 14 – 5 7 13 2 2 4 77 $ 264 3,170 1,740 3,901 2,897 4,474 3,200 2,925 3,134 1,860 4,371 111,068 $ 451,705 2,931 1,400 3,975 2,010 3,865 2,782 2,742 1,966 1,671 3,805 96,940 $ 419,685 2,464 1,378 3,835 1,792 4,057 2,506 2,289 2,083 1,632 3,773 90,939 $ 400,363 12.8 3.6 2.8 2.7 50.8 2.7 2.0 4.7 1.1 1.0 2.9 0.3 0.1 0.6 1.0 0.5 0.3 0.6 0.4 0.7 0.5 0.4 0.5 0.3 0.7 16.6 67.4% 11.8 3.5 2.8 2.8 51.0 2.8 2.0 4.8 1.1 1.1 2.1 0.3 0.1 0.7 0.9 0.5 0.2 0.6 0.3 0.6 0.4 0.4 0.3 0.3 0.6 15.3 66.3% 10.8 3.4 2.7 3.0 51.2 2.7 2.1 4.8 1.0 0.9 1.7 0.3 0.1 1.1 0.9 0.4 0.2 0.6 0.3 0.7 0.4 0.4 0.4 0.3 0.6 15.1 66.3% 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 Includes loans that are measured at fair value through other comprehensive income. 4 Home Equity Line of Credit. 45 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 2 4 LOANS AND ACCEPTANCES, NET OF STAGE 3 ALLOWANCE FOR LOAN LOSSES (NET OF COUNTERPARTY-SPECIFIC AND INDIVIDUALLY INSIGNIFICANT ALLOWANCES UNDER IAS 39) BY INDUSTRY SECTOR (continued) 1,2,3 (millions of Canadian dollars, except as noted) October 31 2018 October 31 2017 October 31 2016 October 31 2018 October 31 2017 October 31 2016 As at Percentage of total United States Residential mortgages Consumer instalment and other personal HELOC Indirect Auto Other Credit card Total personal Real estate Residential Non-residential Total real estate Agriculture Automotive Financial Food, beverage, and tobacco Forestry Government, public sector entities, and education Health and social services Industrial construction and trade contractors Metals and mining Pipelines, oil, and gas Power and utilities Professional and other services Retail sector Sundry manufacturing and wholesale Telecommunications, cable, and media Transportation Other Total business and government Total United States International Personal Business and government Total international Total excluding other loans Other loans Debt securities classified as loans Acquired credit-impaired loans4 Total other loans Total Stage 1 and Stage 2 allowance for loan losses – performing (incurred but not identified allowance under IAS 39) Personal, business and government Debt securities classified as loans Total Stage 1 and Stage 2 allowance for loan losses – performing (incurred but not identified allowance under IAS 39) Total, net of allowance Percentage change over previous year – loans and acceptances, net of Stage 3 allowance for loan losses (impaired) (counterparty-specific and individually insignificant under IAS 39) Percentage change over previous year – loans and acceptances, net of allowance Stage 3 allowances for loan losses impaired Gross loans Net loans Net loans Net loans $ 31,128 $ 29 $ 31,099 $ 31,435 $ 27,628 4.6% 5.0% 4.6% 12,334 29,870 874 16,964 91,170 8,050 22,426 30,476 705 5,752 7,699 3,417 637 12,452 12,423 2,060 1,923 2,664 2,833 10,923 5,376 7,717 4,896 9,977 2,160 124,090 215,260 14 2,258 2,272 669,501 n/a 453 453 $ 669,954 59 25 2 264 379 5 7 12 – 2 1 2 – 1 1 2 1 1 – 3 2 4 – 1 10 43 422 – – – 686 12,275 29,845 872 16,700 90,791 8,045 22,419 30,464 705 5,750 7,698 3,415 637 12,451 12,422 2,058 1,922 2,663 2,833 10,920 5,374 7,713 4,896 9,976 2,150 124,047 214,838 14 2,258 2,272 668,815 12,382 29,162 843 14,730 88,552 7,309 22,153 29,462 710 7,332 7,130 3,189 567 12,428 11,408 1,846 1,674 2,070 3,221 10,384 4,909 7,019 3,799 9,995 2,137 119,280 207,832 14 1,579 1,593 629,110 13,132 28,364 742 13,496 83,362 6,845 21,663 28,508 570 5,756 4,716 3,739 587 11,387 10,787 1,830 1,486 2,981 2,642 11,207 4,545 7,389 4,818 11,647 2,014 116,609 199,971 16 1,513 1,529 601,863 1.8 4.5 0.1 2.5 13.5 1.2 3.3 4.5 0.1 0.9 1.2 0.5 0.1 1.9 1.9 0.3 0.3 0.4 0.4 1.6 0.8 1.2 0.7 1.5 0.3 18.6 32.1 – 0.4 0.4 99.9 2.0 4.6 0.1 2.3 14.0 1.2 3.5 4.7 0.1 1.2 1.1 0.5 0.1 2.0 1.8 0.3 0.3 0.3 0.5 1.6 0.8 1.1 0.6 1.6 0.3 18.9 32.9 – 0.2 0.2 99.4 2.2 4.7 0.1 2.2 13.8 1.1 3.6 4.7 0.1 1.0 0.8 0.6 0.1 1.9 1.8 0.3 0.2 0.5 0.4 1.9 0.8 1.2 0.8 1.9 0.3 19.3 33.1 – 0.2 0.2 99.6 n/a 18 18 $ 704 n/a 435 435 $ 669,250 3,083 630 3,713 $ 632,823 1,468 912 2,380 $ 604,243 – 0.1 0.1 100.0% 0.5 0.1 0.6 100.0% 0.2 0.2 0.4 100.0% 2,845 n/a 2,915 20 2,826 55 2,845 $ 666,405 2,935 $ 629,888 2,881 $ 601,362 5.8% 4.7% 7.2% 5.8 4.7 7.2 1 Certain comparative amounts have been restated to conform with the presentation adopted in the current period. 3 Includes loans that are measured at fair value through other comprehensive income. 4 Includes all Federal Deposit Insurance Corporation (FDIC) covered loans and 2 Primarily based on the geographic location of the customer’s address. other ACI loans. 46 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 2 5 LOANS AND ACCEPTANCES, NET OF STAGE 3 ALLOWANCE FOR LOAN LOSSES (NET OF COUNTERPARTY-SPECIFIC AND INDIVIDUALLY INSIGNIFICANT ALLOWANCES UNDER IAS 39) BY GEOGRAPHY1,2 (millions of Canadian dollars, except as noted) 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 Stage 1 and Stage 2 allowances (incurred but not identified allowance under IAS 39) Total, net of allowance Percentage change over previous year – loans and acceptances, net of Stage 3 allowances for loan losses (impaired) (counterparty-specific and individually insignificant under IAS 39) Canada United States International Other loans Total October 31 2018 October 31 2017 October 31 2016 October 31 2018 October 31 2017 October 31 2016 As at Percentage of total Stage 3 allowances for loan losses impaired Gross loans Net loans Net loans Net loans $ 11,754 63,372 272,836 70,316 33,691 451,969 11,528 17,582 41,533 33,374 36,389 11,905 62,949 215,260 1,059 1,213 2,272 669,501 453 $ 669,954 $ 13 27 142 58 24 264 $ 11,741 63,345 272,694 70,258 33,667 451,705 $ 11,378 57,924 249,508 68,879 31,996 419,685 $ 10,895 54,169 236,508 67,498 31,293 400,363 17 30 62 44 49 21 199 422 11,511 17,552 41,471 33,330 36,340 11,884 62,750 214,838 10,813 15,806 38,564 34,024 35,118 11,594 61,913 207,832 9,788 13,870 38,744 33,910 31,323 13,144 59,192 199,971 – – – 686 18 $ 704 1,059 1,213 2,272 668,815 435 $ 669,250 678 915 1,593 629,110 3,713 $ 632,823 500 1,029 1,529 601,863 2,380 $ 604,243 2,845 $ 666,405 2,935 $ 629,888 2,881 $ 601,362 1.8% 9.5 40.6 10.5 5.0 67.4 1.7 2.6 6.2 5.0 5.4 1.8 9.4 32.1 0.2 0.2 0.4 99.9 0.1 100.0% 1.8% 9.2 39.4 10.9 5.0 66.3 1.7 2.5 6.1 5.4 5.6 1.8 9.8 32.9 0.1 0.1 0.2 99.4 0.6 100.0% 1.8% 9.0 39.1 11.2 5.2 66.3 1.6 2.3 6.4 5.6 5.2 2.2 9.8 33.1 – 0.2 0.2 99.6 0.4 100.0% 2018 7.6% 3.4 42.6 (88.3) 5.8% 2017 4.8% 3.9 4.2 56.0 4.7% 2016 4.5% 14.3 (22.9) (28.1) 7.2% 1 Primarily based on the geographic location of the customer’s address. 2 Includes loans that are measured at fair value through other comprehensive income. 3 The territories are included as follows: Yukon is included in British Columbia; Nunavut is included in Ontario; and Northwest Territories is included in the Prairies region. 4 The states included in New England are as follows: Connecticut, Maine, Massachusetts, New Hampshire, and Vermont. 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, which are largely behind a TD mortgage that is in first position. In Canada, credit policies are designed to 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 examined 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. 47 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 2 6 CANADIAN REAL ESTATE SECURED LENDING1 (millions of Canadian dollars) Total Total 1 Excludes loans classified as trading as the Bank intends to sell the loans immediately or in the near term, and loans designated at fair value through profit or loss for which no allowance is recorded. Total real estate Amortizing Non-amortizing secured lending As at Residential mortgages Total amortizing Home equity real estate lines of credit secured lending Home equity lines of credit $ 193,829 $ 50,554 $ 244,383 $ 35,605 $ 279,988 October 31, 2018 $ 190,325 $ 38,792 $ 229,117 $ 36,145 $ 265,262 October 31, 2017 T A B L E 2 7 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, 2018 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 1.8% $ 2,544 $ 3,492 23,460 6.4 12,389 60,308 35,355 18.2 14,998 23,561 12.2 8,372 4.8 84,147 43.4% 109,682 30,462 $ 140,144 900 $ 85,047 9,350 2.0% $ 2,225 $ 3,749 19,774 7.7 14,561 50,882 41,319 21.7 14,080 25,421 13.4 10,576 7,738 5.6 95,626 50.4% 94,699 30,895 $ 125,594 859 $ 96,485 1.3% $ 12.1 31.1 7.7 4.3 56.6% 424 1,981 7,052 3,408 1,105 13,970 1 $ 13,971 1.2% $ 10.4 26.5 7.4 4.1 49.6% 487 2,329 8,052 3,861 1,286 16,015 10 $ 16,025 0.5% $ 1,312 14,221 2.3 40,163 8.2 10,963 4.0 5,530 1.3 16.3% 72,189 12,367 $ 84,556 16.5 46.6 12.7 6.4 1.5% $ 3,916 14,370 42,407 26,969 10,455 83.7% 98,117 901 $ 99,018 1.4% $ 3,856 37,681 5.1 100,471 15.1 25,961 9.6 13,902 3.7 34.9% 181,871 42,829 $ 224,700 1.4% 13.5 35.9 9.3 5.0 65.1% October 31, 2017 0.6% $ 1,187 11,386 3.1 32,474 10.7 9,640 5.2 4,235 1.7 21.3% 58,922 12,472 $ 71,394 15.2 43.3 12.9 5.7 1.6% $ 4,236 16,890 49,371 29,282 11,862 78.7% 111,641 869 $ 112,510 1.6% $ 3,412 31,160 6.4 83,356 18.6 23,720 11.0 11,973 4.5 42.1% 153,621 43,367 $ 196,988 1.3% 11.7 31.5 8.9 4.5 57.9% 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 immediately or in the near term, and loans designated at fair value through profit or loss for which no allowance is recorded. 3 Default insurance is contractual coverage for the life of eligible facilities whereby the Bank’s exposure to real estate secured lending, all or in part, is protected against potential losses caused by borrower default. It is provided by either government-backed entities or other approved private mortgage insurers. 4 The territories are included as follows: Yukon is included in British Columbia; Nunavut is included in Ontario; and 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 8 RESIDENTIAL MORTGAGES BY REMAINING AMORTIZATION1,2 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 1.0% 4.8 1.6% 3.8% 8.2 4.4% 6.7% 4.8 6.5% 15.1% 5.2 13.7% 42.7% 29.4 40.8% 30.1% 46.3 32.4% 0.6% 1.0 0.6% –% 100.0% 0.3 100.0 –% 100.0% October 31, 2018 1.1% 4.3 1.6% 4.0% 7.3 4.5% 7.3% 7.6 7.3% 14.3% 5.2 13.0% 41.8% 20.7 38.9% 30.4% 53.8 33.7% 1.1% 0.8 1.0% –% 100.0% 0.3 100.0 –% 100.0% October 31, 2017 1 Excludes loans classified as trading as the Bank intends to sell the loans immediately or in the near term, and loans designated at fair value through profit or loss for which no allowance is recorded. 2 Percentage based on outstanding balance. 48 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 2 9 UNINSURED AVERAGE LOAN-TO-VALUE – Newly Originated and Newly Acquired 1,2,3 Canada Atlantic provinces British Columbia6 Ontario6 Prairies6 Québec Total Canada United States Total For the 12 months ended October 31, 2018 For the 12 months ended October 31, 2017 Residential Home equity mortgages lines of credit4,5 Total Residential mortgages Home equity lines of credit4,5 Total 74% 66 67 73 73 68 69 68% 70% 62 65 71 73 66 61 65% 73% 64 67 72 73 67 65 67% 73% 67 68 73 72 69 67 68% 70% 62 65 71 73 66 62 65% 72% 65 66 72 73 67 64 67% 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 immediately or in the near term, and loans designated at fair value through profit or loss for which no allowance is recorded. 3 Based on house price at origination. 4 HELOC loan-to-value includes first position collateral mortgage, if applicable. 5 Home equity lines of credit fixed rate advantage option is included in loan-to- value calculation. 6 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. IMPAIRED LOANS A loan is considered impaired and migrates to Stage 3 when it is 90 days or more past due for retail exposures, rated BRR 9 for non-retail exposures, or 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. Gross impaired loans excluding FDIC covered loans and other ACI loans increased $69 million, or 2%, compared with the prior year. In Canada, impaired loans net of Stage 3 allowances (counterparty- specific and individually insignificant allowances under IAS 39) increased by $98 million, or 18% in 2018. Residential mortgages, consumer instalment and other personal loans, and credit cards, had net impaired loans of $454 million, a decrease of $8 million, or 2%, compared with the prior year. Business and government loans net of Stage 3 allowances (counterparty-specific and individually insignificant allowances under IAS 39) were $198 million, an increase of $106 million, or 115%, compared with the prior year, largely due to new formations in the Canadian Commercial portfolio. In the U.S., net impaired loans decreased by $28 million, or 2% in 2018. Residential mortgages, consumer instalment and other personal loans, and credit cards, had net impaired loans of $1,474 million, a decrease of $26 million, or 2%, compared with the prior year. Business and government net impaired loans were $342 million, a decrease of $2 million, or 1%, compared with the prior year. Geographically, 26% of total net impaired loans were located in Canada and 74% in the U.S. The largest regional concentration of net impaired loans in Canada was in Ontario, increasing to 13% of total net impaired loans, compared with 8% in the prior year primarily reflecting new formations in the Canadian Commercial portfolio. The largest regional concentration of net impaired loans in the U.S. was in New England representing 18% of total net impaired loans, stable from the prior year. T A B L E 3 0 CHANGES IN GROSS IMPAIRED LOANS AND ACCEPTANCES1,2,3 (millions of Canadian dollars) Personal, Business and Government Loans Impaired loans as at beginning of period Classified as impaired during the period4 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 2018 2017 2016 $ 3,085 5,012 (864) (1,360) (21) (2,748) – 50 $ 3,154 $ 3,509 4,724 (966) (1,556) – (2,538) – (88) $ 3,085 $ 3,244 5,621 (1,521) (1,523) (4) (2,350) – 42 $ 3,509 1 Includes customers’ liability under acceptances. 2 Excludes ACI loans, DSCL under IAS 39, and DSAC and DSOCI under IFRS 9. 3 Includes loans that are measured at FVOCI. 4 Under IFRS 9, loans are considered impaired and migrate to Stage 3 when they are 90 days or more past due for retail exposures (including Canadian government- insured real estate personal loans), rated BRR 9 for non-retail exposures, or when there is objective evidence that there has been a deterioration of credit quality to the extent the Bank no longer has reasonable assurance as to the timely collection of the full amount of principal and interest. 49 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 3 1 IMPAIRED LOANS NET OF STAGE 3 ALLOWANCE FOR LOAN LOSSES (NET OF COUNTERPARTY-SPECIFIC AND INDIVIDUALLY INSIGNIFICANT ALLOWANCES UNDER IAS 39) BY INDUSTRY SECTOR1,2,3,4 (millions of Canadian dollars, except as noted) Oct. 31 2018 Oct. 31 2017 Oct. 31 2016 Oct. 31 2015 Oct. 31 Oct. 31 2018 2014 Oct. 31 2017 Oct. 31 2016 Oct. 31 2015 Oct. 31 2014 As at Percentage of total Stage 3 allowances for loan losses impaired 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 card5 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 $ 264 $ 18 $ 246 $ 279 $ 385 $ 378 $ 427 10.0% 11.6% 13.9% 14.2% 19.0% 130 69 46 132 641 12 46 34 77 187 118 23 12 55 454 102 11 19 51 462 140 9 20 46 600 166 17 19 45 625 249 17 20 66 779 4.8 0.9 0.5 2.2 18.4 4.3 0.5 0.8 2.1 19.3 5.0 0.3 0.7 1.7 21.6 6.2 0.7 0.7 1.7 23.5 11.1 0.8 0.9 2.9 34.7 9 4 13 6 9 2 2 1 – 10 139 17 23 – 10 12 19 3 4 5 275 $ 916 6 2 8 2 – – 1 – – 6 3 10 14 – 5 7 13 2 2 4 77 $ 264 3 2 5 4 9 2 1 1 – 4 136 7 9 – 5 5 6 1 2 1 198 $ 652 3 3 6 5 2 – 1 – – 11 2 15 22 – 6 8 7 3 7 10 9 1 2 2 – – 11 11 18 51 – 4 11 3 6 7 13 3 1 1 1 – 1 3 2 6 68 – 4 9 2 10 4 14 5 1 1 – 2 3 5 1 1 1 – 4 7 2 0.1 0.1 0.2 0.2 0.4 0.1 – – – 0.2 5.5 0.3 0.4 – 0.2 0.2 0.2 0.1 0.1 0.2 0.2 0.1 – – – – 0.5 0.1 0.7 0.9 – 0.2 0.3 0.3 0.1 0.3 0.4 0.3 – 0.1 0.1 – – 0.4 0.4 0.7 1.8 – 0.1 0.4 0.1 0.2 0.3 0.5 0.1 – – – – – 0.1 0.1 0.2 2.6 – 0.2 0.3 0.1 0.4 0.2 0.6 0.3 – – – 0.1 0.1 0.3 – – – – 0.2 0.4 0.1 – 5 2 92 $ 554 – – 4 137 $ 737 2 2 3 121 $ 746 1 1 5 54 $ 833 – 0.1 – 8.0 26.4% – 0.2 0.1 3.8 23.1% – – 0.1 4.9 26.5% 0.1 0.1 0.1 4.5 28.0% – – 0.3 2.4 37.1% 1 Includes customers’ liability under acceptances. 2 Primarily based on the geographic location of the customer’s address. 3 Includes loans that are measured at FVOCI. 4 Excludes ACI loans, DSCL under IAS 39, and DSAC and DSOCI under IFRS 9. 5 Credit cards are considered impaired when they are 90 days past due and written off at 180 days past due. 50 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 3 1 IMPAIRED LOANS NET OF STAGE 3 ALLOWANCE FOR LOAN LOSSES (NET OF COUNTERPARTY-SPECIFIC AND INDIVIDUALLY INSIGNIFICANT ALLOWANCES UNDER IAS 39) BY INDUSTRY SECTOR (continued) 1,2,3,4 (millions of Canadian dollars, except as noted) Oct. 31 2018 Oct. 31 2017 Oct. 31 2016 Oct. 31 2015 Oct. 31 Oct. 31 2018 2014 Oct. 31 2017 Oct. 31 2016 Oct. 31 2015 Oct. 31 2014 As at Percentage of total Stage 3 allowances for loan losses impaired Gross impaired loans Net impaired loans Net impaired loans Net impaired loans Net impaired loans Net impaired loans $ 445 $ 29 $ 416 $ 429 $ 418 $ 361 $ 303 16.9% 17.9% 15.0% 13.6% 13.5% 855 223 8 322 1,853 29 104 133 2 10 29 12 1 8 12 21 4 12 1 47 39 19 3 16 16 385 2,238 – – $ 3,154 59 25 2 264 379 5 7 12 – 2 1 2 – 1 1 2 1 1 – 3 2 4 796 198 6 58 1,474 24 97 121 2 8 28 10 1 7 11 19 3 11 1 44 37 15 795 234 4 38 1,500 27 73 100 2 12 39 9 1 9 11 20 4 17 1 46 37 26 863 190 4 38 1,513 54 87 141 1 14 24 4 12 8 29 22 4 77 – 75 43 41 780 155 5 44 1,345 68 133 201 1 11 26 7 – 8 38 30 13 6 – 74 65 40 325 128 4 29 789 79 154 233 1 14 25 9 1 16 49 26 9 – – 84 80 39 – 1 10 43 422 3 15 6 342 1,816 1 6 3 344 1,844 9 25 6 535 2,048 13 31 5 569 1,914 16 15 5 622 1,411 – – – – $ 686 $ 2,468 $ 2,398 $ 2,785 $ 2,660 $ 2,244 – – – – – – – – 32.3 8.0 0.2 2.4 59.8 33.1 9.8 0.2 1.6 62.6 31.0 6.8 0.1 1.4 54.3 29.3 5.8 0.2 1.7 50.6 1.0 3.9 4.9 0.1 0.3 1.1 0.4 – 0.3 0.5 0.8 0.1 0.5 – 1.8 1.5 0.6 0.1 0.6 0.2 13.8 73.6 – – 1.1 3.1 4.2 0.1 0.5 1.6 0.4 – 0.4 0.5 0.8 0.2 0.7 – 1.9 1.6 1.1 – 0.2 0.1 14.3 76.9 – – 1.9 3.1 5.0 – 0.5 0.9 0.1 0.4 0.3 1.1 0.8 0.1 2.8 – 2.7 1.6 1.5 0.3 0.9 0.2 19.2 73.5 – – 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 – – 100.0% 100.0% 100.0% 100.0% 100.0% 3.33% 3.45% 4.09% 4.24% 4.28% United States Residential mortgages Consumer instalment and other personal HELOC Indirect Auto Other Credit card5 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 1 Includes customers’ liability under acceptances. 2 Primarily based on the geographic location of the customer’s address. 3 Includes loans that are measured at FVOCI. 4 Excludes ACI loans, DSCL under IAS 39, and DSAC and DSOCI under IFRS 9. 5 Credit cards are considered impaired when they are 90 days past due and written off at 180 days past due. 51 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 3 2 IMPAIRED LOANS NET OF STAGE 3 ALLOWANCE FOR LOAN LOSSES (NET OF COUNTERPARTY-SPECIFIC AND INDIVIDUALLY INSIGNIFICANT ALLOWANCES UNDER IAS 39) BY GEOGRAPHY1,2,3,4,5 (millions of Canadian dollars, except as noted) As at Percentage of total October 31 2018 October 31 2017 October 31 2016 October 31 2018 October 31 2017 October 31 2016 Canada Atlantic provinces British Columbia6 Ontario6 Prairies6 Québec Total Canada United States Carolinas (North and South) Florida New England7 New Jersey New York Pennsylvania Other Total United States Total Stage 3 Gross allowances for loan losses impaired impaired loans Net impaired loans Net impaired loans Net impaired loans $ 43 79 457 235 102 916 125 186 504 377 403 134 509 2,238 $ 3,154 $ 13 27 142 58 24 264 17 30 62 44 49 21 199 422 $ 686 $ 30 52 315 177 78 652 108 156 442 333 354 113 310 1,816 $ 2,468 $ 29 57 196 191 81 554 97 148 441 336 366 126 330 1,844 $ 2,398 $ 32 85 277 231 112 737 98 154 564 396 328 161 347 2,048 $ 2,785 1.2% 2.1 12.8 7.2 3.1 26.4 4.4 6.3 17.9 13.5 14.3 4.6 12.6 73.6 100.0% 1.2% 2.4 8.2 7.9 3.4 23.1 4.0 6.2 18.4 14.0 15.3 5.2 13.8 76.9 100.0% 1.2% 3.1 9.9 8.3 4.0 26.5 3.5 5.5 20.2 14.2 11.8 5.8 12.5 73.5 100.0% Net impaired loans as a % of net loans 0.37% 0.38% 0.46% 1 Includes customers’ liability under acceptances. 2 Primarily based on the geographic location of the customer’s address. 3 Includes loans that are measured at FVOCI. 4 Excludes ACI loans, DSCL under IAS 39, and DSAC and DSOCI under IFRS 9. 5 Credit cards are considered impaired when they are 90 days past due and written 6 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. 7 The states included in New England are as follows: Connecticut, Maine, Massachusetts, New Hampshire, and Vermont. off at 180 days past due. ALLOWANCE FOR CREDIT LOSSES The allowance for loan losses including off-balance sheet positions of $4,578 million as at October 31, 2018, was comprised of Stage 3 allowance for impaired loans of $704 million, Stage 2 allowance of $1,696 million, and Stage 1 allowance of $2,178 million collectively for performing loans and off-balance sheet positions. Stage 3 allowances (impaired) The Stage 3 allowance for loan losses decreased $144 million, or 17%, compared with the counterparty-specific and individually insignificant allowances under IAS 39 last year primarily reflecting certain debt securities classified as loans under IAS 39 now classified as debt securities at amortized cost as a result of the adoption of IFRS 9. Stage 1 and Stage 2 allowances (performing) As at October 31, 2018, the Stage 1 and 2 allowances (allowance for incurred but not identified credit losses under IAS 39) was $3,874 million, up from $3,502 million as at October 31, 2017. The increase was primarily due to the impact of methodology changes related to the adoption of IFRS 9 including where Stage 2 loans are measured on a lifetime ECL methodology, and the impact of foreign exchange. PROVISION FOR CREDIT LOSSES The PCL is the amount charged to income to bring the total allowance for credit losses, including both Stage 1 and 2 allowances (performing) and Stage 3 allowance (impaired), to a level that management considers adequate to absorb expected and incurred credit-related losses in the Bank’s loan portfolio. Provisions are reduced by any recoveries in the year. In Canada PCL – impaired relating to residential mortgages, consumer instalment and other personal loans, and credit card loans was $880 million, a decrease of $51 million, or 5%, compared to 2017 reflecting continued strong credit performance. PCL – impaired related to business and government loans was $45 million, an increase of $10 million, or 29%, primarily reflecting a lower recovery of provisions in the oil and gas sector compared with prior year. In the U.S. PCL – impaired related to residential mortgages, consumer instalment and other personal loans, and credit card loans was $1,260 million, an increase of $201 million, or 19%, compared to 2017, primarily reflecting volume growth, seasoning, and mix in the credit card and auto portfolios and the impact of foreign exchange. PCL – impaired related to business and government loans was $7 million, an increase of $2 million compared to 2017. Geographically, 43% of PCL – impaired were attributed to Canada and 58% to the U.S. including recoveries in the acquired credit-impaired loan portfolios. The largest regional concentration of PCL – impaired in Canada was in Ontario, which represented 17% of total PCL – impaired, down from 19% in 2017. The largest regional concentration of PCL – impaired in the U.S. was in New England, representing 7% of total PCL – impaired, remaining stable from the prior year. 52 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS The following table provides a summary of provisions charged to the Consolidated Statement of Income. T A B L E 3 3 PROVISION FOR CREDIT LOSSES UNDER IFRS 9 (millions of Canadian dollars) Provision for credit losses – Stage 3 (impaired) Canadian Retail U.S. Retail Wholesale Banking Corporate1 Total provision for credit losses – Stage 3 Provision for credit losses – Stage 1 and Stage 2 (performing)2 Canadian Retail U.S. Retail Wholesale Banking Corporate1 Total provision for credit losses – Stage 1 and 2 Provision for credit losses 2018 $ 927 776 (8) 471 2,166 71 141 11 91 314 $ 2,480 T A B L E 3 4 PROVISION FOR CREDIT LOSSES UNDER IAS 39 (millions of Canadian dollars) 2017 2016 Provision for credit losses – counterparty-specific and individually insignificant Counterparty-specific Individually insignificant Recoveries Total provision for credit losses for counterparty-specific $ 40 2,575 (625) $ 139 2,334 (602) and individually insignificant 1,990 1,871 Provision for credit losses – incurred but not identified Canadian Retail and Wholesale Banking1 U.S. Retail Corporate2 Total provision for credit losses – incurred but not identified Provision for credit losses – 144 82 165 210 84 226 $ 2,216 459 $ 2,330 1 The incurred but not identified PCL is included in the Corporate segment results for management reporting. 1 Includes PCL on the retailer program partners’ share of the U.S. strategic 2 The retailer program partners’ share of the U.S. strategic cards portfolio. cards portfolio. 2 Includes financial asset, loan commitments, and financial guarantees. T A B L E 3 5 PROVISION FOR LOAN LOSSES BY INDUSTRY SECTOR1,2 (millions of Canadian dollars, except as noted) For the years ended Percentage of total October 31 2018 October 31 2017 October 31 2016 October 31 2018 October 31 2017 October 31 2016 Stage 3 provision for loan losses (impaired) (Counterparty-specific and individually insignificant provision under IAS 39) 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 1 Primarily based on the geographic location of the customer’s address. 2 Includes loans that are measured at fair value through other comprehensive income. $ 15 $ 22 $ 15 0.7% 1.1% 0.8% 11 205 178 471 880 (2) 3 1 1 3 – – – – 3 2 4 (2) – 4 14 (2) 2 2 13 45 $ 925 7 245 172 485 931 – 1 1 – – – – 1 – 4 9 5 (11) – 6 11 1 1 2 5 35 $ 966 5 253 169 503 945 – – – – 1 – (3) – (1) 4 11 1 43 – 9 12 14 1 4 7 103 $ 1,048 0.5 9.5 8.2 21.7 40.6 (0.1) 0.1 – – 0.1 – – – – 0.1 0.1 0.2 (0.1) – 0.2 0.7 (0.1) 0.1 0.1 0.7 2.1 42.7% 0.4 12.3 8.6 24.4 46.8 – 0.1 0.1 – – – – 0.1 – 0.2 0.4 0.2 (0.5) – 0.3 0.5 0.1 0.1 0.1 0.2 1.8 48.6% 0.3 13.5 9.0 26.9 50.5 – – – – 0.1 – (0.2) – (0.1) 0.2 0.6 0.1 2.3 – 0.5 0.6 0.7 0.1 0.2 0.4 5.5 56.0% 53 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 3 5 PROVISION FOR LOAN LOSSES BY INDUSTRY SECTOR (continued) 1,2 (millions of Canadian dollars, except as noted) For the years ended Percentage of total 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 loans3 Total other loans Total Stage 3 provision for loan losses (impaired) (Counterparty-specific and individually insignificant provision under IAS 39) Stage 1 and 2 provision for loan losses (Incurred but not identified provision under IAS 39) Personal, business, and government Debt securities classified as loans Total Stage 1 and 2 provision for loan losses (Incurred but not identified provision under IAS 39) Total provision for loan losses October 31 2018 October 31 2017 October 31 2016 October 31 2018 October 31 2017 October 31 2016 $ 13 $ 7 $ 16 0.7% 0.4% 0.9% 15 272 155 805 1,260 (2) (4) (6) – 1 7 (1) – – – 1 2 (7) – (1) – 1 1 (4) 13 7 1,267 2,192 – (26) (26) 7 229 128 688 1,059 1 (3) (2) – (1) 19 1 (7) (2) (6) 7 (1) (15) (1) 3 – (6) (1) 1 16 5 1,064 2,030 (2) (38) (40) 58 146 96 491 807 (5) 6 1 – 1 (3) 1 7 (6) 2 (1) 3 25 1 (2) (4) (4) 3 1 14 39 846 1,894 8 (31) (23) 0.7 12.5 7.2 37.1 58.2 (0.1) (0.2) (0.3) – – 0.3 – – – – – 0.1 (0.3) – – – – – (0.2) 0.7 0.3 58.5 101.2 – (1.2) (1.2) 0.4 11.5 6.4 34.5 53.2 0.1 (0.2) (0.1) – (0.1) 1.0 0.1 (0.4) (0.1) (0.3) 0.4 (0.1) (0.8) (0.1) 0.2 – (0.3) (0.1) 0.1 0.8 0.2 53.4 102.0 (0.1) (1.9) (2.0) 3.1 7.8 5.1 26.2 43.1 (0.3) 0.4 0.1 – 0.1 (0.2) 0.1 0.4 (0.4) 0.1 (0.1) 0.2 1.2 0.1 (0.1) (0.2) (0.2) 0.2 0.1 0.7 2.1 45.2 101.2 0.4 (1.6) (1.2) $ 2,166 $ 1,990 $ 1,871 100.0% 100.0% 100.0% $ 306 – 306 $ 2,472 $ 237 (11) 226 $ 2,216 $ 463 (4) 459 $ 2,330 1 Primarily based on the geographic location of the customer’s address. 2 Includes loans that are measured at fair value through other comprehensive income. 3 Includes all FDIC covered loans and other ACI loans. 54 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 3 6 PROVISION FOR LOAN LOSSES BY GEOGRAPHY1,2,3 (millions of Canadian dollars, except as noted) For the years ended Percentage of total October 31 2018 October 31 2017 October 31 2016 October 31 2018 October 31 2017 October 31 2016 Canada Atlantic provinces British Columbia4 Ontario4 Prairies4 Québec Total Canada United States Carolinas (North and South) Florida New England5 New Jersey New York Pennsylvania Other6 Total United States Total excluding other loans Other loans Total Stage 3 provision for loan losses (impaired) (Counterparty-specific and individually insignificant provision under IAS 39) Stage 1 and 2 provision for loan losses (incurred but not identified provision under IAS 39) Total provision for loan losses Provision for loan losses as a % of average net loans and acceptances6 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 Stage 3 provision for loan losses (impaired) counterparty-specific and individually insignificant provision (under IAS 39) Stage 1 and 2 provision for loan losses $ 74 106 361 262 122 925 54 93 148 107 142 51 672 1,267 2,192 (26) $ 75 109 374 258 150 966 42 77 112 95 143 52 543 1,064 2,030 (40) $ 69 120 400 310 149 1,048 33 53 112 81 98 41 428 846 1,894 (23) 3.0% 4.3 14.6 10.6 4.9 37.4 2.2 3.8 6.0 4.3 5.7 2.1 27.2 51.3 88.7 (1.1) 3.4% 4.9 16.9 11.6 6.8 43.6 1.9 3.5 5.1 4.3 6.4 2.3 24.5 48.0 91.6 (1.8) 3.0% 5.1 17.2 13.3 6.4 45.0 1.4 2.3 4.8 3.4 4.2 1.8 18.4 36.3 81.3 (1.0) 2,166 1,990 1,871 87.6 89.8 80.3 306 $ 2,472 226 $ 2,216 459 $ 2,330 12.4 100.0% 10.2 100.0% 19.7 100.0% October 31 2018 October 31 2017 October 31 2016 0.01% 0.63 0.04 0.21 0.04 2.18 0.01 0.63 – 0.34 (4.97) 0.01% 0.73 0.04 0.24 0.03 1.92 – 0.55 – 0.34 (1.47) 0.34 0.33 0.01% 0.81 0.12 0.27 0.06 1.50 0.04 0.46 – 0.33 (0.84) 0.32 0.08 (Incurred but not identified provision under IAS 39) 0.05 0.04 Total provision for loan losses as a % of average net loans and acceptances 0.39% 0.36% 0.40% 1 Primarily based on the geographic location of the customer’s address. 2 Includes loans that are measured at fair value through other comprehensive income. 3 Includes customers’ liability under acceptances. 4 The territories are included as follows: Yukon is included in British Columbia; Nunavut is included in Ontario; and Northwest Territories is included in the Prairies region. 5 The states included in New England are as follows: Connecticut, Maine, Massachusetts, New Hampshire, and Vermont. 6 Other includes PCL attributable to other states/regions including those outside TD’s core U.S. geographic footprint. NON-PRIME LOANS As at October 31, 2018, the Bank had approximately $2.8 billion (October 31, 2017 – $2.5 billion), gross exposure to non-prime loans, which primarily consist of automotive loans originated in Canada. The credit loss rate, an indicator of credit quality, and defined as annual PCL divided by the average month-end loan balance was approximately 3.77% on an annual basis (October 31, 2017 – 5.25%), remaining at cyclically low levels. These loans are recorded at amortized cost. 55 TD BANK GROUP ANNUAL REPORT 2018 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 7 EXPOSURE TO EUROPE – Total Net Exposure by Country and Counterparty 1 (millions of Canadian dollars) As at Loans and commitments2 Derivatives, repos, and securities lending3 Trading and investment portfolio4,5 Country Corporate Sovereign Financial Total Corporate Sovereign Financial Total Corporate Sovereign Financial Total Total Exposure6 GIIPS Greece Italy Ireland Portugal Spain Total GIIPS Rest of Europe Austria Belgium Finland France Germany Luxembourg Netherlands Norway Sweden Switzerland United Kingdom Other7 Total Rest of Europe Total Europe GIIPS Greece Italy Ireland Portugal Spain Total GIIPS Rest of Europe Austria Belgium Finland France Germany Luxembourg Netherlands Norway Sweden Switzerland United Kingdom Other7 Total Rest of Europe Total Europe $ – $ – $ – – – – – 178 – – 30 208 – $ 1 197 – 56 254 – $ 179 197 – 86 462 – $ – 17 – – 17 – $ – – 139 – 139 – $ 3 268 56 61 388 – 3 285 195 61 544 $ – $ – $ 26 – 1 23 50 22 – – 522 544 – $ 5 – – – 5 – $ 53 – 1 545 599 – 235 482 196 692 1,605 October 31, 2018 – 67 12 263 660 486 – 146 110 579 2,520 1,822 1,106 2,181 933 – 424 396 509 1,141 362 121 362 54 – 522 235 997 2,127 2,164 2,872 9,262 11,379 – 531 3,346 16,164 22,097 6,447 $ 6,447 $ 3,168 $ 1,330 $ 10,945 $ 2,604 $ 3,485 $ 16,552 $ 22,641 7 488 141 1,226 1,670 99 1,409 159 162 1,144 3,973 5 1,076 10,483 – – 141 514 354 – 706 33 67 58 1,082 5 2,960 9 140 – 77 443 28 273 20 – 37 1,558 2 2,587 7 225 – 133 210 99 194 5 95 89 19 – 46 34 36 621 805 – 506 288 287 – 559 164 365 – 40 – 122 240 3 44 24 15 39 336 – 2 – 176 63 – 265 630 644 25 2,429 66 1,008 1,082 1,008 94 1,284 136 1,071 1,358 1,071 5,613 5,911 9,657 7,779 8,082 11,933 – 526 3,717 6,576 426 1,601 1,548 2,891 – 3,372 857 3,622 18,974 395 997 4,300 27,671 60,251 863 22,508 $ 913 $ 23,052 $ 4,305 $ 28,270 $ 61,856 3 4,026 1,080 2,207 64 461 – $ – $ – $ – – – – – 168 – – 99 267 – $ 3 194 – 47 244 – $ 171 194 – 146 511 – $ – 11 – – 11 – $ – – – – – – $ 3 274 16 35 328 – 3 285 16 35 339 $ – $ – $ 29 – 7 9 45 35 – – 1,277 1,312 – $ 2 – – 3 5 – $ 66 – 7 1,289 1,362 – 240 479 23 1,470 2,212 October 31, 2017 24 – 220 258 41 6 3,202 602 2,193 1,259 1,173 – 1,370 548 355 – 606 – 635 975 9,086 10,502 2,511 313 – 6,159 20,634 $ 6,159 $ 4,917 $ 739 $ 11,815 $ 1,948 $ 3,688 $ 15,337 $ 20,973 11 23 40 604 901 – 727 311 361 – 580 130 3,688 – – 134 636 522 – 339 67 105 58 2,784 5 4,650 12 188 – 66 419 35 320 22 – 34 836 5 1,937 – 258 141 1,355 1,809 – 1,048 71 227 1,075 5,315 5 11,304 – – 1 117 28 – 161 4 122 42 20 – 495 1 9 1 2,532 873 1,138 323 22 245 601 178 15,009 – 42 – 78 233 6 72 1 5 55 269 51 – – 275 45 – 313 457 788 59 1,744 11 1,073 90 1,066 5,337 7,568 – 4,109 327 1,189 – 2,082 282 23,123 1,148 1,124 610 132 1,066 1,248 5,690 10,247 7,846 11,848 1,179 6,912 1,211 2,815 1,824 4,095 19,912 611 – 761 3,743 27,627 59,565 $ 806 $ 24,435 $ 3,748 $ 28,989 $ 61,777 6 4,494 785 1,982 114 293 1 Certain comparative amounts have been recast to conform with the presentation 4 Trading and Investment portfolio includes deposits and trading exposures are net adopted in the current period. of eligible short positions. 2 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 of October 31, 2017 and October 31, 2018. 3 Exposures are calculated on a fair value basis and are net of collateral. Total market value of pledged collateral is $0.4 billion (October 31, 2017 – $1.5 billion) for GIIPS and $66 billion (October 31, 2017 – $67.4 billion) for the rest of Europe. Derivatives are presented as net exposures where there is an International Swaps and Derivatives Association (ISDA) master netting agreement. 5 The fair values of the GIIPS exposures in Level 3 in the trading and investment portfolio were not significant as at October 31, 2018, and October 31, 2017. 6 The reported exposures do not include $0.2 billion of protection the Bank purchased through credit default swaps (October 31, 2017 – $0.2 billion). 7 Other European exposure is distributed across 9 countries (October 31, 2017 – 8 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, 2018. Of the Bank’s European exposure, approximately 96% (October 31, 2017 – 96%) is to counterparties in countries rated AA or better by either Moody’s Investor Services (Moody’s) or Aa3 or better by 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, and cash. The Bank also takes a limited amount of exposure to well rated corporate issuers in Europe where the Bank also does business with their related entities in North America. 56 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS In addition to the European exposure identified above, the Bank also has $11.2 billion (October 31, 2017 – $9.5 billion) of exposure to supranational entities with European sponsorship and $1.0 billion (October 31, 2017 – $2.3 billion) of indirect exposure to 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. GROUP FINANCIAL CONDITION Capital Position T A B L E 3 8 CAPITAL STRUCTURE AND RATIOS – Basel III 1 (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 Investments in own Tier 2 instruments 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 assets2,3 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 ratio4 2018 2017 $ 21,267 46,145 6,639 74,051 $ 20,967 40,489 8,006 69,462 (19,285) (2,236) (317) 2,568 (953) (115) (113) (123) (1,088) (21,662) 52,389 4,996 2,455 245 7,696 (18,820) (2,310) (113) 506 (805) (73) (13) – (1,206) (22,834) 46,628 4,247 3,229 – 7,476 – (1) (350) (350) 7,346 59,735 8,927 198 – 1,734 10,859 (352) (353) 7,123 53,751 7,156 2,648 – 1,668 11,472 – (25) (160) (160) 10,699 $ 70,434 (160) (185) 11,287 $ 65,038 $ 435,632 435,780 435,927 $ 435,750 435,750 435,750 12.0% 13.7 16.2 4.2 10.7% 12.3 14.9 3.9 1 Capital position has been calculated using the “all-in” basis. 2 Each capital ratio has its own RWA measure due to the OSFI-prescribed scalar for inclusion of the CVA. For fiscal 2018, the scalars for inclusion of CVA for CET1, Tier 1, and Total Capital RWA are 80%, 83%, and 86%, respectively. For fiscal 2017, the corresponding scalars were 72%, 77%, and 81%, respectively. 3 As at October 31, 2017, RWA for all ratios were the same due to the regulatory floor which was based on Basel I risk weights. As at October 31, 2018, the regulatory floor is based on Basel II standardized risk weights and is no longer triggered resulting in a separate RWA for each ratio due to the CVA scalar. 4 The leverage ratio is calculated as Tier 1 Capital divided by leverage exposure, as defined. 57 TD BANK GROUP ANNUAL REPORT 2018 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 Treasury and Balance Sheet Management (TBSM) group manages capital for the Bank and is responsible for forecasting and monitoring compliance with capital targets. 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 Economic capital is the Bank’s internal measure of capital requirements and is one of the key components in the Bank’s assessment of internal capital adequacy. 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 utilized to fund acquisitions or investments to support future earnings growth. The Bank uses internal models to determine the amount of risk- based capital required to support the risks resulting from the Bank’s business operations. Characteristics of these models are described in the “Managing Risk” section of this document. The objective of the Bank’s economic capital framework is to hold risk-based capital to cover unexpected losses in a manner consistent with the Bank’s capital management objectives. The Bank operates its capital regime under the Basel Capital Framework. Consequently, in addition to addressing Pillar 1 risks covering credit risk, market risk, and operational risk, the Bank’s economic capital framework captures other material Pillar 2 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 risks associated with the Bank’s significant investments. The framework also captures diversification benefits across risk types and business segments. Please refer to the “Economic Capital and Risk-Weighted Assets by Segment” section for a business segment breakdown of the Bank’s economic capital. REGULATORY CAPITAL Capital requirements of the Basel Committee on Banking 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. Risk sensitive regulatory capital ratios are calculated by dividing CET1, Tier 1, and Total Capital by their respective RWA, inclusive of any minimum requirements outlined under the regulatory floor. In 2015, Basel III implemented a non-risk sensitive leverage ratio to act as a supplementary measure to the risk-sensitive capital requirements. The objective of the leverage ratio is to constrain the build-up of excess leverage in the banking sector. The leverage ratio is calculated by dividing Tier 1 Capital by leverage exposure which is primarily comprised of on-balance sheet assets with adjustments made to derivative and securities financing transaction exposures, and credit equivalent amounts of off-balance sheet exposures. OSFI’s Capital Requirements under Basel III OSFI’s Capital Adequacy Requirements (CAR) guideline details how the Basel III capital rules apply to Canadian banks. Effective January 1, 2014, the CVA capital charge is to be phased in over a five year period based on a scalar approach. For fiscal 2018, the scalars for inclusion of the CVA for CET1, Tier 1, and Total Capital RWA are 80%, 83%, and 86%, respectively. All of the above scalars will increase to 100% in 2019 for the CET1, 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 upon the occurrence of a trigger event as defined in the guidance. 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. The CAR guideline contains two methodologies for capital ratio calculation: (1) the “transitional” method; and (2) the “all-in” method. The minimum CET1, Tier 1, and Total Capital ratios, based on the “all-in” method, are 4.5%, 6.0%, and 8.0%, respectively. OSFI expects Canadian banks to include an additional capital conservation buffer of 2.5%, effectively raising the CET1, Tier 1 Capital, and Total Capital ratio minimum requirements to 7.0%, 8.5%, and 10.5%, respectively. In March 2013, OSFI designated the six major Canadian banks as domestic systemically important banks (D-SIBs), for which a 1% common equity capital surcharge is in effect from January 1, 2016. As a result, the six Canadian banks designated as D-SIBs, including TD, are required to meet an “all-in” Pillar 1 target CET1, Tier 1, and Total Capital ratios of 8.0%, 9.5%, and 11.5%, respectively. 58 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSISAt the discretion of OSFI, a common equity countercyclical capital For accounting purposes, IFRS is followed for consolidation of buffer (CCB) within a range of 0% to 2.5% may be imposed. The primary objective of the CCB is to protect the banking sector against future potential losses resulting from periods of excess aggregate credit growth that have often been associated with the build-up of system-wide risk. The CCB is an extension of the capital conservation buffer and must be met with CET1 capital. The CCB is calculated using the weighted-average of the buffers deployed in Canada and across BCBS member jurisdictions and selected non-member jurisdictions to which the bank has private sector credit exposures. Effective November 1, 2017, OSFI required D-SIBs and foreign bank subsidiaries in Canada to comply with the CCB regime, phased-in according to the transitional arrangements. As a result, the maximum countercyclical buffer relating to foreign private sector credit exposures was capped at 1.25% of total RWA in the first quarter of 2017 and increases each subsequent year by an additional 0.625%, to reach its final maximum of 2.5% of total RWA in the first quarter of 2019. As at October 31, 2018, the CCB is only applicable to private sector credit exposures located in Hong Kong, Sweden, Norway, and the United Kingdom. Based on the allocation of exposures and buffers currently in place in Hong Kong, Sweden, Norway, and the United Kingdom, the Bank’s countercyclical buffer requirement is 0% as at October 31, 2018. On June 25, 2018, OSFI provided greater transparency related to previously undisclosed Pillar 2 CET1 capital buffer through the introduction of the public Domestic Stability Buffer (DSB). The DSB is held by D-SIBs against Pillar 2 risks associated with systemic vulnerabilities including, but not limited to: i) Canadian consumer indebtedness; ii) asset imbalances in the Canadian market; and iii) Canadian institutional indebtedness. The level of the buffer ranges between 0% and 2.5% of total RWA and must be met with CET1 Capital. The current buffer is set at 1.5%, effectively raising the CET1 target to 9.5%. At a minimum, OSFI will review the buffer semi-annually and any changes will be made public. A breach of the buffer will not automatically constrain capital distributions; however, OSFI will require a remediation plan. Effective in the second quarter of 2018, OSFI implemented a revised methodology for calculating the regulatory capital floor. The revised floor is based on the standardized approach (TSA), with the floor factor transitioned in over three quarters. The factor increased from 70% in the second quarter of 2018, to 72.5% in the third quarter, and 75% in the current quarter. The Bank is not constrained by the capital floor. The leverage ratio is calculated as per OSFI’s Leverage Requirements guideline and has a regulatory minimum requirement of 3.0%. 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. Effective the third quarter of 2016, OSFI approved the Bank to calculate the majority of the retail portfolio credit RWA in the U.S. Retail segment using the Advanced Internal Ratings Based (AIRB) approach. The remaining assets in the U.S. Retail segment continue to use TSA for credit risk. subsidiaries and joint ventures. For regulatory capital purposes, insurance subsidiaries are deconsolidated and reported as a deduction from capital. Insurance subsidiaries are subject to their own capital adequacy reporting, such as OSFI’s Minimum Continuing Capital Surplus Requirements and Minimum Capital Test. Currently, for regulatory capital purposes, all the entities of the Bank are either consolidated or deducted from capital and there are no entities from which surplus capital is recognized. Some of the Bank’s subsidiaries are individually regulated by either OSFI or other regulators. Many of these entities have minimum capital requirements which they must maintain and which may limit the Bank’s ability to extract capital or funds for other uses. As at October 31, 2018, the Bank’s CET1, Tier 1, and Total Capital ratios were 12.0%, 13.7%, and 16.2%, respectively. Compared with the Bank’s CET1 Capital ratio of 10.7% at October 31, 2017, the CET1 Capital ratio, as at October 31, 2018, increased due to organic capital growth, implementation of the revised regulatory capital floor in the second quarter of 2018, actuarial gains on employee benefit plans primarily due to an increase in discount rates, partially offset by RWA growth across all segments, common shares repurchased, and the impact of the U.S. tax reform. As at October 31, 2018, the Bank’s leverage ratio was 4.2%. Compared with the Bank’s leverage ratio of 3.9% at October 31, 2017, the leverage ratio, as at October 31, 2018, increased as capital generation and preferred share issuances were partially offset by business growth in all segments. Common Equity Tier 1 Capital CET1 Capital was $52.4 billion as at October 31, 2018. 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 $518 million under the dividend reinvestment plan and from stock option exercises. Tier 1 and Tier 2 Capital Tier 1 Capital was $60 billion as at October 31, 2018, consisting of CET1 Capital and Additional Tier 1 Capital of $52 billion and $8 billion, respectively. Tier 1 Capital management activities during the year consisted of the issuance of $350 million non-cumulative Rate Reset Preferred Shares, Series 18 and $400 million non-cumulative Rate Reset Preferred Shares, Series 20, both of which included NVCC Provisions to ensure loss absorbency at the point of non-viability; and the redemption of Class A Preferred Shares Series S, Series T, Series Y, and Series Z, totalling $500 million. On November 26, 2018, TD Capital Trust III (Trust III) announced its intention to redeem all of the outstanding TD Capital Trust III Securities – Series 2008 (TD CaTS III) on December 31, 2018. Tier 2 Capital was $10 billion as at October 31, 2018. Tier 2 Capital management activities during the year consisted of the issuance of $1.75 billion 3.589% subordinated debentures due September 14, 2028, which included NVCC Provisions to ensure loss absorbency at the point of non-viability, the redemption of $650 million 5.828% subordinated debentures due July 9, 2023, and the redemption of $1.8 billion 5.763% subordinated debentures due December 18, 2106. 59 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS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 TBSM 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. TBSM 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, 2018, the quarterly dividend was $0.67 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 $2.61 per share (2017 – $2.35). For cash dividends payable on the Bank’s preferred shares, refer to Note 21 of the 2018 Consolidated Financial Statements. As at October 31, 2018, 1,828 million common shares were outstanding (2017 – 1,840 million). The Bank’s ability to pay dividends is subject to the requirements of the Bank Act and OSFI. Refer to Note 21 of the 2018 Consolidated Financial Statements for further information on dividend restrictions. NORMAL COURSE ISSUER BID As approved by the Board on November 28, 2018, the Bank announced its intention to amend its normal course issuer bid (NCIB) for up to an additional 20 million of its common shares, 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. On April 19, 2018, the Bank announced that the TSX and OSFI approved the Bank’s previously announced NCIB to repurchase for cancellation up to 20 million of the Bank’s common shares. During the year ended October 31, 2018, the Bank repurchased 20 million common shares under its NCIB at an average price of $75.07 per share for a total amount of $1.5 billion. The Bank had repurchased 22.98 million common shares under its previous NCIB announced in March 2017, as amended in September 2017, at an average price of $60.78 per share for a total amount of $1.4 billion. 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 are included in the following table. T A B L E 3 9 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 Internal Ratings Based (IRB) approaches Adjustment to IRB RWA for scaling factor Other assets not included in standardized or IRB approaches Total credit risk Market risk Operational risk Regulatory floor Total As at October 31 October 31 2017 2018 $ 31,280 $ 30,500 19,432 45,300 29,276 44,564 182,685 168,119 7,618 8,275 14,442 805 8,370 9,001 13,142 1,173 319,491 294,491 8,615 10,189 40,364 36,687 370,044 339,793 14,020 13,213 48,392 52,375 – 33,545 $ 435,632 $ 435,750 1 Each capital ratio has its own RWA measure due to the OSFI-prescribed scalar for inclusion of the CVA. For fiscal 2018, the scalars for inclusion of CVA for CET1, Tier 1 and Total Capital RWA are 80%, 83%, and 86%, respectively. For fiscal 2017, the scalars were 72%, 77%, and 81%, respectively. 2 As at October 31, 2017, RWA for all ratios were the same due to the regulatory floor which was based on Basel I risk weights. As at October 31, 2018, the regulatory floor is based on Basel II standardized risk weights and is no longer triggered resulting in a separate RWA for each ratio due to the CVA. 60 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS ECONOMIC CAPITAL AND RISK-WEIGHTED ASSETS BY SEGMENT The following chart provides a breakdown of the Bank’s RWA and economic capital as at October 31, 2018. RWA reflects capital requirements assessed based on regulatory prescribed rules for credit risk, trading market risk, and operational risk. Economic capital reflects the Bank’s internal view of capital requirements for these risks as well as risks not captured within the assessment of RWA as described in the “Economic Capital” section of this document. The results shown in the chart do not reflect attribution of goodwill and intangibles. 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 65% 9% 9% 17% TD Bank Group CET1 RWA1 $ 370,044 Credit Risk: Market Risk: $ 13,213 Operational Risk: $ 52,375 Corporate Canadian Retail U.S. Retail2 Wholesale Banking • Global Markets • Corporate and Investment Banking • Other • Treasury and Balance Sheet Management • Other Control Functions • Personal Deposits • Consumer Lending • Credit Cards Services • Auto Finance • Commercial Banking • Small Business Banking • Advice-based Wealth Business • Asset Management • TD Ameritrade • Personal Deposits • Consumer Lending • Real Estate Secured Lending • Credit Cards and Merchant Solutions • Auto Finance • Commercial Banking • Small Business Banking • Direct Investing • Advice-based Wealth Business • Asset Management • Property and Casualty Insurance • Life and Health Insurance Economic Capital (%) Credit Risk Market Risk Operational Risk Other Risks 73% 5% 6% 16% Credit Risk Market Risk Operational Risk Other Risks 59% 9% 11% 21% Credit Risk Market Risk Operational Risk Other Risks 75% 11% 8% 6% Credit Risk Market Risk Operational Risk Other Risks 28% 38% 13% 21% CET1 RWA1 $ 98,753 Credit Risk Market Risk – $ Operational Risk $ 9,773 $ 214,395 Credit Risk Market Risk – $ Operational Risk $ 29,260 $ 48,689 Credit Risk Market Risk $ 13,213 Operational Risk $ 8,202 $ 8,207 Credit Risk Market Risk – $ Operational Risk $ 5,140 1 Amounts are in millions of Canadian dollars 2 U.S. Retail includes TD Ameritrade in Other Risks for Economic Capital 61 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSISPreferred shares Series 1, 3, 5, 7, 9, 11, 12, 14, 16, 18, and 20 include NVCC provisions. If a NVCC trigger event were to occur, the maximum number of common shares that could be issued, assuming there are no declared and unpaid dividends on the respective series of preferred shares at the time of conversion, would be 1.0 billion in aggregate. For NVCC subordinated notes and debentures, if a NVCC trigger event were to occur, the maximum number of common shares that could be issued, assuming there is no accrued and unpaid interest on the respective subordinated notes and debentures, would be 2,550 million in aggregate. The following subordinated debentures contain NVCC provisions: the 2.692% subordinated debentures due June 24, 2025, 2.982% subordinated debentures due September 30, 2025, 3.589% subordinated debentures due September 14, 2028, 3.224% subordinated debentures due July 25, 2029, 4.859% subordinated debentures due March 4, 2031, and the 3.625% subordinated debentures due September 15, 2031. Refer to Note 19 of the Bank’s 2018 Consolidated Financial Statements for additional details. Future Regulatory Capital Developments In October 2018, OSFI released the final revised CAR guideline for implementation in the first quarter of 2019. The main revisions relate to the domestic implementation of TSA to counterparty credit risk (SA-CCR), capital requirements for bank exposures to central counterparties, as well as revisions to the securitization framework. SA-CCR includes a comprehensive, non-modelled approach for measuring counterparty credit risk of derivatives and long settlement transactions. The guideline allows a scalar of 0.7 to be applied to SA-CCR exposures that impact the CVA risk capital charge from the first quarter of 2019 to the fourth quarter of 2021. The revised securitization framework includes a revised hierarchy to determine capital treatment, and preferential capital treatment for transactions that meet the simple, transparent, and comparable criteria. Upon implementation, the securitization framework allows grandfathering of the current capital treatment, for one year, through an adjustment to risk-weighted assets that effectively eliminates the initial impact of implementation of the revisions. In October 2018, OSFI released the final Leverage Requirements guideline, and in November 2019, OSFI issued the final Leverage Ratio Disclosure Requirements. The revisions align the leverage requirements and disclosures to changes made to the CAR guideline, and are effective in the first quarter of 2019. In October 2018, BCBS issued a consultative document seeking views on whether a targeted and limited revision to the treatment of client cleared derivatives in the calculation of the leverage ratio exposure measure may be warranted. The BCBS is also seeking views on the merits of introducing a requirement for initial margin, that is eligible for offsetting client cleared derivative exposure, be subject to segregation criteria. In August 2018, OSFI provided notification to the Bank setting a supervisory target Total Loss Absorbing Capacity (TLAC) ratio at 23.0% of RWA, inclusive of the DSB, and the minimum TLAC leverage ratio at 6.75%. This is pursuant to the final guideline on TLAC issued by OSFI in April 2018. Beginning the first quarter of 2022, D-SIBs will be expected to meet the supervisory target TLAC requirements. Investments in TLAC issued by global systemically important banks (G-SIBs) or Canadian D-SIBs may be required to be deducted from capital. T A B L E 4 0 EQUITY AND OTHER SECURITIES1 (millions of shares/units, except as noted) Common shares outstanding Treasury shares – common Total common shares Stock options Vested Non-vested Preferred shares – Class A Series S2 Series T3 Series Y4 Series Z5 Series 1 Series 3 Series 5 Series 7 Series 9 Series 11 Series 12 Series 14 Series 16 Series 186 Series 207 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 20088 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 2017 2018 Number of Number of shares/units shares/units 1,830.4 1,842.5 (2.9) 1,828.3 1,839.6 (2.1) 4.7 8.4 5.4 8.9 – – – – 20.0 20.0 20.0 14.0 8.0 6.0 28.0 40.0 14.0 14.0 16.0 200.0 (0.3) 199.7 5.4 4.6 5.5 4.5 20.0 20.0 20.0 14.0 8.0 6.0 28.0 40.0 14.0 – – 190.0 (0.3) 189.7 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 2018 Consolidated Financial Statements. 2 On July 31, 2018, the Bank redeemed all of its 5.4 million outstanding Class A First Preferred Shares, Series S (“Series S Shares”), at the redemption price of $25.00 per Series S Share, for total redemption costs of approximately $135 million. 3 On July 31, 2018, the Bank redeemed all of its 4.6 million outstanding Class A First Preferred Shares, Series T (“Series T Shares”), at the redemption price of $25.00 per Series T Share, for total redemption costs of approximately $115 million. 4 On October 31, 2018, the Bank redeemed all of its 5.5 million outstanding Class A First Preferred Shares, Series Y (“Series Y Shares”), at a redemption price of $25.00 per Series Y Share, for total redemption costs of approximately $137 million. 5 On October 31, 2018, the Bank redeemed all of its 4.5 million outstanding Class A First Preferred Shares, Series Z (“Series Z Shares”), at a redemption price of $25.00 per Series Z Share, for total redemption costs of approximately $113 million. 6 Non-Cumulative 5-Year Rate Reset Preferred Shares (NVCC), Series 18 (the “Series 18 Shares”) issued by the Bank on March 14, 2018, at a price of $25 per share, with quarterly non-cumulative cash dividends on these shares, if declared, payable at a per annum rate of 4.7% for the initial period ending April 30, 2023. Thereafter, the dividend rate will reset every five years equal to the then five-year Government of Canada bond yield plus 2.7%. Holders of these shares will have the right to convert their shares into non-cumulative NVCC Floating Rate Preferred Shares, Series 19, subject to certain conditions, on April 30, 2023, and on April 30 every five years thereafter. Holders of the Series 19 Shares will be entitled to receive quarterly floating rate dividends, if declared, at a rate equal to the three-month Government of Canada Treasury Bill yield plus 2.7%. The Series 18 Shares are redeemable by the Bank, subject to regulatory consent, at $25 per share on April 30, 2023, and on April 30 every five years thereafter. 7 Non-Cumulative 5-Year Rate Reset Preferred Shares (NVCC), Series 20 (the “Series 20 Shares”) issued by the Bank on September 13, 2018, at a price of $25 per share, with quarterly non-cumulative cash dividends on these shares, if declared, payable at a per annum rate of 4.75% for the initial period ending October 31, 2023. Thereafter, the dividend rate will reset every five years equal to the then five-year Government of Canada bond yield plus 2.59%. Holders of these shares will have the right to convert their shares into non-cumulative NVCC Floating Rate Preferred Shares, Series 21, subject to certain conditions, on October 31, 2023, and on October 31 every five years thereafter. Holders of the Series 21 Shares will be entitled to receive quarterly floating rate dividends, if declared, at a rate equal to the three-month Government of Canada Treasury Bill yield plus 2.59%. The Series 20 Shares are redeemable by the Bank, subject to regulatory consent, at $25 per share on October 31, 2023, and on October 31 every five years thereafter. 8 On November 26, 2018, Trust III announced its intention to redeem all of the outstanding TD CaTS III on December 31, 2018. 62 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS In July 2018, OSFI released a discussion paper on the proposed implementation of the Basel III reforms for public consultation. The discussion paper sets out OSFI’s proposed policy direction and timelines for domestic implementation. The BCBS issued the finalized Basel III reforms in December 2017. The reforms include: i) a revised internal ratings-based approach for credit risk where the use of the internal models are constrained by placing limits on certain inputs and the option to use AIRB for certain asset classes has been removed; ii) a revised standardized approach for credit risk that is more granular and risk-sensitive; iii) replacement of the CVA framework with new standardized and basic approaches; iv) streamlining the existing operational risk framework to a risk-sensitive standardized approach which will replace existing methodologies; v) revisions to the measurement of the leverage ratio and introduction of a leverage ratio buffer for G-SIBs; vi) the implementation of the adoption of the minimum capital requirements for market risk (Fundamental Review of the Trading Book); and vii) an aggregate output floor based on the revised Basel III standardized approaches. The reforms are effective the first quarter of 2022, with the standardized output floor having an added five-year phased implementation period until 2027. In May 2018 OSFI issued final guidelines on TLAC Disclosure Requirements and Capital Disclosure Requirements. Together, these guidelines set out the TLAC disclosure requirements for Canadian D-SIBs. The disclosure requirements are effective in the first quarter of 2019. In March 2018, BCBS issued a consultative document on revisions to the minimum capital requirements for market risk. The key aspects of the proposal include changes to the measurement of TSA, and recalibration of standardized approach risk weights for general interest rate risk, equity risk, and foreign exchange risk. The proposal also includes revisions to the assessment process to determine whether internal risk management models appropriately reflect the risks of trading desks. In February 2018, BCBS issued a consultative document “Pillar 3 disclosure requirements – updated framework”. Proposed disclosure changes arising from the finalization of the Basel III reforms include credit risk, operational risk, the leverage ratio, key metrics, and benchmarking RWA internal model outcomes. The proposal also contains new disclosure requirements on asset encumbrance and capital distribution constraints. The proposal seeks views on the scope of application of the disclosure requirement on the composition of regulatory capital that was introduced in the final standard on Phase 2 of the Pillar 3 Disclosure Requirements. Together with the first phase and second phase of the revised Pillar 3 disclosure requirements, the proposed disclosure requirements would comprise the single Pillar 3 framework. In December 2017, BCBS issued a discussion paper on the regulatory treatment of sovereign exposures. The purpose of the discussion paper is to seek views of stakeholders to inform the BCBS analysis on the treatment of sovereign exposures. The discussion paper clarifies the definitions of different sovereign entities, addresses inherent sovereign risk, and presents various ideas related to the treatment of sovereign exposures. The BCBS has not reached a consensus on the changes to the treatment of sovereign exposures and has therefore not issued a consultative document at this time. In October 2017, BCBS issued final guidelines on identification and management of step-in risk. Step-in risk is the risk that the bank decides to provide financial support to an unconsolidated entity that is facing stress, in the absence of, or in excess of, any contractual obligations. The guideline requires banks to define the scope of entities to be evaluated, self-assess step-in risk within the scope, and report to supervisor. For step-in risk identified, banks need to estimate the potential impact on liquidity and capital positions and determine the appropriate internal risk management actions. The framework entails no automatic Pillar 1 capital or liquidity charge additional to the existing Basel standards. The guidelines are expected to be implemented by 2020. In March 2017, BCBS issued the final standard on Phase 2 of the Pillar 3 Disclosure Requirements. The final standard consolidates all existing and prospective BCBS disclosure requirements into the Pillar 3 framework, prescribes enhanced disclosure of key prudential metrics, and for banks which record prudent valuation adjustments, a new disclosure requirement for a granular breakdown of how the adjustments are calculated. The standard also includes new disclosure requirements for the total loss-absorbing capital regime for G-SIBs and revised disclosure requirements for market risk. The implementation date for these disclosure requirements will be determined when OSFI issues Phase 2 of the Pillar 3 Disclosure Requirements. The BCBS has commenced Phase 3, the final phase of the Pillar 3 review. The objectives of Phase 3 is to develop disclosure requirements for standardized RWA to benchmark internally modelled capital requirements, asset encumbrances, operational risk, and ongoing policy reforms. Global Systemically Important Banks Disclosures In July 2013, the BCBS issued an update to the final rules on G-SIBs and outlined the G-SIB assessment methodology which is based on the submissions of the largest global banks. Twelve indicators are used in the G-SIB assessment methodology to determine systemic importance. The score for a particular indicator is calculated by dividing the individual bank value by the aggregate amount for the indicator summed across all banks included in the assessment. Accordingly, an individual bank’s ranking is reliant on the results and submissions of other global banks. The update also provided clarity on the public disclosure requirements of the twelve indicators used in the assessment methodology. As per OSFI’s revised Advisory issued September 2015, the Canadian banks that have been designated as D-SIBs are also required by OSFI to publish, at a minimum, the twelve indicators used in the G-SIB indicator-based assessment framework. Public disclosure of financial year-end data is required annually, no later than the date of a bank’s first quarter public disclosure of shareholder financial data in the following year. In July 2018, BCBS issued a revised G-SIB framework; G-SIBs: revised assessment methodology and the higher loss absorbency requirement. The new assessment methodology introduces a trading volume indicator and modifies the weights in the substitutability category, amends the definition of cross-jurisdictional indicators, extends the scope of consolidation to insurance subsidiaries, and provides further guidance on bucket migration and associated loss absorbency surcharges. The revised methodology is expected to be implemented in 2021. Based on 2017 fiscal year indicators, the Bank was not designated a G-SIB in November 2018. TD’s 2018 fiscal year indicators will be included in the Bank’s first quarter of 2019 Report to Shareholders. 63 TD BANK GROUP ANNUAL REPORT 2018 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 securitizing 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 and Note 10 of the 2018 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, credit card loans, and 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 sponsored by the Canada Mortgage and Housing Corporation (CMHC). The securitization of the residential mortgages with the CMHC does not qualify for derecognition and the mortgages remain on the Bank’s Consolidated Balance Sheet. Additionally, the Bank securitizes credit card and 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. Refer to Notes 9 and 10 of the 2018 Consolidated Financial Statements for further information. T A B L E 4 1 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 Credit card loans Business and government loans Total exposure Residential mortgage loans Consumer instalment and other personal loans2 Credit card loans Business and government loans Total exposure Securitized assets $ 22,516 – – – $ 22,516 $ 22,733 – – – $ 22,733 Carrying value of retained interests Securitized assets Securitized assets Carrying value of retained interests $ – – – – $ – $ – – – – $ – $ – 1,749 3,884 – $ 5,633 $ – 2,481 3,354 – $ 5,835 October 31, 2018 $ 818 – – 1,206 $ 2,024 $ – – – 25 $ 25 October 31, 2017 $ 2,252 – – 1,428 $ 3,680 $ – – – 32 $ 32 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 derecognition 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. Consumer Instalment and Other Personal Loans The Bank securitizes consumer instalment and other personal loans through consolidated SPE. The Bank consolidates the SPE as it serves as a financing vehicle 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 SPE. As at October 31, 2018, the SPE had $2 billion of issued notes outstanding (October 31, 2017 – $2 billion). As at October 31, 2018, the Bank’s maximum potential exposure to loss for these conduits was $2 billion (October 31, 2017 – $2 billion) with a fair value of $2 billion (October 31, 2017 – $2 billion). 64 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS Credit Card Loans The Bank securitizes credit card loans through an SPE. The Bank consolidates the SPE as it serves as a financing vehicle 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 SPE. As at October 31, 2018, the Bank had $4 billion of securitized credit card receivables outstanding (October 31, 2017 – $3 billion). As at October 31, 2018, the consolidated SPE had US$3 billion variable rate notes outstanding (October 31, 2017 – US$3 billion). The notes are issued to third party investors and have a fair value of US$3 billion as at October 31, 2018 (October 31, 2017 – US$3 billion). Due to the nature of the credit card receivables, their carrying amounts approximate fair value. Business and Government Loans The Bank securitizes business and government loans through significant unconsolidated SPEs and Canadian non-SPE third parties. Business and government loans securitized by the Bank may be derecognized from the Bank’s balance sheet depending on the individual arrangement of each transaction. In instances where the Bank fully derecognizes business and government loans, the Bank may be exposed to the risks of transferred loans through retained interests. There are no expected credit losses on the retained interests of the securitized business and government loans as the mortgages are all government insured. Securitization of Third Party-Originated Assets Significant Unconsolidated Special Purpose Entities Multi-Seller Conduits The Bank administers multi-seller conduits and provides liquidity facilities as well as securities distribution services; it may also provide credit enhancements. Third party-originated assets are securitized through Bank-sponsored SPEs, which are not consolidated by the Bank. The Bank’s maximum potential exposure to loss due to its ownership interest in commercial paper and through the provision of liquidity facilities for multi-seller conduits was $10.4 billion as at October 31, 2018 (October 31, 2017 – $13.2 billion). Further, as at October 31, 2018, the Bank had committed to provide an additional $2.8 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, 2017 – $2.9 billion). All third-party assets securitized by the Bank’s unconsolidated 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 2 EXPOSURE TO THIRD PARTY-ORIGINATED ASSETS SECURITIZED BY BANK-SPONSORED UNCONSOLIDATED CONDUITS (millions of Canadian dollars, except as noted) Residential mortgage loans Automobile loans and leases Equipment 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. October 31, 2018 October 31, 2017 As at Exposure and ratings profile of unconsolidated SPEs AAA1 $ 6,002 3,803 413 143 $ 10,361 Expected weighted- average life (years)2 2.9 1.5 1.5 2.5 2.3 Exposure and ratings profile of unconsolidated SPEs AAA1 $ 8,294 3,306 168 1,465 $ 13,233 Expected weighted- average life (years)2 2.5 1.6 1.8 0.2 2.0 As at October 31, 2018, the Bank held $0.3 billion of ABCP issued by Bank-sponsored multi-seller conduits within the Trading loans, securities, and other category on its Consolidated Balance Sheet (October 31, 2017 – $1 billion). control processes in place to mitigate these risks. Certain commitments still remain off-balance sheet. Note 27 of the 2018 Consolidated Financial Statements provides detailed information about the maximum amount of additional credit the Bank could be obligated to extend. 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 commitments of $3 billion as at October 31, 2018 (October 31, 2017 – $1.5 billion). The assets within these conduits are comprised of individual notes backed by automotive loan receivables, credit card receivables, equipment receivables and trade receivables. As at October 31, 2018, 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 Leveraged Finance Credit Commitments Also included in “Commitments to extend credit” in Note 27 of the 2018 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 acquisitions, buyouts or capital distributions. As at October 31, 2018, the Bank’s exposure to leveraged finance credit commitments, including funded and unfunded amounts, was $24.5 billion (October 31, 2017 – $22.7 billion). GUARANTEES In the normal course of business, the Bank enters into various guarantee contracts to support its clients. The Bank’s significant types of guarantee products are financial and performance standby letters of credit, assets sold with recourse, credit enhancements, and indemnification agreements. Certain guarantees remain off-balance sheet. Refer to Note 27 of the 2018 Consolidated Financial Statements for further information. 65 TD BANK GROUP ANNUAL REPORT 2018 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 management 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 23 of the 2018 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 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, 2018, other than as described in the following sections and in Note 12 of the 2018 Consolidated Financial Statements. Other Transactions with TD Ameritrade and Symcor (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 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 and four independent directors of TD or TD’s U.S. subsidiaries. Insured Deposit Account Agreement The Bank is party to an IDA agreement with TD Ameritrade, pursuant to which the Bank makes available to clients of TD Ameritrade, FDIC-insured money market deposit accounts as either designated sweep vehicles or as non-sweep deposit accounts. TD Ameritrade provides marketing and support services with respect to the IDA. The Bank paid fees of $1.9 billion in 2018 (2017 – $1.5 billion; 2016 – $1.2 billion) to TD Ameritrade related to deposit accounts. The amount paid by the Bank is based on the average insured deposit balance of $140 billion in 2018 (2017 – $124 billion; 2016 – $112 billion) with a portion of the amount 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 tied to 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, 2018, amounts receivable from TD Ameritrade were $137 million (October 31, 2017 – $68 million). As at October 31, 2018, amounts payable to TD Ameritrade were $174 million (October 31, 2017 – $167 million). The Bank and other financial institutions provided TD Ameritrade with unsecured revolving loan facilities. The total commitment provided by the Bank was $338 million, which was undrawn as at October 31, 2018, and October 31, 2017. (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, 2018, the Bank paid $86 million (October 31, 2017 – $93 million; October 31, 2016 – $97 million) for these services. As at October 31, 2018, the amount payable to Symcor was $14 million (October 31, 2017 – $15 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, 2018, and October 31, 2017. 66 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS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, derivative instruments and securities purchased under reverse repurchase agreements; while financial liabilities include, but are not limited to, deposits, obligations related to securities sold short, securitization 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, non-trading financial instruments at fair value through profit or loss, financial instruments designated at fair value through profit or loss, financial assets at fair value through other comprehensive income, and all derivatives are measured at fair value in the Bank’s Consolidated Financial Statements. Debt Securities at amortized cost, loans, 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 Judgments, Estimates, and Assumptions” – “Fair Value Measurement” section of this document. The use of financial instruments allows the Bank to earn profits in trading, interest, and fee income. Financial instruments also create a variety of risks which the Bank manages with its extensive risk management policies and procedures. The key risks include interest rate, credit, liquidity, market, and foreign exchange risks. For a more detailed description on how the Bank manages its risk, refer to the “Managing Risk” section of this document. 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 or could impact the Bank’s reputation or sustainability of its business model. 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 document. TOP AND EMERGING RISKS 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. Risks are identified, discussed, and actioned by senior leaders and reported quarterly to the Risk Committee of the Board and 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 to a lesser extent 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 liquidity, real estate prices, employment levels, consumer spending and debt levels, evolving consumer trends and business models, 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, reputational risk associated with increased regulatory, public, and media focus, the effects of public health emergencies, the effects of disruptions to public infrastructure, natural disasters, and the level of business conducted in a specific region. 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 Long-Term Strategies and Shorter-Term Key Strategic Priorities The Bank has a number of strategies and priorities, including those detailed in each segment’s “Business Segment Analysis” section of this document, which may include large scale strategic or regulatory 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, new platforms and new technology or enhancement to existing technology. Risk can be elevated due to the size, scope, velocity, interdependency, 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 deal assessments and due diligence before completing a merger or an acquisition and closely monitors integration activities and performance post acquisition. However, there is no assurance that the Bank will achieve its objectives, including anticipated cost savings or revenue synergies following acquisitions and integration. In general, while significant management attention is placed 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 Focus for 2019”, “Focus for 2019”, and “Managing Risk” sections of this document, as well as disciplined resource and expense management and our ability to implement (and the costs associated with the implementation 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 acquisitions, strategic plans or priorities are not successfully executed, there could be an impact on the Bank’s operations and financial performance and the Bank’s earnings could grow more slowly or decline. 67 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSISTechnology and Cyber Security Risk Technology and cyber 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 technologies and attack methodologies used by sociopolitical entities, organized 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 internet banking platforms. The Bank’s technologies, systems and networks, and those of our customers (including their own devices) and the third parties providing services to the Bank, continue to be subject to cyber-attacks, and may be subject to disruption of services, breaches or other compromises. Although the Bank has not experienced any material financial losses relating to technology failure, cyber-attacks or security breaches, there is no assurance that the Bank will not experience loss or damage in the future. These may include cyber-attacks such as targeted and automated online attacks on banking systems and applications, introduction of malicious software, denial of service attacks, and phishing attacks, any of which could result in the fraudulent use or theft of data or amounts that customers hold with the Bank. Attempts to fraudulently induce employees, customers, third party service providers or other users of the Bank’s systems will likely continue, in an effort to obtain sensitive information and gain access to the Bank’s or its customers’ data or amounts that the Bank holds or that its customers hold with the Bank. In addition, the Bank’s customers often use their own devices, such as computers, smart phones, and tablets, to make payments and manage their accounts, and the Bank has limited ability to assure the safety and security of its customers’ transactions with the Bank to the extent they are using their own devices. The Bank actively monitors, manages, and continues to enhance its ability to mitigate these technology and cyber security risks through enterprise-wide programs, using industry leading practices, and robust threat and vulnerability assessments and responses. The Bank continues to make investments to mature its cyber defences in accordance with industry accepted standards and practices to enable rapid detection and response to internal and external cyber incidents. It is possible that the Bank, or those with whom the Bank does business, may not anticipate or implement effective measures against all such cyber 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, and the Bank’s cyber insurance purchased to mitigate risk may not be sufficient to materially cover against all financial losses. As such, with any attack, breach, disruption or compromise of technology or information systems, hardware or related 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. If the Bank were to experience such an incident, it may take a significant amount of time and effort to investigate the incident to obtain full and reliable information necessary to assess the impact. Evolution of Fraud and Criminal Behaviour As a financial institution, the Bank is inherently exposed to various types of fraud and other financial crime. The sophistication, complexity, and materiality of these crimes evolves quickly and these crimes can arise from numerous sources, including potential or existing clients or customers, agents, vendors or outsourcers, other external parties, or employees. 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 customers, counterparties or other external parties including financial statements and financial information and authentication information. The Bank may also rely on the representations of customers, counterparties, and other external parties as to the accuracy and completeness of such information. In order to authenticate customers, whether through the Bank’s phone or digital channels or in its branches and stores, the Bank may also rely on certain authentication methods which could be subject to fraud. In addition to the risk of material loss (financial loss, misappropriation of confidential information or other assets of the Bank or its customers and counterparties) that could result in the event of a financial crime, the Bank could face legal action and client and market confidence in the Bank could be impacted. The Bank 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 to strengthen the Bank’s control posture to combat more complex fraud, including cyber fraud. Third Party Service Providers The Bank recognizes the value of using third parties to support its businesses, as they provide access to leading applications, processes, products and services, specialized expertise, innovation, economies of scale, and operational efficiencies. However, they may also create reliance upon the provider with respect to continuity, reliability, and security of these relationships, and their associated processes, people and facilities. As the financial services industry and its supply chain become more complex, the need for robust, holistic, and sophisticated controls and ongoing oversight increases. Just as the Bank’s owned and operated applications, processes, products, and services could be subject to failures or disruptions as a result of human error, natural disasters, utility disruptions, cyber-attacks or other criminal or terrorist acts, or non-compliance with regulations, each of its suppliers may be exposed to similar risks which could in turn impact the Bank’s operations. Such adverse effects could limit the Bank’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 risk management, as well as policies and procedures governing third party relationships from the point of selection through the life cycle of the business arrangement. The Bank develops and tests robust business continuity management plans which contemplate customer, employee, and operational implications, including technology and other infrastructure contingencies. Introduction of New and Changes to Current Laws and Regulations The financial services industry is highly regulated. TD’s operations, profitability and reputation could be adversely affected by the introduction of new laws and regulations, changes to, or changes in interpretation or application of current laws and regulations, and issuance of judicial decisions. These adverse effects could also result from the fiscal, economic, and monetary policies of various regulatory agencies and governments in Canada, the U.S., the United Kingdom, and other countries, and changes in the interpretation or implementation of those policies. 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; unfavourably 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 jurisdictions outside Canada, the favouring of certain domestic institutions); and increasing risks associated with potential non-compliance. 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 68 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSISreputation. The global anti-money laundering and economic sanctions landscape continues to experience regulatory change, with significant, complex new laws and regulations anticipated to come into force in the jurisdictions in which the Bank does business in the short- and medium-term. In addition, the global privacy landscape has and continues to experience regulatory change, with significant new legislation having recently been implemented in some of the jurisdictions in which the Bank does business and additional new legislation that is anticipated to come into force in the medium-term. In Europe, there are a number of uncertainties in connection with the future of the United Kingdom and its relationship with the European Union, and reforms implemented through the European Market Infrastructure Regulation and the review of Markets in Financial Instruments Directive and accompanying Regulation could result in higher operational and system costs and potential changes in the types of products and services the Bank can offer to clients in the region. In addition, the Canadian Securities Administrators has proposed regulations relating to over-the-counter derivatives reform. The Bank is closely monitoring this regulatory initiative which, if implemented, could result in increased compliance costs, and compliance with these standards may impact the Bank’s businesses, operations and results. Finally, in Canada, there are a number of government initiatives underway that could impact financial institutions, including regulatory initiatives with respect to payments evolution and modernization, open banking, and consumer protection. In addition, changes relating to interchange in Canada, which will become effective May 2020, may impact the Bank’s credit card businesses. 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 enacted on July 21, 2010, required significant structural reform to the U.S. financial services industry and affects every banking organization operating in the U.S., including the Bank. In general, in connection with Dodd-Frank the Bank could be negatively impacted by loss of revenue, limitations on the products or services it offers, and additional operational and compliance costs. 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 rules under Dodd-Frank and other regulatory requirements that impact the Bank include: the so-called “Volcker Rule”, which generally restricts banking entities from engaging in proprietary trading and from sponsoring or holding ownership interests in or having certain relationships with certain hedge funds and private equity funds; requires capital planning and stress testing requirements for our top-tier U.S. bank holding company; requires stress testing for TD Bank, N.A.; and establishes various “enhanced prudential standards” as adopted by the Federal Reserve including the requirement to establish a separately capitalized top-tier U.S. intermediate holding company (IHC) to hold, subject to limited exceptions, the ownership interests in all U.S. subsidiaries including the Bank’s investment in TD Ameritrade Holding Corporation. The Bank has incurred, and will continue to incur, operational, capital, liquidity, and compliance costs, and compliance with these standards may impact the Bank’s businesses, operations, and results in the U.S. and overall. The current U.S. regulatory environment for banking organizations may be impacted by recent and future legislative or regulatory developments. For example, the recently enacted Economic Growth, Regulatory Relief and Consumer Protection Act (Reform Act) included modifications to the Volcker Rule, testing and other aspects of Dodd-Frank. The applicable U.S. Federal regulatory agencies have also proposed regulatory amendments to certain of these requirements, including with respect to the Volcker Rule regulations and capital planning and stress testing requirements. The ultimate consequences of these developments and their impact on the Bank remain uncertain, and it remains unclear whether any other legislative or regulatory proposals relating to these requirements will be enacted or adopted. Bank Recapitalization “Bail-In” Regime In 2016, legislation to amend the Bank Act, the Canada Deposit Insurance Corporation Act (the “CDIC Act”) and certain other federal statutes pertaining to banks to create a bank recapitalization or bail-in regime for D-SIBs, which include the Bank, was approved. On April 18, 2018, the Government of Canada (GOC) published regulations under the CDIC Act and the Bank Act providing the final details of conversion and issuance regimes for bail-in instruments issued by D-SIBs (collectively, the Bail-in Regulations). The Bail-in Regulations came into force on September 23, 2018. Pursuant to the CDIC Act, if the Superintendent is of the opinion that a D-SIB has ceased or is about to cease to be viable and its viability cannot be restored through the exercise of the Superintendent’s powers, the GOC can, among other things, appoint the Canada Deposit Insurance Corporation (CDIC) as receiver of the Bank and direct CDIC to convert certain shares (including preferred shares) and liabilities of the Bank (including senior debt securities) into common shares of the Bank or any of its affiliates (a Bail-in Conversion). However, under the CDIC Act, the conversion powers of CDIC would not apply to shares and liabilities issued or originated before September 23, 2018 (the date on which the Bail-in Regulations came into force) unless, on or after such date, they are amended or in the case of liabilities, their term is extended. The Bail-in Regulations prescribe the types of shares and liabilities that will be subject to a Bail-in Conversion. In general, any senior debt securities with an initial or amended term-to-maturity greater than 400 days that are unsecured or partially secured and have been assigned a CUSIP, ISIN, or similar identification number would be subject to a Bail-in Conversion. Shares, other than common shares, and subordinated debt, that are not NVCC instruments, would also be subject to a Bail-in Conversion. However, certain other debt obligations of the Bank such as structured notes (as defined in the Bail-in Regulations), covered bonds, and certain derivatives would not be subject to a Bail-in Conversion. The bail-in regime could adversely affect the Bank’s cost of funding. Regulatory Oversight and Compliance Risk Our businesses are subject to extensive regulation and oversight. Regulatory change is occurring in all of the geographies where the Bank operates. Regulators have demonstrated an increased focus on conduct risk. As well, they have continued the trends towards establishing new standards and best practice expectations and a willingness to use public enforcement with fines and penalties when compliance breaches occur. The Bank continually monitors and evaluates the potential impact of rules, proposals, consent orders, and regulatory guidance relevant within all of its business segments. However, while the Bank devotes substantial compliance, legal, and operational business resources to facilitate compliance with these rules by their respective effective dates and consideration of regulator expectations, it is possible that the Bank 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, if regulators take formal enforcement action, rather than taking informal/supervisory actions, then, despite the Bank’s prudence and management efforts, its operations, business strategies and product and service offerings may be adversely impacted, therefore impacting financial results. Also, it may be determined that the Bank has not successfully addressed new rules, orders or enforcement actions to which it is subject, in a manner which meets regulator expectations. 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. 69 TD BANK GROUP ANNUAL REPORT 2018 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 acquisition can be influenced by many factors, including the Bank’s reputation as well as the pricing, market differentiation, and overall customer experience of our products and services. Enhanced competition from incumbents and new entrants may impact the Bank’s pricing of products and services and may cause us to lose revenue and/ or market share. Increased competition requires us to make additional short and long-term investments in order to remain competitive, which may increase expenses. In addition, the Bank operates in environments where laws and regulations that apply to it may not universally apply to its current and emerging competitors, which could include the domestic institutions in jurisdictions outside of Canada or non-traditional providers (such as Fintech, big technology competitors) 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 compete with banks in offering digital financial solutions (primarily mobile or web-based services), without facing the same regulatory requirements or oversight. These evolving distribution methods 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, representing inherent risks to certain Bank businesses, including payments. As such, this type of competition could also adversely impact the Bank’s earnings. To mitigate these effects, stakeholders across each of the business segments constantly seek to understand emerging technologies and trends. This includes monitoring the competitive environment in which they operate and reviewing or amending their customer acquisition, management, and retention strategies as appropriate and building optionality and flexibility into the products and services offered to keep pace with evolving customer expectations. The Bank is committed to investing in differentiated and personalized experiences for our customers, putting a particular emphasis on mobile technologies, enabling customers to transact seamlessly across their preferred channels. To keep pace with customer expectations, the Bank considers all various options to accelerate innovation, including making strategic investments in innovative companies, exploring partnership opportunities, and experimenting with new technologies and concepts internally. OTHER RISK FACTORS 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 litigation or disputes with third parties, including regulatory investigations and 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, capital and credit ratings; require material changes in the Bank’s operations; result in loss of customers; 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 estimate until late in the proceedings, which may last several years. In addition, settlement or other resolution of certain types of matters are often 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 investigations and enforcement proceedings related to its businesses and operations. Regulators and other government agencies examine the operations of the Bank and its subsidiaries on both a routine- and targeted-exam basis, and there is no assurance that they will not pursue regulatory settlements or other enforcement actions against the Bank in the future. For additional information relating to the Bank’s material legal proceedings, refer to Note 27 of the 2018 Consolidated Financial Statements. Acquisitions The Bank regularly explores opportunities to acquire other companies, or parts of their businesses, directly or indirectly through the acquisition strategies of its subsidiaries. The Bank undertakes due diligence before completing an acquisition and closely monitors integration activities and performance post acquisition. However, 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 conditions, any required approvals will be granted. If the Bank does not achieve its financial or strategic objectives of an acquisition, or if the Bank does not successfully complete an acquisition, there could be an impact on the Bank’s financial performance and the Bank’s earnings could grow more slowly or decline. Ability to Attract, Develop, and Retain Key Executives The Bank’s future performance is dependent on the availability of qualified talent and the Bank’s ability to attract, develop, and retain it. The Bank’s management understands that the competition for talent continues to increase across geographies, industries, and emerging capabilities in the financial services sector. As a result, the Bank undertakes an annual resource planning process that assesses critical capability requirements for all areas of the business each year. Through this process, an assessment of current executive leadership, technical and core capabilities, as well as talent development opportunities is completed against both near term and future business needs. The outcomes from the process inform plans at both the enterprise and business level to retain, develop, or acquire the talent which are then actioned throughout the course of the year. In addition to the resource planning process, the Bank has initiated an enterprise level critical capability and capacity planning process with the objective of improving the organization’s ability to forecast talent demand and workforce scenarios. The outcomes of this process are coupled with resource planning to further define broader capability and talent investments. Although it is the goal of the Bank’s management resource policies and practices to attract, develop, and retain key talent employed by the Bank or an entity acquired by the Bank, there is no assurance that the Bank will be able to do so. Foreign Exchange Rates, Interest Rates, and Credit Spreads Foreign exchange rate, interest rate, and credit spread movements in Canada, the U.S., and other jurisdictions in which the Bank does business impact the Bank’s financial 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 environment affects the interest spread between the Bank’s deposits and loans, and as a result, impacts the Bank’s net interest income. A change in the level of credit spreads affects the relative valuation of assets and liabilities, and as a result, impacts the Bank’s earnings. The Bank manages its structural foreign exchange rate, interest rate, and credit spread 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. 70 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSISIBOR Transition Following the announcement by the U.K. Financial Conduct Authority (FCA) on July 27, 2017, indicating that the FCA would no longer compel banks to submit rates for the calculation of the LIBOR post December 31, 2021, efforts to transition away from interbank offered rate (IBOR) benchmarks to alternative reference rates have been continuing in various jurisdictions. These developments, and the related uncertainty over the potential variance in the timing and manner of implementation in each jurisdiction, introduce risks that may have adverse consequences on the Bank, its clients and the financial services industry. As the Bank has significant contractual rights and obligations referenced to IBOR benchmarks, discontinuance of, or changes to, benchmark rates could adversely affect our business and results of operations. The Bank is evaluating the impact on its products, services, systems and processes with the intention of minimizing the impact through appropriate mitigating actions. Accounting Policies and Methods Used by the Bank The Bank’s accounting policies and estimates 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 and changes to accounting standards and policies could have a materially adverse impact on the Bank’s Consolidated Financial Statements, and therefore its reputation. The Bank has established procedures designed to ensure that accounting policies are applied consistently and that the processes for changing methodologies, determining estimates and adopting new accounting standards are well-controlled and occur in an appropriate and systematic manner. Significant accounting policies as well as current and future changes in accounting policies are described in Note 2 and Note 4, respectively, of the 2018 Consolidated Financial Statements. RISK FACTORS AND MANAGEMENT Managing Risk EXECUTIVE SUMMARY Growing profitability in financial results based on balanced revenue, expense and capital growth services involves selectively taking and managing risks within the Bank’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 its businesses to meet its future strategic objectives. The Bank’s Enterprise Risk Framework (ERF) reinforces the Bank’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 the Bank’s risk appetite. RISKS INVOLVED IN TD’S BUSINESSES The Bank’s Risk Inventory sets out the Bank’s 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. The Bank’s major risk categories are: Strategic Risk; Credit Risk; Market Risk; Operational Risk; Model Risk; Insurance Risk; Liquidity Risk; Capital Adequacy Risk; Legal, Regulatory Compliance and Conduct Risk; and Reputational Risk. Major Risk Categories Strategic Risk Credit Risk Market Risk Operational Risk Model Risk Insurance Risk Liquidity Risk Capital Adequacy Risk Legal, Regulatory Compliance and Conduct Risk Reputational Risk RISK APPETITE The Bank’s RAS is the primary means used to communicate how the Bank views risk and determines the type and amount of risk it is willing to take to deliver on its strategy and enhance shareholder value. In defining its risk appetite, the Bank takes into account its vision, purpose, strategy, shared commitments, risk philosophy, and capacity to bear risk. The core risk principles for the Bank’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. The Bank considers current operating conditions and the impact of emerging risks in developing and applying its risk appetite. Adherence to enterprise 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. The Bank’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 the Bank’s RAS measures. The function also monitors and evaluates the effectiveness of these practices and measures. RAS measures are reported regularly to senior management, the Board, and the Risk Committee; other 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 the Bank’s RAS measures. RISK CULTURE The Bank’s risk culture starts with the “tone at the top” set by the Board, Chief Executive Officer (CEO), and the Senior Executive Team (SET), and is supported by its vision, purpose, and shared commitments. These governing objectives describe the behaviours 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. The Bank’s 71 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSISrisk culture promotes accountability, learning from past experiences, and encourages open communication and transparency on all aspects of risk taking. The Bank’s 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 the Bank’s risk culture. The Bank’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 Bank 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. The Bank’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 is prepared by Risk Management, reviewed by the Risk Committee, and 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. In addition, governance, risk, and oversight functions operate independently from business segments supported by an organizational structure that provides objective oversight and independent 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, awareness and communication of the Bank’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 the Bank’s risk culture by increasing the knowledge and understanding of the Bank’s expectations for risk taking. WHO MANAGES RISK The Bank’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 governance, a “three lines of defence” model is employed, in which the first line of defence are the “Risk Owners”, the second line provides “Risk Oversight”, and the third line is Internal Audit. The Bank’s risk governance model includes a senior management committee structure that is designed to support transparent risk reporting and discussions. The Bank’s overall risk and control oversight is provided by the Board and its committees (primarily the Audit and Risk Committees). The CEO and SET determine the Bank’s long-term direction which is then carried out by business segments within the Bank’s risk appetite. Risk Management, headed by the Group Head and CRO, sets 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 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 Business Segments Canadian Retail U.S. Retail Wholesale Banking Internal Audit Internal Audit 72 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSISThe Board of Directors The Board oversees the Bank’s strategic direction, the implementation of an effective risk culture, and the internal control framework across the enterprise. It accomplishes its risk management mandate both directly and indirectly through its four committees, the Audit Committee and Risk Committee, as well as the Human Resources and Corporate Governance Committees. The Board reviews and approves the Bank’s RAS and related measures annually, and monitors the Bank’s risk profile and performance against risk appetite measures. The Audit Committee The Audit Committee oversees financial reporting, the adequacy and effectiveness of internal controls, including internal controls over financial reporting, and the activities of the Bank’s Global Anti-Money Laundering (GAML) group, Compliance group, and Internal Audit. The Risk Committee The Risk Committee is responsible for reviewing and recommending TD’s RAS for approval by the Board annually. The Risk Committee oversees the management of TD’s risk profile and performance against its risk appetite. In support of this oversight, the Committee reviews 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 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 responsibilities, develops, and where appropriate, recommends to the Board for approval corporate governance guidelines, including a code of conduct and ethics, aimed at fostering a healthy governance culture at the Bank, and also acts as the conduct review committee for the Bank, including providing oversight of conduct risk. Chief Executive Officer and Senior Executive Team The CEO and the SET develop and recommend to the Board the Bank’s long-term strategic direction and also develop and recommend for Board approval TD’s risk appetite. The SET members set the “tone at the top” and manage risk in accordance with the Bank’s risk appetite while considering 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 the Bank’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 Enterprise Risk Management Committee (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 and Chief Financial Officer (CFO), the Asset/Liability and Capital Committee (ALCO) oversees directly and through its standing subcommittees (the Risk Capital Committee (RCC) and Global Liquidity Forum (GLF)) the management of the Bank’s consolidated non-trading market risk and each of its consolidated liquidity, funding, investments, and capital positions. • OROC – chaired by the Group Head and CRO, the Operational Risk Oversight Committee (OROC) oversees the identification, monitoring, and control of key risks within the Bank’s operational risk profile. • Disclosure Committee – chaired by the Group Head and CFO, the Disclosure Committee oversees that appropriate controls and procedures are in place and operating to permit timely, accurate, balanced, and compliant disclosure to regulators with respect to public disclosure, shareholders, and the market. • RRC – chaired by the Group Head and CRO, the Reputational Risk Committee (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-wide risk management, risk governance, and control including the setting of risk strategy and policy to manage risk in alignment with the Bank’s risk appetite and business strategy. Risk Management’s primary objective is to support a comprehensive and proactive approach to risk management that promotes a strong risk culture. Risk Management works with the business segments and other corporate oversight functions to establish policies, standards, and limits that align with the Bank’s risk appetite and monitors and reports on existing and emerging risks and compliance with the Bank’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 independent oversight while emphasizing accountability for risk within the business segment. Business management is responsible for setting 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 the Bank’s risk appetite and manage risk within approved risk limits. Internal Audit The Bank’s internal audit function provides independent and objective assurance to the Board regarding the reliability and effectiveness of key elements of the Bank’s risk management, internal control, and governance processes. Compliance The Compliance Department is responsible for fostering a culture of integrity, ethics, and compliance throughout the Bank; delivering independent regulatory compliance and conduct risk management and oversight throughout the Bank globally to protect its reputation and operate within its risk appetite; and assessing the adequacy of, adherence to, and effectiveness of the Bank’s Regulatory Compliance Management controls, enterprise-wide. Global Anti-Money Laundering The GAML Department is responsible for Anti-Money Laundering, Anti-Terrorist Financing, Economic Sanctions, and anti-bribery/anti- corruption regulatory compliance and prudential risk management across the Bank in alignment with enterprise policies so that the money laundering, terrorist financing, economic sanctions, and bribery/ corruption risks are appropriately identified and mitigated. 73 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSISTreasury and Balance Sheet Management The TBSM group manages and reports on the Bank’s capital and investment positions, as well as liquidity and funding risk, and the market risks of the Bank’s non-trading banking activities. Three Lines of Defence In order to further the understanding of responsibilities for risk management, the Bank employs the following “three lines of defence” model that describes the respective accountabilities of each line of defence in managing risk across the Bank. THREE LINES OF DEFENCE First Line Risk Owner Identify and Control • Own, identify, manage, measure, and monitor current and emerging risks in day-to-day activities, operations, products, and services. • Design, implement, and maintain appropriate mitigating controls, and assess the design and operating effectiveness of those controls. Implement risk based approval processes for all new products, activities, processes, and systems. • Assess activities to maintain compliance with applicable laws and regulations. • Monitor and report on risk profile to ensure activities are within TD’s risk appetite and policies. • • Escalate risk issues and develop and implement action plans in a timely manner. • Deliver training, tools, and advice to support its accountabilities. • Promote a strong risk management culture. Second Line Risk Oversight Set Standards and Challenge • Establish and communicate enterprise governance, risk, and control strategies, frameworks, and policies. • Provide oversight and independent challenge to the first line through an effective objective assessment, that is evidenced and documented where material, including: – Challenge the quality and sufficiency of the first line’s risk activities; – Identify and assess current and emerging risks and controls, using a risk-based approach, as appropriate; – Monitor the adequacy and effectiveness of internal control activities; – Review and discuss assumptions, material risk decisions and outcomes; and – Aggregate and share results across business lines and control areas to identify similar events, patterns, or broad trends. Identify and assess, and communicate relevant regulatory changes. • • Develop and implement risk measurement tools so that activities are within TD’s Risk Appetite. • Monitor and report on compliance with TD’s Risk Appetite and policies. • Escalate risk issues in a timely manner. • Report on the risks of the Bank on an enterprise-wide and disaggregated level to the Board and/or Senior Management, independently of the business lines or operational management. • Provide training, tools, and advice to support the first line in carrying out its accountabilities. • Promote a strong risk management culture. Third Line Internal Audit Independent Assurance • Verify independently that TD’s ERF is designed and 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, the Bank applies the following principles in governing how it manages risks: • Enterprise-Wide in Scope – Risk Management will span all areas of the Bank, including third-party alliances and joint venture undertakings to the extent they may impact the Bank, 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 the Bank’s daily routines, decision-making, and strategy formulation. • 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 The Bank’s comprehensive and proactive approach to risk management is comprised of four 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 maintain integrated risk identification and assessment processes that enhance the understanding of risk interdependencies, consider how risk types intersect, and support the identification of emerging risk. To that end, the Bank’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 vulnerabilities for the Bank. 74 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSISRisk Measurement The ability to quantify risks is a key component of the Bank’s risk management process. The Bank’s risk measurement process aligns with regulatory requirements such as capital adequacy, leverage ratios, liquidity measures, stress testing, and maximum credit exposure guidelines established by its regulators. Additionally, 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 methodologies, 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 coverage, leverage ratios, capital adequacy metrics, and operational risk event notification metrics. The Bank also requires business segments and corporate oversight functions to assess key risks and internal controls 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. Risk Control The Bank’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 its risk appetite and risk tolerances. The Bank’s approach to risk control also includes risk and capital assessments to appropriately capture key risks in its measurement and management of capital adequacy. This involves the review, challenge, and endorsement by senior management committees of the ICAAP and related economic capital practices. The Bank’s 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 its 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. 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 the Bank 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. The Bank’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 understand potential vulnerabilities that are relevant to the Bank’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 environments. Stress testing engages senior management in each business segment, Finance, TBSM, Economics, and Risk Management. The RCC, which is a subcommittee of the ALCO, provides oversight of the processes and practices governing the EWST program. As part of its 2018 program, the Bank evaluated two internally generated macroeconomic stress scenarios covering a range of severities as described below. The scenarios were constructed to cover a wide variety of risk factors meaningful to the Bank’s risk profile in both the North American and global economies. Stressed macroeconomic variables such as unemployment, GDP, resale home prices, and interest rates were forecasted over the stress horizon which drives the assessment of impacts. In the scenarios evaluated in the 2018 program, the Bank had sufficient capital to withstand severe, but plausible, stress conditions. 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 Severe Scenario Extreme Scenario • The scenario is benchmarked against historical recessions that have taken place in the U.S. and Canada. The recession extends four consecutive quarters followed by a modest recovery. • The scenario incorporates deterioration in key macroeconomic variables such as GDP, resale home prices, and unemployment that align with historically observed recessions. • TD Economics maintains a risk index that measures current vulnerabilities to a number of key risk factors. This risk index is then leveraged to scale the severity of the above mentioned indicators. • The scenario features a marked slowdown in global growth prospects leading to a prolonged recession and heightened uncertainty in global financial markets. • Stress emanates from China where the authorities are unable to contain the fallout from a series of major domestic debt defaults. Financial support for state-owned banks and non-financial enterprises is strained by limited fiscal resources, raising concerns about fiscal sustainability and undermining investor confidence in the Chinese economy. Property prices decline sharply, following years of rapid growth and mounting household debt. To make domestic debt payments and meet higher margin requirements Chinese investors are forced to sell foreign assets, accentuating the decline in global real estate prices. • The financial turmoil in China spills over to countries with close trade and financial linkages, and leads to a major downturn in world commodity prices. Risk appetite retrenches and financial markets worldwide are destabilized. Distress in international financial markets and the deterioration in global growth prospects reinforce the downward spiral in investor sentiment. • Growing fiscal imbalances in the U.S. undermine confidence in the U.S. dollar, raising the risk premium on Treasury bonds. • 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 relative to the U.S. 75 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS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 requirements for operating banks, the Federal Reserve Board’s capital plan rule and related Comprehensive Capital Analysis and Review (CCAR) requirements for the holding company. The Bank also employs reverse stress testing as part of a comprehensive Crisis Management Recovery Planning program to assess potential mitigating actions and contingency planning strategies. The scenario contemplates significantly stressful events that would result in the Bank reaching the point of non-viability in order to consider meaningful remedial actions for replenishing its capital and liquidity position. 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 chosen strategies, choosing not to pursue certain strategies, or a lack of responsiveness to changes in the business 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 and Decision Support group, under the leadership of the Group Head and CFO, is charged with developing the Bank’s overall long-term strategy and shorter-term strategic priorities with input and support from senior executives across the Bank. Each member of the SET is responsible for establishing and managing long-term strategy and shorter-term priorities for their areas of responsibility (business and corporate function), and for ensuring such strategies are aligned with the Bank’s overall long-term strategy and short-term strategic priorities, and the enterprise risk appetite. Each SET member is also accountable to the CEO for identifying, assessing, measuring, controlling, monitoring, and reporting on the effectiveness and risks of their business strategies. 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 those risks are managed. The ERMC oversees the identification and monitoring of significant and emerging risks related to the Bank’s strategies and seeks to ensure that mitigating actions are taken where appropriate. HOW TD MANAGES STRATEGIC RISK The Bank’s enterprise-wide strategies and operating performance, and the strategies and operating performance of significant business segments and corporate functions, are assessed regularly by the CEO and the members of the SET through an integrated financial and strategic planning process, operating results reviews and strategic business plans. The Bank’s annual integrated financial and strategic planning process establishes enterprise and segment-level long-term and shorter-term strategies, designs strategies to be consistent with the risk appetite, evaluates concurrence among strategies, and sets enterprise and segment-level strategic risk limits including asset concentration limits. Operating results reviews are conducted on a periodic basis during the year to monitor segment-level performance against the integrated financial and strategic plan. These reviews include an evaluation of the long-term strategy and short-term strategic priorities of each business segment, including but not limited to: the operating environment, competitive position, performance assessment, initiatives for strategy execution and key business risks. The frequency of the operating results reviews depends on the risk profile and size of the business segment or corporate function. Strategic business plans are prepared at the business line-level; business lines are subsets of business segments. The plans assess the strategy for each business line, including but not limited to: mission, current position, key operating trends, long-term strategy, target metrics, key risks and mitigants, and alignment with enterprise strategy and risk appetite. The frequency of preparation depends on the risk profile and size of the business line. The Bank’s strategic risk, and adherence to its risk appetite, is reviewed by the ERMC in the normal course, as well as by the Board. Additionally, material acquisitions are assessed for their fit with the Bank’s strategy and risk appetite in accordance with the Bank’s Due Diligence Policy. This assessment is reviewed by the SET and Board as part of the decision process. The shaded areas of this MD&A represent a discussion on risk management 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, 2018 and 2017. Effective November 1, 2017, the Bank adopted IFRS 9, which replaces the guidance in IAS 39. The Bank continues to manage credit risk using the existing framework as detailed in this section but applies the IFRS 9 ECL model to measure and report allowance for credit losses and provision for credit losses on in-scope financial assets. Refer to Note 2 and Note 3 of the 2018 Consolidated Financial Statements for a summary of the Bank’s accounting policies and significant accounting judgments, estimates, and assumptions as it relates to IFRS 9. 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 include 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 integrated into each business, but report directly 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 its discretionary authority. Risk Management is accountable for oversight of credit risk by developing policies that govern and control portfolio risks, and approval of product-specific policies, as required. The Risk Committee oversees the management of credit risk and annually approves certain significant credit risk policies. 76 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS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, 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 the Bank’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 performance 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. 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 businesses. 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 provide for a diversified loan portfolio and to reduce the risk of undue concentration. The Bank manages its risk using limits based on an internal risk rating score that combines TD’s industry risk rating model and industry analysis, and regularly reviews industry risk ratings to assess whether internal 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 private sector 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 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 for calculating credit, market, and operational RWA. Credit Risk and the Basel Framework The Bank received approval from OSFI to use the Basel 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 TSA for some small credit exposures in North America. Risk Management reconfirms annually that this approach remains appropriate. • Effective the third quarter of 2016, OSFI approved the Bank to calculate the majority of the retail portfolio credit RWA in the U.S. Retail segment using the AIRB Approach. The non-retail portfolio in the U.S. retail segment continues to use TSA while working to achieve regulatory approval to transition to the AIRB Approach. 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 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. • EAD – the total amount the Bank is exposed to at the time of default. By applying these risk parameters, the Bank 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, individual 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). 77 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS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 1994–2017, covering both wholesale and commercial lending experience. All borrowers and facilities are assigned an internal risk rating that must be reviewed at least once each year. External data such as rating agency default rates or loss databases are used to validate the parameters. Internal risk ratings (BRR and FRR) are key to portfolio monitoring and management, and are used to set exposure limits and loan pricing. Internal risk ratings are also used in the calculation of regulatory capital, economic capital, and incurred but not identified allowance for credit losses. Consistent with the 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 relevant 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 judgment, 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. The Bank calculates RWA for its retail exposures using the AIRB Approach. All retail PD, LGD, and EAD parameter models are based exclusively on the internal default and loss performance history for each of the three retail exposure sub-types. Account-level PD, LGD, and EAD 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 exposures as delinquency of 90 days or more for the majority of retail credit portfolios. LGD estimates used in the RWA calculations reflect economic losses, such as, 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 utilization of undrawn credit limit prior to default. PD, LGD, and EAD 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. 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 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: 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 Risk Assessment Low Risk Normal Risk Medium Risk High Risk Default 78 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS 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 characteristics 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 judgment 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 experience, suggests higher than average loss rates or lower than average recovery, such as during an economic recession. To reflect this, average 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 determined in part 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. Credit Risk Exposures Subject to the Standardized Approach Currently TSA to credit risk is used primarily for assets in the U.S. non-retail credit portfolio. The Bank is currently in the process of transitioning this portfolio to the AIRB Approach. Under TSA, 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. The Bank 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 TSA: Sovereign Bank Corporate 0%1 20%1 100% 1 The risk weight may vary according to the external risk rating. Lower risk weights apply where approved credit risk mitigants exist. Non-retail loans that are more than 90 days past due receive a risk weight of 150%. 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 counterparty credit risk, is the risk of a financial loss occurring as a result of the failure of a counterparty to meet its obligation to the Bank. The 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 ongoing stress testing to identify and quantify exposure to extreme events. The Bank establishes various limits, including gross notional limits, to manage business volumes and concentrations. It also 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 pledging 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 counterparties, measuring and monitoring exposures, including wrong- way risk exposures, and managing the size, diversification, and maturity structure of the portfolios. 79 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS 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 counterparty 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 obligations 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, 2018, after taking into account risk mitigation strategies, the Bank does not have material derivative exposure to any counterparty considered higher risk as defined by the Bank’s credit policies. In addition, the Bank does not have a material credit risk valuation adjustment to any specific counterparty. Validation of the Credit Risk Rating System Credit risk rating systems and methodologies are independently validated on a regular basis to verify that they remain accurate predictors of risk. The validation process includes the following considerations: • Risk parameter estimates – PDs, LGDs, and EADs 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 investment grade borrowers where no security is pledged. Non-investment grade borrowers typically pledge business assets in the same manner as commercial borrowers. Common standards across the Bank are used to value collateral, determine frequency of recalculation, and to document, register, perfect, and monitor collateral. 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 the Bank’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 Banking 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. AVMs are computer-based tools used to estimate 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. 80 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS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 3 GROSS CREDIT RISK EXPOSURES – Standardized and Advanced Internal Ratings Based Approaches 1 (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, 2018 As at October 31, 2017 Standardized AIRB Total Standardized AIRB Total $ 3,091 – 12,835 15,926 $ 371,450 112,388 80,513 564,351 $ 374,541 112,388 93,348 580,277 132,030 95,411 18,019 245,460 $ 261,386 346,751 136,951 110,295 593,997 $ 1,158,348 478,781 232,362 128,314 839,457 $ 1,419,734 $ 5,862 – 19,011 24,873 125,621 91,567 18,195 235,383 $ 260,256 $ 349,749 93,527 75,566 518,842 $ 355,611 93,527 94,577 543,715 305,867 157,947 94,181 557,995 $ 1,076,837 431,488 249,514 112,376 793,378 $ 1,337,093 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. Other Credit Risk Exposures Non-trading Equity Exposures The Bank’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 TSA and the Ratings Based Approach (RBA). Both approaches assign risk weights to exposures using external ratings. The Bank uses ratings assigned by external rating agencies, 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 number of underlying exposures in the 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 assessing 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 facilitate 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. 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 held in trading positions due to adverse movements in market factors. These market factors include interest rates, foreign exchange rates, equity prices, commodity prices, credit spreads, and their respective volatilities. Non-Trading Market Risk is the risk of loss on the balance sheet or volatility in earnings from non-trading activities such as asset-liability management or investments, due to adverse movements in market factors. These market factors are predominantly interest rate, credit spread, foreign exchange rates and equity prices. 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, 2018, using the Internal Models Approach. 81 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS 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 4 MARKET RISK LINKAGE TO THE BALANCE SHEET1 (millions of Canadian dollars) October 31, 2018 October 31, 2017 Balance Trading Non-trading sheet market risk market risk Other Balance Trading sheet market risk Non-trading market risk Other As at Non-trading market risk – primary risk sensitivity Assets subject to market risk Interest-bearing deposits with banks Trading loans, securities, and other Non-trading financial assets at fair value through profit or loss $ 30,720 $ 729 $ 127,897 125,437 29,991 $ 2,460 4,015 – 4,015 – $ – – 51,185 $ 194 $ 103,918 99,168 50,991 $ 4,750 – – Interest rate Interest rate n/a n/a n/a n/a Derivatives 56,996 53,087 3,909 – 56,195 51,492 4,703 Financial assets designated at fair value through profit or loss Financial assets at fair value through 3,618 – 3,618 other comprehensive income 130,600 – 130,600 – – 4,032 – 4,032 n/a n/a n/a n/a Available-for-sale securities n/a n/a n/a – 146,411 – 146,411 – Debt securities at amortized cost, net of allowance for credit losses 107,171 – 107,171 – n/a n/a n/a Held-to-maturity securities n/a n/a n/a – 71,363 – 71,363 n/a – Foreign exchange, interest rate Foreign exchange, interest rate Securities purchased under reverse repurchase agreements Loans, net of allowance for loan losses 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 127,379 646,393 17,267 8,445 1,751 72,651 – – – – – 68,458 $ 1,334,903 $ 183,173 $ 1,079,079 $ 72,651 $ 1,278,995 $ 152,199 $ 1,058,338 $ 68,458 – – – – – 72,651 134,429 616,374 17,297 7,784 1,549 68,458 123,459 646,393 17,267 8,445 1,751 – 133,084 616,374 17,297 7,784 1,549 – 3,920 – – – – – 1,345 – – – – – Interest rate Interest rate Interest rate Equity Interest rate 114,704 48,270 6,202 44,119 108,502 4,151 – – 79,940 3,539 51,214 46,206 76,401 5,008 Securitization liabilities at fair value Deposits 12,618 851,439 12,618 – – 851,439 – – 12,757 12,757 – 832,824 – 832,824 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 17,269 – 17,269 – 17,297 – 17,297 39,478 37,323 2,155 – 35,482 32,124 3,358 93,389 14,683 8,740 16,150 3,797 – – 2 89,592 14,683 8,740 16,148 – – – – 88,591 16,076 9,528 17,281 2,064 – – 1 86,527 16,076 9,528 17,280 Liabilities and Equity not exposed to market risk Total Liabilities and Equity 118,163 118,005 $ 1,334,903 $ 104,061 $ 1,112,679 $ 118,163 $ 1,278,995 $ 96,691 $ 1,064,299 $ 118,005 118,163 118,005 – – – – 1 Certain comparative amounts have been restated to conform with the presentation adopted in the current period. 2 Relates to retirement benefits, insurance, and structured entity liabilities. 82 – – Equity, foreign exchange, interest rate Equity, foreign exchange, interest rate Interest rate Equity, foreign exchange, interest rate Foreign exchange, interest rate – – – – – – – – – – Interest rate Equity foreign exchange, interest rate Interest rate Equity, interest rate Interest rate Interest rate Interest rate Interest rate Interest rate Equity Interest rate TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS MARKET RISK IN TRADING ACTIVITIES The overall objective of the Bank’s trading businesses is to provide wholesale banking services, including facilitation and liquidity, to clients of the Bank. The Bank 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 underwrite new issues. The Bank also trades in order to have in-depth knowledge of market conditions to provide the most efficient and effective pricing and service to clients, while balancing the risks inherent in its dealing activities. WHO MANAGES MARKET RISK IN TRADING ACTIVITIES Primary responsibility for managing market risk in trading activities lies with Wholesale Banking, with oversight from Market Risk Control within Risk Management. The Market Risk 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, 2018. 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 the Bank’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, organizational experience, and business strategy. Limits are prescribed at the Wholesale Banking level in aggregate, as well as at more granular levels. The core market risk limits are based on the key risk drivers in the business and includes notional, 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 The Bank computes total VaR on a daily basis by combining the General Market Risk (GMR) and Idiosyncratic Debt Specific Risk (IDSR) associated with its 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 net revenue, reported on a taxable equivalent basis, within Wholesale Banking. Trading net revenue includes trading income and net interest income related to positions within the Bank’s market risk capital trading books. For the year ending October 31, 2018, there were 14 days of trading losses and trading net revenue was positive for 95% 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 NET REVENUE (millions of Canadian dollars) Trading Net Revenue Value-at-Risk $40 30 20 10 0 (10) (20) (30) (40) 7 1 0 2 / 1 / 1 1 7 1 0 2 / 8 / 1 1 7 1 0 2 / 5 1 / 1 1 7 1 0 2 / 2 2 / 1 1 7 1 0 2 / 9 2 / 1 1 7 1 0 2 / 6 / 2 1 7 1 0 2 / 3 1 / 2 1 7 1 0 2 / 0 2 / 2 1 7 1 0 2 / 8 2 / 2 1 8 1 0 2 / 5 / 1 8 1 0 2 / 2 1 / 1 8 1 0 2 / 9 1 / 1 8 1 0 2 / 6 2 / 1 8 1 0 2 / 2 / 2 8 1 0 2 / 9 / 2 8 1 0 2 / 6 1 / 2 8 1 0 2 / 3 2 / 2 8 1 0 2 / 2 / 3 8 1 0 2 / 9 / 3 8 1 0 2 / 6 1 / 3 8 1 0 2 / 3 2 / 3 8 1 0 2 / 0 3 / 3 8 1 0 2 / 6 / 4 8 1 0 2 / 3 1 / 4 8 1 0 2 / 0 2 / 4 8 1 0 2 / 7 2 / 4 8 1 0 2 / 4 / 5 8 1 0 2 / 1 1 / 5 8 1 0 2 / 8 1 / 5 8 1 0 2 / 5 2 / 5 8 1 0 2 / 1 / 6 8 1 0 2 / 8 / 6 8 1 0 2 / 5 1 / 6 8 1 0 2 / 2 2 / 6 8 1 0 2 / 9 2 / 6 8 1 0 2 / 6 / 7 8 1 0 2 / 3 1 / 7 8 1 0 2 / 0 2 / 7 8 1 0 2 / 7 2 / 7 8 1 0 2 / 3 / 8 8 1 0 2 / 0 1 / 8 8 1 0 2 / 7 1 / 8 8 1 0 2 / 4 2 / 8 8 1 0 2 / 1 3 / 8 8 1 0 2 / 7 / 9 8 1 0 2 / 4 1 / 9 8 1 0 2 / 1 2 / 9 8 1 0 2 / 8 2 / 9 8 1 0 2 / 5 / 0 1 8 1 0 2 / 2 1 / 0 1 8 1 0 2 / 9 1 / 0 1 8 1 0 2 / 6 2 / 0 1 83 TD BANK GROUP ANNUAL REPORT 2018 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 incorporates 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 additional metrics designed for risk management and capital purposes. These include Stressed VaR, Incremental Risk Charge (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 2018, 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. The Bank 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. The following table presents the end of year, average, high, and low usage of TD’s portfolio metrics. T A B L E 4 5 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 $ 14.2 17.2 6.1 8.7 3.0 17.2 (41.9) 24.5 54.2 237.1 $ 14.0 11.8 7.2 4.4 2.6 16.5 (32.7) 23.8 49.8 205.8 $ 25.7 18.2 12.9 8.7 6.8 22.4 n/m2 33.1 84.8 269.8 2018 Low $ 5.3 7.7 4.0 2.2 1.3 11.3 n/m 16.9 28.8 156.2 As at Average High $ 6.9 7.6 8.5 2.7 2.3 10.1 (23.0) 15.1 40.9 190.8 $ 14.2 8.9 8.9 4.3 1.3 14.1 (30.3) 21.4 39.3 242.9 $ 34.9 11.8 12.3 7.9 2.5 17.9 n/m 36.4 51.1 330.2 2017 Low $ 6.2 6.0 5.8 2.2 0.7 10.1 n/m 15.1 28.1 171.3 1 The aggregate VaR is less than the sum of the VaR of the different risk types due 2 Not meaningful. It is not meaningful to compute a diversification effect because to risk offsets resulting from portfolio diversification. the high and low may occur on different days for different risk types. Average VaR increased marginally year-over-year due to an increase in debt specific risk driven by positions in financial bonds. Average Stressed VaR increased year-over-year driven by an increase in the U.S. interest rate risk positions. 1987 equity market crash, the 1998 Russian debt default crisis, the aftermath of September 11, 2001, the 2007 ABCP crisis, the credit crisis of Fall 2008, and the Brexit referendum of June 2016. Stress tests are produced and reviewed regularly with the Market The average IRC decreased year-over-year driven by Canadian bank positions. Validation of VaR Model The Bank uses a back-testing process to compare the actual and theoretical profit and losses to VaR to verify 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 transition 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 Risk Control Committee. 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 remaining merchant banking investments. Risk Management reviews and approves policies and procedures, which are established to monitor, measure, and mitigate these risks. Asset/Liability Management Asset/liability management deals with managing the market risks of TD’s traditional banking activities. This generally reflects the market risks arising from personal and commercial banking products (loans and deposits) as well as related funding, investments and high quality liquid assets (HQLA). Such structural market risks primarily include interest rate risk and foreign exchange risk. WHO IS RESPONSIBLE FOR ASSET/LIABILITY MANAGEMENT The TBSM group 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 and CFO, 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. 84 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS 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. Interest rate risk management is designed 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 strategies to manage overall sensitivity to rates across varying interest rate scenarios; • Measuring the contribution of each TD product on a risk-adjusted, fully-hedged basis, including the impact of financial options such as mortgage commitments that are granted to customers; and • Developing and implementing strategies to stabilize net interest income from all retail and commercial banking products. The Bank is exposed to interest rate risk when asset and liability principal and interest cash flows, determined using contractual cash- flows and the target-modeled maturity profile for non-maturity products, have different interest payment or maturity dates. These are called “mismatched positions” and impact the Bank’s earnings when its interest-sensitive assets and liabilities reprice as interest rates change and when there are: final maturities, normal amortizations, or option exercises (such as prepayment, redemption, or conversion). The Bank’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. Two of the measures used are 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 resulting from mismatched positions for an immediate and sustained 100 bps 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 from the effect of the interest rate shock on the mismatched positions. 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 sensitive 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 rates do not become negative. The methodology 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. The Bank policy as approved by the Risk Committee sets overall limits on EVaR and NIIS which are linked to capital and net interest income, respectively. These 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, hedged, and reported, and breaches of these Board limits, if any, are escalated to both the ALCO and the Risk Committee of the Board. In addition to Board policy limits, book-level risk limits are set for TBSM’s management of non-trading interest rate risk by Risk Management. These book-level risk limits are set at a more granular level than Board policy limits for 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 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 non-maturity assets and liabilities; • A target investment profile on its net equity position; and • Liquidation assumptions on mortgages other than from embedded pre-payment options. The Bank also measures its exposure to non-maturity liabilities, such as core deposits, by assessing interest rate elasticity and balance permanence using historical data and business judgment. Fluctuations of non-maturity deposits can occur because of factors such as interest rate movements, equity market movements, and changes to customer liquidity preferences. The objective of portfolio management within the closed-cash-flow 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 commitments or embedded in loans and deposits, expose the Bank to a significant financial risk. • Rate Commitments: The Bank measures its exposure from freestanding mortgage rate commitment options using an expected funding profile based on historical experience. Customers’ propensity to fund, and their preference for fixed or floating rate mortgage products, is influenced by factors such as market mortgage rates, house prices, and seasonality. • Asset Prepayment: 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 behaviour. Econometric models are used to model prepayments and the effects of prepayment behaviour to the Bank. In general mortgage prepayments are also affected by factors, 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. 85 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS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 demand deposit accounts. Other Non-Trading Market Risks 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. The Bank is also exposed to non-trading equity price risk primarily from its 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. These share units are recorded as a liability over the vesting period and revalued at each reporting period until settled in cash. Changes in the Bank’s share price can impact non-interest expenses. The Bank uses derivative instruments to manage its non-trading equity price risk. 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 structural interest rate management. This reflects the interest rate risk from personal and commercial banking products (loans and deposits) as well as related funding, investments, and HQLA. 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 sensitive 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 interest rates. Closely matching asset and liability cash flows reduces EVaR and mitigates the risk of volatility in future net interest income. ALL INSTRUMENTS PORTFOLIO Economic Value at Risk After Tax – October 31, 2018 and October 31, 2017 (millions of Canadian dollars) October 31, 2017 October 31, 2018 ) s n o i l l i m ( e u a v l t n e s e r p n i e g n a h C $150 50 (50) (150) (250) (350) (450) (550) October 31, 2017: $(235) October 31, 2018: $(238) (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, 2018, an immediate and sustained 100 bps increase in interest rates would have decreased the economic value of shareholders’ equity by $238 million (October 31, 2017 – $235 million decrease) after tax. An immediate and sustained 100 bps decrease in interest rates would have increased the economic value of shareholders’ equity by $2 million (October 31, 2017 – $225 million decrease) after tax. The interest rate exposure, or EVaR, in the insurance business is not included in the above graph. Interest rate risk in the insurance business 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 the Bank has material exposure. T A B L E 4 6 SENSITIVITY OF AFTER-TAX ECONOMIC VALUE AT RISK BY CURRENCY (millions of Canadian dollars) Currency Canadian dollar U.S. dollar October 31, 2018 October 31, 2017 100 bps increase $ (41) (197) $ (238) 100 bps decrease $ (17) 19 $ 2 100 bps increase $ (24) (211) $ (235) 100 bps decrease $ (43) (182) $ (225) For the NIIS measure (not shown on the graph), a 100 bps increase in interest rates on October 31, 2018, would have decreased pre-tax net interest income by $73 million (October 31, 2017 – $116 million increase) in the next twelve months due to the mismatched positions. A 100 bps decrease in interest rates on October 31, 2018, would have decreased pre-tax net interest income by $114 million (October 31, 2017 – $152 million decrease) in the next twelve months due to the mismatched positions. Reported NIIS remains consistent with the Bank’s risk appetite and within established Board limits. 86 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS 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 4 7 SENSITIVITY OF PRE-TAX NET INTEREST INCOME SENSITIVITY BY CURRENCY (millions of Canadian dollars) Currency Canadian dollar U.S. dollar 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 create foreign exchange risk. The Bank is exposed to non-trading foreign exchange risk primarily 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 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 certain capital ratios change by no more than an acceptable amount for a given change in foreign exchange rates. Managing Investment Portfolios The Bank manages a securities portfolio that is integrated into the overall asset and liability management process. The securities portfolio is managed using high quality, low risk securities in a manner appropriate to the attainment of the following goals: (1) to generate a targeted credit of funds to deposits balances that are in excess of loan balances; (2) to provide a sufficient pool of liquid assets to meet unanticipated deposit and loan fluctuations and overall liquidity management objectives; (3) to provide eligible securities to meet collateral and cash management requirements; and (4) to manage the target interest rate risk profile of the balance sheet. The Risk Committee reviews and approves the Enterprise Investment Policy that sets out limits for the Bank’s investment portfolio. Operational Risk Operational risk is the risk of loss resulting from inadequate or failed internal processes or technology or from human activities or from external events. This definition includes legal risk but excludes strategic and reputational risk. Operational risk is inherent in all of the Bank’s business activities, including the practices and controls used to manage other risks such as credit, market, and liquidity risk. Failure to manage operational risk can result in financial loss (direct or indirect), reputational harm, or regulatory censure and penalties. The Bank actively mitigates and manages operational risk in order to 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. In fiscal 2018, operational risk losses remain within the Bank’s risk appetite. Refer to Note 27 of the 2018 Consolidated Financial Statements for further information on material legal or regulatory actions. October 31, 2018 October 31, 2017 100 bps increase $ (49) (24) $ (73) 100 bps decrease $ 49 (163) $ (114) 100 bps increase $ (9) 125 $ 116 100 bps decrease $ 9 (161) $ (152) WHY NET INTEREST MARGIN FLUCTUATES OVER TIME As previously noted, the Bank’s approach to asset/liability management is to ensure that earnings are stable and predictable over time, regardless of cash flow mismatches and the exercise of options granted to customers. This approach also creates margin certainty on fixed rate loans and deposits as they are booked. Despite this approach however, the Bank’s net interest margin on average earning assets is subject to change over time for the following reasons: • Differences in margins earned on new and renewing fixed-rate products relative to the margin previously earned on matured products; • The weighted-average margin on average earning assets will shift as the mix of business changes; • Changes in the basis between the Prime Rate and the Bankers’ Acceptance rate, or the Prime Rate and the London Interbank Offered Rate; and/or • The lag in changing product prices in response to changes in wholesale rates. The general level of interest rates will affect the return the Bank generates on its modeled maturity profile for core deposits and the investment 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 to managing these factors tends to moderate their impact over time, resulting in a more stable and predictable earnings stream. WHO MANAGES OPERATIONAL RISK Operational Risk Management is an independent function that owns 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. Operational Risk Management is designed to ensure 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. In addition to the framework, Operational Risk Management owns and maintains, or has oversight of the Bank’s operational risk policies. These policies govern the activities of the corporate areas responsible for the management and appropriate oversight of business continuity and incident management, third party management, data management, financial crime and fraud management, project management, and technology and cyber security management. 87 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS The senior management of individual business units and corporate areas is responsible for the day-to-day management of operational risk following the Bank’s established operational risk management framework and policies and the three lines of defence model. An independent risk management oversight 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 and corporate area participate in a Risk Management Committee that oversees operational risk management issues and initiatives. Ultimately, every employee has a role to play in managing operational 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 the operational risk appetite, governance processes, and policies. The Operational Risk Management Framework is maintained by Risk Management and supports alignment with the Bank’s ERF and risk appetite. The framework incorporates sound industry practices and meets regulatory requirements. Key components of the framework include: Governance and Policy Management reporting and organizational structures emphasize accountability, ownership, and effective oversight of each business unit and each corporate area’s operational risk exposures. In addition, the expectations of the Risk Committee and senior management for managing operational risk are set out by enterprise-wide policies and practices. Risk and Control Self-Assessment Internal controls are one of the primary methods of safeguarding the Bank’s employees, customers, assets, and information, and in preventing and detecting errors and fraud. 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 determine that risk management 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 operational risks. The Bank’s policies and processes require that operational risk events be identified, tracked, and reported to the appropriate level of management to facilitate the Bank’s analysis and management of its risks and inform the assessment of suitable corrective and preventative action. The Bank also reviews, analyzes, and benchmarks itself 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 used to assess the likelihood and loss impact for significant and infrequent operational risk events (tail risks). The Bank applies this practice to meet risk measurement and risk management objectives. The process includes the 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 new scenarios and 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 promote management accountability and direct the appropriate level of attention to current and emerging issues. Insurance TD’s Corporate Insurance team, with oversight from TD Risk Management, utilizes insurance and other risk transfer arrangements to mitigate and reduce potential future losses related to operational risk. Risk Management includes oversight of the effective use of insurance aligned with the Bank’s risk management strategy and risk appetite. Insurance terms and provisions, including types and amounts of coverage, are regularly assessed so that 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 the Bank’s risk to third parties where appropriate. The Bank transacts with external insurers that satisfy its minimum financial rating requirements. Technology and Cyber Security Virtually all aspects of the Bank’s business and operations use technology and information to create and support new markets, competitive products, delivery channels, as well as other business operations and opportunities. The Bank manages these risks to assure adequate and proper day-to-day operations; and protect against unauthorized access of the Bank’s technology, infrastructure, systems, information, or data. To achieve this, the Bank actively monitors, manages, and continues to enhance its ability to mitigate these technology and cyber security risks through enterprise-wide programs using industry leading practices and robust threat and vulnerability assessments and responses. Together with the Bank’s operational risk management framework, technology and cyber security programs also include enhanced resiliency planning and testing, as well as disciplined change management practices. Data Asset Management The Bank’s data is a strategic asset that is governed and managed to preserve value and support business objectives. Inconsistent data governance and management practices may compromise the Bank’s critical data and information assets which could result in financial and reputational impacts. The Bank’s Office of the Chief Data Officer (OCDO), Corporate and Technology partners develop and implement enterprise wide standards and practices that describe how data and information assets are managed, governed, used, and protected. Business Continuity and Incident Management The Bank maintains an enterprise-wide Business Continuity and Incident Management Program that supports management’s ability to operate the Bank’s businesses and operations (including providing customers access to products and services) in the event of a business disruption incident. All areas of the Bank are required to maintain and regularly test business continuity plans to facilitate the continuity and recovery of business operations. The Bank’s Program is supported by formal incident management measures so that the appropriate level of leadership, oversight and management is applied to incidents affecting the Bank. Third Party Management A third party supplier/vendor is an entity that supplies a particular product or service to or on behalf of the Bank. 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 third-party risk management program that is designed to manage third-party activities throughout the life cycle of an arrangement and provide an appropriate level of risk management and senior management oversight which is appropriate to the size, risk, and criticality of the third-party arrangement. 88 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSISProject Management The Bank has established a disciplined approach to project management across the enterprise coordinated by the Bank’s Enterprise Project Delivery Excellence Group. This approach involves senior management governance and oversight of the Bank’s project portfolio and leverages leading industry practices to guide the Bank’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 The Financial Crime and Fraud Management Group leads the development and implementation of enterprise-wide financial crime and fraud management strategies, policies, and practices. The Bank employs prevention, detection and monitoring capabilities to strengthen the Bank’s defences and enhance governance, oversight, and collaboration across the enterprise to protect customers, shareholders, and employees from increasingly sophisticated financial crimes and fraud. Operational Risk Capital Measurement The Bank’s operational risk capital is determined using the Advanced Measurement Approach (AMA), a risk-sensitive capital model, along with TSA. Effective the third quarter of 2016, OSFI approved the Bank to use AMA. Entities not reported under AMA, use the TSA methodology. The Bank’s AMA Capital Model uses a Loss Distribution Approach (LDA) and incorporates Internal Loss Data and Scenario Analysis results. External Loss Data is indirectly considered through the identification and assessment of Scenario Analysis estimations. Business, Environment and Internal Control Factors (BEICF) are used as a post- model adjustment to capital estimates to reflect forward-looking indicators of risk exposure. The Bank’s AMA model includes the incorporation of a diversification benefit, which considers correlations across risk types and business lines as extreme loss events may not occur simultaneously across all categories. The capital is estimated at the 99.9% confidence level. Although the Bank manages a comprehensive portfolio of insurance and other risk mitigating arrangements to provide additional protection from loss, the Bank’s AMA model does not consider risk mitigation through insurance. Model Risk Model risk is the potential for adverse consequences arising from decisions based on incorrect or misused models and other estimation approaches and their outputs. It can lead to financial loss, reputational risk, or incorrect business and strategic decisions. WHO MANAGES MODEL RISK Primary accountability for the management of model risk resides with the senior management of individual businesses with respect to the models they use. The Model Risk Governance Committee provides oversight of governance, risk, and control matters, by providing a platform to guide, challenge, and advise decision makers and model owners in model risk related matters. Model Risk Management monitors and reports on existing and emerging model risks, and provides periodic assessments to senior management, Risk Management, the Risk Committee of the Board, and regulators on the state of model risk at TD and alignment with the Bank’s Model Risk Appetite. The Risk Committee of the Board approves the Bank’s Model Risk Management Framework and Model Risk Policy. HOW TD MANAGES MODEL RISK The Bank manages model risk in accordance with management approved model risk policies and supervisory guidance which encompass 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 also 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 comprehensiveness matching the materiality and complexity of the model. Once models are implemented, business owners are responsible for ongoing performance monitoring and usage in accordance with the Bank’s Model Risk Policy. 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 model complexity and materiality, set model performance monitoring standards, and provide training to all stakeholders. The validation process varies in rigour, depending on the model risk rating, 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 an alternative modeling approach. The results of the benchmark model are compared to the model being assessed to validate the appropriateness of the model’s methodology and its use. As with traditional model approaches, machine-learning models are also subject to the same rigorous standards and risk management practices. 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. Model risk exists on a continuum from the most complex and material models to analytical tools (also broadly referred to as non-models) that may still expose the Bank to risk based on their incorrect use or inaccurate outputs. The Bank has policies and procedures in place designed to ensure that the level of independent challenge and oversight corresponds to the materiality and complexity of both models and non-models. 89 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS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, 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 are designed to support strong independent oversight and control of risk within the insurance business. The TD Insurance Risk Committee and its sub committees provide critical oversight of the risk management activities within the insurance business and monitor 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 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 claim 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 and life and health reserving policies. Sound product design is an essential element of managing risk. The Bank’s exposure to insurance risk is mostly 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 insurance legislation, the regulatory environment, 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 concentration risk associated with general insurance and life and health coverage. Exposure to insurance risk concentration 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 within the reinsurance business to manage concentration risk. Liquidity Risk The risk of having insufficient cash or collateral to meet financial obligations and an inability to, in a timely manner, raise funding or monetize assets at a non-distressed price. 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) guidelines. Under the LAR guidelines, Canadian banks are required to maintain a Liquidity Coverage Ratio (LCR) at the minimum of 100%. The Bank operates under a prudent funding paradigm with an emphasis on maximizing deposits as a core source of funding, and having ready access to wholesale funding markets across diversified terms, funding types, and currencies that is designed 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 is designed to ensure low exposure to identified sources of liquidity risk and compliance with regulatory requirements. 90 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSISLIQUIDITY RISK MANAGEMENT RESPONSIBILITY The Bank’s ALCO oversees the Bank’s liquidity risk management program. It is designed to ensure there are effective management structures and policies in place to properly measure and manage liquidity risk. The GLF, a subcommittee of the ALCO comprised of senior management from TBSM, Risk Management, Finance, and Wholesale Banking, identifies and monitors the Bank’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 regularly reviews the Bank’s liquidity position and approves the Bank’s Liquidity Risk Management Framework bi-annually and the related policies annually. The Bank maintains an internal view for measuring and managing liquidity that uses an assumed “Severe Combined Stress Scenario” (SCSS). The SCSS models potential liquidity requirements during a crisis resulting in a loss of confidence in the Bank’s ability to meet obligations as they come due. In addition to this bank-specific event, the SCSS also incorporates the impact of a stressed market-wide liquidity event that results in a significant reduction in the availability of funding for all institutions and a decrease in the marketability of assets. The Bank’s liquidity policy stipulates that the Bank must maintain a sufficient level of liquid assets to cover identified liquidity requirements at all times under the SCSS up to 90 days. The Bank calculates liquidity requirements for the SCSS related to the following conditions: • wholesale funding maturing in the next 90 days (assumes maturing Pursuant to the Enhanced Prudential Standards for Bank Holding debt will be repaid instead of rolled over); Companies and Foreign Banking Organizations, the Bank has established TD Group US Holding LLC (TDGUS), as TD’s U.S. IHC, and a Combined U.S. Operations (CUSO) reporting unit that consists of the IHC and TD’s U.S. branch and agency network. Both TDGUS and CUSO are managed to the U.S. Enhanced Prudential Standards liquidity requirements in addition to the Bank’s liquidity management framework. The following areas are responsible for measuring, monitoring, and managing liquidity risks for major business segments: • Risk Management is responsible for maintaining the liquidity risk management policy and asset pledging policy, along with associated limits, standards, and processes which are designed to ensure that consistent and efficient liquidity management approaches are applied across all of the Bank’s operations. Enterprise Market Risk Control provides oversight of liquidity risk across the enterprise and provides independent risk assessment and effective challenge of liquidity risk. Capital Markets Risk Management is responsible for daily liquidity risk reporting. • TBSM Liquidity Management manages the liquidity position of the Canadian Retail (including wealth businesses), Corporate, and the Wholesale Banking businesses. U.S. TBSM is responsible for managing the liquidity position of the U.S. Retail operations, as well as in conjunction with TBSM Canada, the liquidity position of CUSO. • Other regional operations, including those within TD’s insurance, and non-U.S. 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 the Bank’s access to funding or destabilize its deposit base. • • accelerated attrition or “run-off” of deposit balances; • increased utilization of available credit and liquidity facilities; and increased collateral requirements associated with downgrades in the Bank’s credit rating and adverse movement in reference rates for derivative and securities financing transactions. The Bank also manages its liquidity to comply with the regulatory liquidity requirements in the OSFI LAR (LCR and the Net Cumulative Cash Flow (NCCF) monitoring tool). The LCR requires that banks maintain minimum liquidity coverage of 100% over a 30-day stress period. As a result, the Bank’s liquidity is managed to the higher of its 90-day surplus requirement and the target buffers over the regulatory minimums. The Bank does not consolidate the surplus liquidity of U.S. Retail with the positions of other business segments 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 is also excluded in the enterprise liquidity position calculation due to regulatory investment restrictions. The Bank’s Funds Transfer Pricing process considers liquidity risk as a key determinant of the cost or credit of funds to the retail and wholesale bank businesses. Liquidity costs applied to loans and trading assets are determined based on the cash flow or stressed liquidity profile, while deposits are assessed based on the required liquidity reserves and balance stability. Liquidity costs are also applied to other contingent obligations like undrawn lines of credit provided to customers based on expected duration of the draw. LIQUID ASSETS The unencumbered liquid assets the Bank holds to meet its liquidity requirements must be high quality securities that the Bank believes can be monetized quickly in stress conditions with minimum loss in market value. 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 any reduction in market value of its liquid asset portfolio to be modest given the underlying high credit quality and demonstrated liquidity. 91 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSISAssets held by the Bank to meet liquidity requirements are summarized in the following tables. The tables do not include assets held within the Bank’s insurance businesses due to investment restrictions. T A B L E 4 8 SUMMARY OF LIQUID ASSETS BY TYPE AND CURRENCY1,2 (millions of Canadian dollars, except as noted) As at 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 Securities received as collateral from securities financing and derivative transactions Bank-owned liquid assets $ 3,002 18,256 39,649 12,720 6,622 10,554 2,655 93,458 24,046 30,163 47,150 56,034 78,160 33,514 4,786 273,853 $ 367,311 $ 2,202 15,524 37,178 9,865 4,348 9,634 1,977 80,728 44,886 30,758 43,703 55,272 62,867 21,230 5,556 264,272 $ 345,000 $ – 63,463 42 19,241 3,767 1,637 349 88,499 – 37,691 927 45,912 1,576 37,666 4 123,776 $ 212,275 $ – 46,203 45 15,346 3,362 2,518 222 67,696 – 33,090 494 62,720 1,945 21,124 1,374 120,747 $ 188,443 Total liquid assets % of total Encumbered Unencumbered liquid assets liquid assets October 31, 2018 $ 3,002 81,719 39,691 31,961 10,389 12,191 3,004 181,957 24,046 67,854 48,077 101,946 79,736 71,180 4,790 397,629 $ 579,586 $ 2,202 61,727 37,223 25,211 7,710 12,152 2,199 148,424 44,886 63,848 44,197 117,992 64,812 42,354 6,930 385,019 $ 533,443 1% $ 14 6 5 2 2 1 31 4 12 1,098 47,572 3,057 23,651 3,769 6,028 277 85,452 28 32,918 8 18 14 12 1 69 100% 7,522 41,993 7,234 32,206 191 122,092 $ 207,544 $ 1,904 34,147 36,634 8,310 6,620 6,163 2,727 96,505 24,018 34,936 40,555 59,953 72,502 38,974 4,599 275,537 $ 372,042 October 31, 2017 –% $ 12 7 5 2 2 – 28 9 12 421 35,522 3,888 18,177 1,173 4,930 133 64,244 42 32,074 8 22 12 8 1 72 100% 9,560 39,233 6,101 16,741 80 103,831 $ 168,075 $ 1,781 26,205 33,335 7,034 6,537 7,222 2,066 84,180 44,844 31,774 34,637 78,759 58,711 25,613 6,850 281,188 $ 365,368 1 Positions stated include gross asset values pertaining to secured borrowing/lending 2 Liquid assets include collateral received that can be re-hypothecated or and reverse-repurchase/repurchase businesses. otherwise redeployed. The increase of $7 billion in total unencumbered liquid assets from October 31, 2017, was mainly due to regular wholesale business activity and deposit volume growth in the Canadian Retail and U.S. Retail segments. Liquid assets are held in The Toronto-Dominion Bank and multiple domestic and foreign subsidiaries and branches and are summarized in the following table. T A B L E 4 9 SUMMARY OF UNENCUMBERED LIQUID ASSETS BY BANK, SUBSIDIARIES, AND BRANCHES1 (millions of Canadian dollars) The Toronto-Dominion Bank (Parent) Bank subsidiaries Foreign branches Total 1 Certain comparative amounts have been restated to conform with the presentation adopted in the current period. October 31 2018 $ 136,544 217,565 17,933 $ 372,042 As at October 31 2017 $ 111,797 217,098 36,473 $ 365,368 92 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS The Bank’s monthly average liquid assets (excluding those held in insurance subsidiaries) for the years ended October 31, 2018, and October 31, 2017, are summarized in the following table. T A B L E 5 0 SUMMARY OF AVERAGE LIQUID ASSETS BY TYPE AND CURRENCY1,2 (millions of Canadian dollars, except as noted) Average for the years ended 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 Securities received as collateral from securities financing and derivative Total transactions3 liquid assets Bank-owned liquid assets $ 3,115 15,548 41,365 11,160 6,347 10,360 2,216 90,111 34,805 30,349 44,929 53,068 71,142 29,341 4,977 268,611 $ 358,722 $ 3,204 16,550 37,464 9,065 4,544 15,509 2,646 88,982 45,708 29,478 36,079 52,176 60,603 17,937 6,283 248,264 $ 337,246 $ – 54,782 48 17,390 3,729 2,279 348 78,576 – 40,533 677 55,008 1,579 30,034 14 127,845 $ 206,421 $ – 40,278 250 12,585 3,894 2,746 667 60,420 – 41,231 721 48,726 912 10,201 11,631 113,422 $ 173,842 $ 3,115 70,330 41,413 28,550 10,076 12,639 2,564 168,687 34,805 70,882 45,606 108,076 72,721 59,375 4,991 396,456 $ 565,143 $ 3,204 56,828 37,714 21,650 8,438 18,255 3,313 149,402 45,708 70,709 36,800 100,902 61,515 28,138 17,914 361,686 $ 511,088 % of total Encumbered Unencumbered liquid assets3 liquid assets October 31, 2018 1% $ 12 7 5 2 2 1 30 6 13 573 42,407 4,517 21,266 2,018 4,965 278 76,024 127 38,668 8 19 13 10 1 70 100% 8,731 38,663 5,864 24,974 557 117,584 $ 193,608 $ 2,542 27,923 36,896 7,284 8,058 7,674 2,286 92,663 34,678 32,214 36,875 69,413 66,857 34,401 4,434 278,872 $ 371,535 October 31, 2017 –% $ 11 7 4 2 4 1 29 9 14 363 29,310 3,609 13,566 1,532 6,054 643 55,077 46 37,390 7 20 12 6 3 71 100% 10,423 34,310 4,908 5,798 6,884 99,759 $ 154,836 $ 2,841 27,518 34,105 8,084 6,906 12,201 2,670 94,325 45,662 33,319 26,377 66,592 56,607 22,340 11,030 261,927 $ 356,252 1 Certain comparative amounts have been restated to conform with the presentation 3 Liquid assets include collateral received that can be re-hypothecated or adopted in the current period. otherwise redeployed. 2 Positions stated include gross asset values pertaining to secured borrowing/lending and reverse-repurchase/repurchase businesses. Average liquid assets held in The Toronto-Dominion Bank and multiple domestic and foreign subsidiaries (excluding insurance subsidiaries) and branches are summarized in the following table. T A B L E 5 1 SUMMARY OF AVERAGE UNENCUMBERED LIQUID ASSETS BY BANK, SUBSIDIARIES, AND BRANCHES1 (millions of Canadian dollars) The Toronto-Dominion Bank (Parent) Bank subsidiaries Foreign branches Total 1 Certain comparative amounts have been restated to conform with the presentation adopted in the current period. Average for the years ended October 31 2018 $ 124,181 217,036 30,318 $ 371,535 October 31 2017 $ 117,963 209,745 28,544 $ 356,252 93 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS ASSET ENCUMBRANCE In the course of the Bank’s day-to-day operations, assets are pledged to obtain funding, support trading and brokerage businesses, and participate in clearing and/or settlement systems. A summary of encumbered and unencumbered assets (excluding assets held in insurance subsidiaries) is presented in the following table to identify assets that are used or available for potential funding needs. T A B L E 5 2 ENCUMBERED AND UNENCUMBERED ASSETS1 (millions of Canadian dollars, except as noted) 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 Encumbered2 Unencumbered Pledged as collateral3 72 $ 4,310 71,676 – – 23,648 – – – – – – 1,013 $ 100,719 131,484 44,793 9,046 185,323 $ 286,042 $ Other4 33 89 11,959 – – 60,005 – – – – – – – $ 72,086 – 559 – 559 $ 72,645 Available as collateral5 – $ 23,125 274,504 – – 79,439 – – – – – – – $ 377,068 23,035 14,733 20,077 57,845 $ 434,913 $ Other6 4,630 3,196 15,162 56,996 127,379 483,301 17,267 8,445 16,536 2,459 5,324 2,812 41,523 $ 785,030 (127,379) – (14,693) (142,072) $ 642,958 Total on-balance sheet assets Total off-balance sheet items Total $ 88,894 154,350 $ 243,244 $ 65,705 229 $ 65,934 $ 359,169 61,328 $ 420,497 $ 765,227 (145,711) $ 619,516 As at October 31, 2018 Encumbered Total assets as a % assets of total assets $ 4,735 30,720 373,301 56,996 127,379 646,393 17,267 8,445 16,536 2,459 5,324 2,812 42,536 $ 1,334,903 –% 0.3 6.2 – – 6.3 – – – – – – 0.1 12.9% October 31, 2017 $ 1,278,995 12.1% 1 Certain comparative amounts have been restated to conform with the presentation adopted in the current period. 2 Asset encumbrance has been analyzed on an individual asset basis. Where a particular asset has been encumbered and TD has holdings of the asset both on-balance sheet and off- balance sheet, for the purpose of this disclosure, the on and off-balance sheet holdings are encumbered in alignment with the business practice. 3 Represents assets that have been posted externally to support the Bank’s day-to- day operations, including securities financing transactions, clearing and payments, and derivative transactions. Also includes assets that have been pledged supporting Federal Home Loan Bank (FHLB) activity. 4 Assets supporting TD’s long-term 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 collateral purposes however not regularly utilized in practice. 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). 7 Securities include trading loans, securities, non-trading financial assets at fair value through profit or loss and other financial assets designated at fair value through profit or loss, securities at FVOCI, and DSAC. 8 Assets reported in Securities purchased under reverse repurchase agreements represent the value of the loans extended 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. 94 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS LIQUIDITY STRESS TESTING AND CONTINGENCY FUNDING PLANS In addition to the SCSS, the Bank performs liquidity stress testing on multiple alternate scenarios. These scenarios are a mix of TD-specific events and market-wide stress events designed to test the impact from risk factors material to the Bank’s risk profile. Liquidity assessments are also part of the Bank’s EWST program. Results from these stress event scenarios are used to inform 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 liquidity risk management program. It outlines different contingency levels based on the severity and duration of the liquidity situation, and identifies recovery actions appropriate for each level. For each recovery action, it provides key operational steps required to execute the action. Regional CFPs identify recovery actions to address region-specific stress events. The actions and governance structure proposed in the Enterprise CFP are aligned with the Bank’s Crisis Management Recovery Plan. CREDIT RATINGS Credit ratings impact the Bank’s borrowing costs and ability to raise funds. Rating downgrades could potentially result in higher financing costs, increased requirement to pledge collateral, reduced access to capital markets, and could also affect the Bank’s ability to enter into derivative 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. T A B L E 5 3 CREDIT RATINGS1 Rating agency Moody’s S&P DBRS As at October 31, 2018 Short-term debt rating P-1 A-1+ R-1 (high) Legacy senior debt rating2 Aa1 AA- AA Long-term senior debt rating3 Aa3 A Aa (low) Outlook Stable Stable Positive 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. 2 Includes (a) Senior debt issued prior to September 23, 2018; and (b) Senior debt issued on or after September 23, 2018 which is excluded from the bank recapitalization “bail-in” regime, including debt with an original term-to-maturity of less than 400 days and most structured notes. 3 Subject to conversion under the bank recapitalization “bail-in” regime. 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 it is able to provide additional collateral required by trading counterparties in the event of a three-notch downgrades in the Bank’s senior long-term credit ratings. The following table presents the additional collateral that could have been contractually required to be posted to the derivative counterparties as of 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 4 ADDITIONAL COLLATERAL REQUIREMENTS FOR RATING DOWNGRADES 1 (millions of Canadian dollars) One-notch downgrade Two-notch downgrade Three-notch downgrade Average for the years ended October 31 October 31 2017 2018 $ 92 120 462 $ 112 141 382 1 The above collateral requirements are based on trading counterparty Credit Support Annex (CSA) and the Bank’s credit rating across applicable rating agencies. LIQUIDITY COVERAGE RATIO The LCR is a Basel III metric calculated as the ratio of the stock of unencumbered HQLA over the net cash outflow requirements in the next 30 days under a hypothetical liquidity stress event. The Bank must maintain the LCR above 100% under normal operating conditions in accordance with the OSFI LAR requirement. The Bank’s LCR is calculated according to the scenario parameters in the LAR guideline, including prescribed HQLA eligibility criteria and haircuts, deposit run-off rates, and other outflow and inflow rates. HQLA eligible for the LCR calculation under the LAR are primarily central bank reserves, sovereign issued or guaranteed securities, and high quality securities issued by non-financial entities. 95 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS The following table summarizes the Bank’s daily LCR position for the fourth quarter of 2018. T A B L E 5 5 AVERAGE BASEL III LIQUIDITY COVERAGE RATIO1 (millions 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 ratio Average for the three months ended October 31, 2018 Total unweighted value (average)2 Total weighted value (average)3 $ n/a $ 206,490 $ 460,169 194,680 265,489 238,977 96,213 108,902 33,862 n/a 189,274 24,337 5,975 158,962 10,098 568,621 n/a $ $ 32,389 5,840 26,549 116,623 22,902 59,859 33,862 14,613 50,548 12,763 5,975 31,810 4,881 8,745 $ 227,799 $ 187,279 15,014 35,780 $ 238,073 $ 24,106 7,487 35,780 $ 67,373 Average for the three months ended October 31 2018 July 31 2018 Total adjusted value Total adjusted value $ 206,490 160,426 $ 211,757 166,729 129% 127% 1 The LCR for the quarter ended October 31, 2018, is calculated as an average 6 Includes uncommitted credit and liquidity facilities, stable value money market of the 63 daily data points in the 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 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. or inflow and outflow rates, as prescribed by OSFI’s LAR guideline. 7 Adjusted HQLA includes both asset haircut and applicable caps, as prescribed 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. by the 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 LAR (inflows are capped at 75% of outflows). The Bank’s average LCR of 129% for quarter ended October 31, 2018, continues to meet the regulatory requirement. The 2% change over the prior quarter’s LCR was mainly due to normal business and pre-funding activities. The Bank holds a variety of liquid assets commensurate with the liquidity needs of 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, 2018, was $206 billion (July 31, 2018 – $212 billion), with level 1 assets representing 80% (July 31, 2018 – 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 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. 96 TD BANK GROUP ANNUAL REPORT 2018 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 risk appetite that requires assets be funded to the appropriate term and to a prudent diversification profile. 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, wealth, and TD Ameritrade sweep deposits (collectively, “P&C deposits”) that make up over 70% of the Bank’s total funding. T A B L E 5 6 SUMMARY OF DEPOSIT FUNDING (millions of Canadian dollars) P&C deposits – Canadian Retail P&C deposits – U.S. Retail Other deposits Total As at October 31 October 31 2017 2018 $ 359,473 $ 350,446 346,624 336,302 99 36 $ 706,133 $ 686,847 The Bank actively maintains various registered 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 also raises term funding through Canadian Senior Notes, Canadian NHA MBS, Canada Mortgage Bonds, debt issued in Australia, and notes backed by credit card receivables (Evergreen Credit Card Trust). The Bank’s wholesale funding is diversified by geography, by currency, and by funding types. The Bank raises short term (1 year and less) funding using certificates of deposit and commercial paper. The following table summarizes the registered term funding programs by geography, with the related program size. Canada United States Europe Capital Securities Program ($10 billion) Canadian Senior Medium Term Linked Notes Program ($4 billion) HELOC ABS Program (Genesis Trust II) ($7 billion) U.S. SEC (F-3) Registered Capital and Debt Program (US$40 billion) United Kingdom Listing Authority (UKLA) Registered Legislative Covered Bond Program ($50 billion) UKLA Registered European Medium Term Note Program (US$20 billion) The Bank regularly evaluates opportunities to diversify its funding into new markets and to new investors in order to manage funding risk and cost. The following table presents a breakdown of the Bank’s term debt by currency and funding type. Term funding for the year ended October 31, 2018, was $127.7 billion (October 31, 2017 – $109.3 billion). The Bank maintains depositor concentration limits in respect of short-term wholesale deposits so that it does not depend on small groups of large wholesale depositors for funding. The Bank also limits short-term wholesale funding maturity concentration in an effort to mitigate exposures to refinancing risk during a stress event. T A B L E 5 7 LONG-TERM FUNDING Long-term funding by currency Canadian dollar U.S. dollar Euro British pound Other Total Long-term funding by type Senior unsecured medium term notes Covered bonds Mortgage securitization1 Term asset backed securities Total As at October 31 October 31 2018 2017 32% 39 19 7 3 100% 55% 29 12 4 100% 37% 42 14 4 3 100% 53% 27 15 5 100% 1 Mortgage securitization excludes the residential mortgage trading business. 97 TD BANK GROUP ANNUAL REPORT 2018 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, 2018, and October 31, 2017, based on remaining term-to-maturity. T A B L E 5 8 WHOLESALE FUNDING1 (millions of Canadian dollars) Less than 1 to 3 1 month months months 3 to 6 6 months to 1 year As at October 31 October 31 2017 2018 Up to Over 1 to 2 years 1 year Over 2 years Total Total Deposits from banks2 Bearer deposit note Certificates of deposit Commercial paper Covered bonds Mortgage securitization Senior unsecured medium term notes Subordinated notes and debentures3 Term asset backed securitization Other4 Total Of which: Secured Unsecured Total 224 741 $ 71 $ 14,176 $ $ 8,358 $ 5,006 $ – $ 14,176 $ 17,990 – 3,700 51,401 65,465 – 55,570 25,281 – 36,284 29,319 25,797 27,301 28,833 17,911 69,518 57,570 34,194 9,528 8,740 5,835 1,447 8,443 804 $ 28,935 $ 52,112 $ 36,423 $ 45,764 $ 163,234 $ 26,895 $ 88,893 $ 279,022 $ 251,964 3,872 11,610 51,262 12,731 55,570 5,508 5,072 11,647 19,626 – – 2,444 1,787 5,704 849 – $ – 139 – 4,979 4,318 15,698 – 1,735 26 1,250 15,642 14,298 673 819 2,269 – – 731 1,253 17,381 19,150 – 2,221 5,710 – – 1,391 1,145 6,629 9,391 – 22 – – 657 2,733 8,740 5,626 6,534 4,835 2,010 3,872 679 $ 2,221 $ 1,495 $ 8,632 $ 13,027 $ 11,032 $ 45,166 $ 69,225 $ 64,003 $ 28,256 43,727 209,797 187,961 $ 28,935 $ 52,112 $ 36,423 $ 45,764 $ 163,234 $ 26,895 $ 88,893 $ 279,022 $ 251,964 37,132 150,207 34,928 15,863 49,891 1 Certain comparative amounts have been restated to conform with the presentation 3 Subordinated notes and debentures are not considered wholesale funding as they adopted in the current period. 2 Includes fixed-term deposits with banks. may be raised primarily for capital management purposes. 4 Includes fixed-term deposits from non-bank institutions (unsecured) of $6.5 billion (October 31, 2017 – $8.4 billion). Excluding the Wholesale Banking mortgage aggregation business, the Bank’s total 2018 mortgage-backed securities issuance was $2.6 billion (2017 – $2.4 billion), and other asset-backed securities was $1.8 billion (2017 – $1.4 billion). The Bank also issued $29.1 billion of unsecured medium-term notes (2017 – $8.7 billion) and $9.9 billion of covered bonds (2017 – $4.6 billion), in various currencies and markets during the year ended October 31, 2018. This includes unsecured medium-term notes and covered bonds issued but settling subsequent to year-end. REGULATORY DEVELOPMENTS CONCERNING LIQUIDITY AND FUNDING On April 18, 2018, the Government of Canada published the final regulations under the Bank Act and the CDIC Act providing details of the bank recapitalization “bail-in” regime. The issuance regulations under the Bank Act and the conversion regulations under the CDIC Act came into force on September 23, 2018, while the compensation regulations under the CDIC Act were brought into force immediately upon registration on March 27, 2018. The bail-in regulations represent the final step in the implementation of the bail-in regime which provides the Canada Deposit Insurance Corporation (CDIC) with the power to convert specified eligible liabilities of D-SIBs into common shares in the unlikely event the D-SIB becomes non-viable. The Budget Implementation Act, providing amendments to the CDIC Act, Bank Act, and other statutes to allow for bail-in, was passed in June 2016. In October 2014, the BCBS released the final standard for “Basel III: the net stable funding ratio.” The net stable funding ratio (NSFR) requires that the ratio of available stable funding over required stable funding be greater than 100%. 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. Based on implementation progress at the international level, OSFI has determined that it will target a revised NSFR implementation date of January 2020. Relevant areas of the LAR guideline have been updated to reflect the implementation delay. 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 capital lease commitments, certain purchase obligations, 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 such instruments be fully drawn or utilized. Since a significant portion of guarantees and commitments are expected to expire without being drawn upon, the total of the contractual amounts is not representative of expected 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 degree of the Bank’s maturity transformation or the Bank’s 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 non-maturity deposits (chequing and savings accounts) and 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. The Bank issues long-term funding based primarily on the projected net growth of non-trading assets. The Bank raises short term funding primarily to finance trading assets. The liquidity of trading assets under stressed market conditions is considered when determining the appropriate term of the related funding. 98 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 5 9 REMAINING CONTRACTUAL MATURITY1 (millions of Canadian dollars) As at October 31, 2018 Less than 1 month 1 to 3 months 3 to 6 months 6 to 9 months 9 months Over 1 to Over 2 to 5 years to 1 year 2 years No specific 5 years maturity Over Assets Cash and due from banks Interest-bearing deposits with banks Trading loans, securities, and other2 Non-trading financial assets at fair value through profit or loss Derivatives Financial assets designated at fair value through profit or loss Financial assets at fair value through other comprehensive income Debt securities at amortized cost, net of allowance for credit losses Securities purchased under reverse $ 4,733 $ 28,332 1,971 – 7,343 924 5,244 12 9,263 2 $ – $ – $ – $ 154 2,111 21 3,653 16 3,998 1,273 9,683 25,772 25,895 49,570 – $ – – $ – – $ – – $ 99 5,275 460 3,276 906 2,321 227 841 7,130 12,436 848 9,952 622 – 4,015 56,996 30 95 535 243 90 297 1,532 796 – 3,618 1,111 4,214 4,150 5,354 3,962 19,777 57,922 31,936 2,174 130,600 881 2,577 3,010 3,594 4,059 8,103 34,032 50,990 (75) 107,171 Total 4,735 30,720 127,897 repurchase agreements 77,612 30,047 14,426 3,807 1,458 29 – – – 127,379 Loans Residential mortgages Consumer instalment and other personal Credit card Business and government 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 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 Equity Total liabilities and equity Off-balance sheet commitments Credit and liquidity commitments7,8 Operating lease commitments Other purchase obligations Unconsolidated structured entity commitments Total off-balance sheet commitments 908 753 – 23,052 24,713 – 24,713 14,984 – – – – – 3,234 1,332 – 4,320 8,886 – 8,886 2,145 – – – – – 6,614 2,628 – 5,539 14,781 – 14,781 132 – – – 11,166 3,724 – 7,131 22,021 – 22,021 6 – – – – – – 11,061 43,063 113,852 35,293 – 4,131 14,313 56,632 26,321 62,245 – 35,018 9,269 19,637 67,922 59,251 21,533 24,461 77,013 238,406 120,865 118,796 (3,549) 24,461 77,013 238,406 120,865 115,247 – – – 8,445 – 16,536 2,459 – – – – – – – – – – – – – – – – – 225,191 172,079 35,018 217,654 649,942 (3,549) 646,393 17,267 8,445 16,536 2,459 – – – – – – – – – – – – 5,324 2,812 5,324 2,812 26,940 3,432 26,940 15,596 $ 192,082 $ 64,263 $ 46,599 $ 42,555 $ 41,413 $ 122,395 $ 371,242 $ 241,372 $ 212,982 $ 1,334,903 – 8,595 – 1,926 – 301 – 136 – 142 – 90 – 854 – 120 $ 16,145 $ 37,337 $ 31,081 $ 12,954 $ 11,739 $ 1,183 $ 3,260 $ 1,005 $ 6,195 – 8,684 981 4,230 194 3,103 661 2,263 272 5,510 1,822 9,282 6,719 9,003 1,969 – $ 114,704 48,270 – 12,618 – 4,330 6,499 18,840 29,669 14,986 2,621 7,094 1,941 19,337 28,372 2,145 3,679 7,541 255 7,033 14,829 132 1,500 6,245 24 9,984 16,253 6 387 54 7,718 10,222 – 9,876 3 11,299 21,345 54,780 19,071 31,567 64,659 – – 904 – – 4,330 13,771 11,474 8 38 424,580 7,928 8,000 206,465 8,046 638,973 – 812 477,644 16,712 357,083 851,439 17,269 39,478 73,759 22 15,508 1,240 3,516 625 428 503 108 575 43 2,496 27 6,232 – 2,990 – – 93,389 14,683 28,385 213 2,926 – – 28,385 6,698 19,190 8,740 80,040 $ 174,921 $ 100,876 $ 56,998 $ 35,930 $ 36,636 $ 50,093 $ 107,882 $ 44,283 $ 727,284 $ 1,334,903 – 1,755 5,704 – – 80,040 – 309 1,326 – – – 1,624 2,308 – – – 310 1,394 – – – 937 2,205 – – – 294 2,636 – – – 903 153 8,740 – 353 538 – – $ 18,339 $ 16,728 $ 17,217 $ 13,098 $ 9,152 $ 25,691 $ 101,120 $ 4,034 $ 2,663 $ 208,042 7,267 1,643 2,188 641 3,229 128 233 106 902 366 240 109 159 146 237 106 – – 79 41 – 2,763 $ 18,459 $ 18,112 $ 18,506 $ 13,770 $ 9,491 $ 26,966 $ 104,357 $ 7,391 $ 2,663 $ 219,715 1,079 408 940 329 7 – – – 1 Balances as at October 31, 2018 are prepared in accordance with IFRS 9. Prior period comparatives have not been restated. Refer to Note 4 of the 2018 Consolidated Financial Statements for further details. $2 billion in ‘9 months to 1 year’, $5 billion in ‘over 1 to 2 years’, $22 billion in ‘over 2 to 5 years’, and $3 billion in ‘over 5 years’. 6 Includes $60 million of capital lease commitments with remaining contractual 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’. maturities of $2 million in ‘less than 1 month’, $5 million in ‘1 month to 3 months’, $7 million in ‘3 months to 6 months’, $6 million in ‘6 months to 9 months’, $6 million in ‘9 months to 1 year’, $12 million in ‘over 1 to 2 years’, $17 million in ‘over 2 to 5 years’, and $5 million in ‘over 5 years’. 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’. 7 Includes $205 million in commitments to extend credit to private equity investments. 8 Commitments to extend credit exclude personal lines of credit and credit card lines, 5 Includes $36 billion of covered bonds with remaining contractual maturities of which are unconditionally cancellable at the Bank’s discretion at any time. $1 billion in ‘3 months to 6 months’, $3 billion in ‘6 months to 9 months’, 99 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 5 9 REMAINING CONTRACTUAL MATURITY (continued) 1 (millions of Canadian dollars) As at October 31, 2017 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 $ 3,971 $ 49,825 721 6,358 232 652 83 – $ – $ 742 3,433 7,744 269 4,020 824 13 3,178 5,016 402 1,794 2,709 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 No specific maturity – $ Total 3,971 51,185 103,918 56,195 – $ 6 4,090 2,379 – $ 7 4,007 2,657 – $ – 9,092 6,790 – $ – 22,611 13,500 – $ – 592 17,669 39,117 – 11,751 353 3,867 2,583 233 3,121 1,874 370 15,622 12,805 1,059 72,964 22,697 897 42,083 27,788 217 2,288 – 4,032 146,411 71,363 reverse repurchase agreements 84,880 33,930 11,433 3,068 1,086 24 8 – – 134,429 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 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 Equity Total liabilities and equity Off-balance sheet commitments Credit and liquidity commitments7,8 Operating lease commitments Other purchase obligations Unconsolidated structured entity commitments 905 701 – 20,255 – 21,861 – 21,861 14,822 – – – 2,677 1,342 – 7,351 15 11,385 – 11,385 2,372 – – – 8,869 3,329 – 7,079 – 19,277 – 19,277 96 – – – 16,042 3,760 – 7,155 2 26,959 – 26,959 5 – – – 13,264 3,315 – 9,621 16 26,216 – 26,216 2 – – – 2,897 36,284 109,260 44,850 12,902 – – 59,870 14,623 248 31 34,778 – 25,651 61,251 – 33,007 59,107 15,917 – 63,840 214,228 122,433 110,175 (3,783) 63,840 214,228 122,433 106,392 – – – 7,784 – 16,156 2,618 – – – – – – – – – – – – 222,079 157,101 33,007 200,978 3,209 616,374 (3,783) 612,591 17,297 7,784 16,156 2,618 – – – – – – – – – – – – – – – – 5,313 2,497 5,313 2,497 29,971 2,393 29,971 13,264 $ 215,769 $ 65,319 $ 44,970 $ 43,414 $ 39,302 $ 108,681 $ 347,365 $ 222,761 $ 191,414 $ 1,278,995 – 8,440 – 1,052 – 140 – 298 – 138 – 99 – 104 – 600 $ 10,349 $ 20,834 $ 25,071 $ 7,192 $ 12,820 $ 4,587 139 1,981 – 5,307 4 7,230 1,118 2,200 709 1,494 $ 6,868 1,832 1,469 $ 711 $ 11,111 5,966 11,930 2,989 – $ – – 79,940 51,214 12,757 4,538 12,375 23,899 40,812 14,822 1,348 6,472 4,766 18,868 30,106 2,372 3,003 6,424 1,354 15,492 23,270 96 770 6,619 16 4,488 11,123 5 624 6,740 91 6,392 13,223 2 765 9,487 3 15,783 25,273 – 3,948 10,162 – 43,465 53,627 – 11,677 65 417,648 7,271 11 14,555 195,840 14,631 620,759 – 1,426 – 11,921 468,155 25,887 338,782 832,824 17,297 35,482 72,361 48 11,057 668 4,826 1,062 219 708 20 1,264 64 3,060 44 6,287 – 2,979 – – 88,591 16,076 32,851 123 3,551 – – 32,851 6,775 20,470 9,528 75,190 $ 181,576 $ 78,922 $ 61,941 $ 23,373 $ 31,782 $ 46,399 $ 93,476 $ 56,600 $ 704,926 $ 1,278,995 – 1,660 5,891 – – 75,190 – 1,738 1,557 – – – 926 2,934 – – – 417 1,290 – – – 294 1,826 – – – 182 2,352 – – – 1,097 814 9,528 – 338 255 – – Total off-balance sheet commitments $ 20,007 $ 16,715 $ 14,945 $ 11,173 $ 8,626 $ 24,252 $ 87,616 $ $ 19,208 $ 15,961 $ 14,402 $ 10,536 $ 7,934 $ 22,423 $ 85,183 $ 79 24 696 158 102 494 236 79 228 234 59 344 232 52 881 224 2,115 318 408 724 – 3,228 $ 2,325 $ 181,200 7,440 3,505 858 – – – – 2,894 6,733 $ 2,325 $ 192,392 – 1 Certain comparative amounts have been reclassified to conform with the 6 Includes $89 million of capital lease commitments with remaining contractual presentation adopted in the current period. 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 $29 billion of covered bonds with remaining contractual maturities of $2 billion in ‘over 1 to 2 years’, $19 billion in ‘over 2 to 5 years’, and $8 billion in ‘over 5 years’. maturities of $2 million in ‘less than 1 month’, $5 million in ‘1 month to 3 months’, $7 million in ‘3 months to 6 months’, $7 million in ‘6 months to 9 months’, $7 million in ‘9 months to 1 year’, $26 million in ‘over 1 to 2 years’, $25 million in ‘over 2 to 5 years’, and $10 million in ‘over 5 years’. 7 Includes $123 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. 100 TD BANK GROUP ANNUAL REPORT 2018 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 reviews the adherence to capital targets 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 framework, commensurate with the Bank’s risk profile. The CRO works to ensure 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 allocation of capital limits for business segments and reviews adherence to capital targets. TBSM is responsible for forecasting and monitoring compliance with capital targets, on a consolidated basis, with oversight provided by ALCO. TBSM updates the capital forecast and makes recommendations to the ALCO regarding capital issuance, repurchase and redemption. TBSM also leads the ICAAP and EWST processes. The Bank’s business segments are responsible for managing to the allocated capital limits. Additionally, regulated subsidiaries of the Bank, including certain insurance subsidiaries and subsidiaries in the U.S. and other jurisdictions, manage their capital adequacy risk in accordance with applicable regulatory requirements. Capital management policies and procedures of these subsidiaries are also required to conform with those of the Bank. U.S.-regulated subsidiaries of the Bank are required to follow several regulatory guidelines, rules and expectations related to capital planning and stress testing including the U.S. Federal Reserve Board’s Regulation YY establishing Enhanced Prudential Standards for Foreign Bank Organizations and the stress test rule and capital plan rule both applicable to 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 in a manner designed 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 declining capital levels before minimum capital requirements are breached. Capital targets are defined in the Global Capital Management Policy. 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 RWA and Leverage exposure limits. Capital generation and usage are monitored and reported to the ALCO. The Bank assesses the sensitivity of its forecast capital requirements and new capital formations to various economic conditions through its EWST process. The impacts of the EWST are applied to the capital forecast and are considered in the determination of capital targets. 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. 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. Legal, Regulatory Compliance and Conduct Risk Legal, Regulatory Compliance and Conduct (LRCC) risk is the risk associated with the failure to meet the Bank’s legal obligations from legislative, regulatory or contractual perspectives, obligations under the Code of Conduct and Ethics, or requirements of fair business conduct or market conduct practices. This includes risks associated with the failure to identify, communicate, and comply with current and changing laws, regulations, rules, regulatory guidance or self- regulatory organization standards, and codes, including the prudential risk management of Money Laundering, Terrorist Financing, Economic Sanctions, and Bribery and Corruption risk (the “LRCC Requirements”). Potential consequences of failing to mitigate LRCC risk include financial loss, regulatory sanctions, and loss of reputation, which could be material to the Bank. The Bank is exposed to LRCC risk in virtually all of its activities. Failure to meet regulatory and legal requirements can impact the Bank’s ability to meet strategic objectives, poses a risk of censure or penalty, may lead to litigation, and puts the Bank’s reputation at risk. Financial penalties, reputational damage, and other costs associated with legal proceedings, and unfavourable judicial or regulatory determinations may also adversely affect the Bank’s business, results of operations and financial condition. LRCC risk differs from other banking risks, such as credit risk or market risk, in that it is typically not a risk actively or deliberately assumed by management in expectation of a return. LRCC risk can occur as part of the normal course of operating the Bank’s businesses. WHO MANAGES LEGAL AND REGULATORY COMPLIANCE RISK The proactive and effective management of LRCC risk is complex given the breadth and pervasiveness of exposure. The LRCC Risk Management Framework applies enterprise-wide to the Bank and to all of its corporate functions, business segments, its governance, risk, and oversight functions. Each of the Bank’s businesses is responsible for compliance with LRCC requirements applicable to their jurisdiction and specific business requirements, and for adhering to LRCC requirements in their business operations, including setting the appropriate tone for legal, regulatory compliance, and conduct risk management. This accountability involves assessing the risk, designing, and implementing controls, and monitoring and reporting their ongoing effectiveness to safeguard the businesses from operating outside of the Bank’s risk appetite. The Legal, Compliance, and Global Anti-Money Laundering departments, together with the Regulatory Risk (including Regulatory Relationships and Government Affairs) group, provide objective guidance, advice, and oversight with respect to managing LRCC risk. Representatives of these groups interact regularly with senior executives of the Bank’s businesses. Also, the senior management of the Legal, 101 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSISReputational Risk Reputational risk is the potential that stakeholder perceptions, whether true or not, regarding the Bank’s business practices, actions or inactions, will or may cause a significant 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 perceptions about the Bank’s business practices involving any aspect of the Bank’s operations however, usually involves concerns about business ethics and integrity, competence, or the quality or suitability of products and services. Since all risk categories can have an impact on a company’s reputation, reputational risk is not managed in isolation from the Bank’s other major risk categories and can ultimately impact its 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 reputational 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 where significant reputational risk profiles have been identified and escalated. At the same time, every employee and representative of the Bank has a responsibility to contribute in a positive way to the Bank’s reputation and the management of reputational risk. This means that every Bank employee is responsible for 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 its reputation. HOW TD MANAGES REPUTATIONAL RISK The Bank’s approach to the management of reputational risk combines the experience and knowledge of individual business segments, corporate shared service areas and governance, risk and oversight functions. It is based on enabling TD’s businesses 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. The Bank’s Reputational Risk Management Framework provides a comprehensive overview of its approach to the management of this risk. Amongst other significant policies, the Bank’s Enterprise Reputational Risk Management Policy is approved by the Group Head and CRO and sets out the requirements under which business segments and corporate shared services are required to manage reputational risk. These requirements include implementing procedures and designating a business-level committee to review and recommend reputational risks and escalation to the RRC as appropriate. The Bank also has an enterprise-wide New Business and Product Approval (NBPA) Policy that is approved by the CRO and establishes standard practices to support consistent processes for approving new businesses, products, and services across the Bank. The policy is supported by business segment specific processes, which involve independent review from oversight functions, and consider all aspects of a new product, including reputational risk. Compliance, and GAML departments have established regular meetings with and reporting to the Audit Committee, which oversees the establishment and maintenance of policies and programs that are reasonably designed to achieve and maintain the Bank’s compliance with the laws and regulations that apply to it. Senior management of the Compliance Department reports regularly to the Corporate Governance Committee, which acts as the conduct review committee for the Bank and certain of its Canadian subsidiaries that are federally- regulated financial institutions, including providing oversight of conduct risk. In addition, senior management of the Regulatory Risk group has established periodic reporting to the Board and its committees. HOW TD MANAGES LEGAL, REGULATORY COMPLIANCE, AND CONDUCT RISK Effective management of LRCC risk is a result of enterprise-wide collaboration and requires (a) independent and objective identification and assessment of LRCC risk, (b) objective guidance and advisory services to identify, assess, control, and monitor LRCC risk, and (c) an approved set of frameworks, policies, procedures, guidelines, and practices. Each of the Legal, Compliance, and GAML departments plays a critical role in the management of LRCC risk at the Bank. Depending on the circumstances, they play different roles at different times: ‘trusted advisor’, provider of objective guidance, independent challenge, and oversight and control (including ‘gatekeeper’ or approver). In particular, the Compliance department: acts as an independent regulatory compliance and conduct risk management oversight function; assesses the adequacy of, adherence to, and effectiveness of the Bank’s Regulatory Compliance Management (RCM) controls; is accountable for leading enterprise conduct risk governance oversight; and supports the Chief Compliance Officer in providing an opinion to the Audit Committee, as to whether the RCM controls are sufficiently robust in achieving compliance with applicable regulatory requirements. The Compliance department works in partnership with Human Resources and Operational Risk Management to provide oversight and challenge to the businesses in their identification, management, measurement, mitigation, and monitoring of conduct risk. The GAML department: acts as an independent regulatory compliance and risk management oversight function and is responsible for regulatory compliance and the broader prudential risk management components of the GAML, Anti-Terrorist Financing, Sanctions, and Anti-Bribery/ Anti-Corruption programs (the “GAML Programs”), including their design, content, and enterprise-wide implementation; monitors, evaluates, and reports on GAML program controls, design, and execution; and reports on the overall adequacy and effectiveness of the GAML Programs, including program design and operation. In addition, the Compliance and GAML departments have developed methodologies and processes to measure and aggregate legal and regulatory risks on an ongoing basis as a critical baseline to assess whether the Bank’s internal controls are effective in adequately mitigating such risks and determine whether individual or aggregate business activities are conducted within the Bank’s risk appetite. The Legal department acts as an independent provider of legal services and advice, and protects the Bank from unacceptable legal risk. The Legal department has also developed methodologies for measuring litigation risk for adherence to the Bank’s risk appetite. Processes employed by the Legal, Compliance, and GAML departments (including policies and frameworks, training and education, and the Code of Conduct and Ethics) support the responsibility of each business to adhere to LRCC requirements. Finally, the Bank’s Regulatory Risk and Government Affairs groups also create and facilitate communication with elected officials and regulators, monitor legislation and regulations, support business relationships with governments, coordinate regulatory examinations and regulatory findings remediation, facilitate regulatory approvals of new products, and advance the public policy objectives of the Bank. 102 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS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, including climate change, 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 environmental performance or environmental events, such as changing climate patterns that may impact the Bank’s 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 and Chief Marketing Officer holds senior executive accountability for environmental management. The Executive Vice President is supported by the Vice President of Global Corporate Citizenship who provides operational oversight, and the Head of Environment who has management responsibility and leads the Corporate Environmental Affairs team. The Corporate Environmental Affairs team is responsible for developing environmental strategy, setting environmental performance standards and targets, and reporting on performance. There is also an enterprise-wide Corporate Citizenship Committee (CCC) composed of senior executives from the Bank’s main business segments and corporate functions. The CCC is responsible for approving environmental strategy and performance standards, and communicating these throughout the business. The Bank’s business segments are responsible for implementing the environmental strategy and managing associated risks within their units. HOW TD MANAGES ENVIRONMENTAL RISK The Bank manages environmental risks within the Environmental Management System (EMS) which consist of two components: an Environmental Policy, 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 System, it has identified a number of priority areas and has made voluntary commitments 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. The Bank applies its Environmental and Social Credit Risk Management Procedures to credit and lending in the wholesale and commercial businesses. These procedures include assessment of TD’s clients’ policies, procedures, and performance on material environmental and related social issues, such as air, land, and water risk, climate risk, biodiversity, stakeholder engagement, and free prior and informed consent (FPIC) of Indigenous peoples. Within Wholesale and Commercial Banking, sector-specific 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. The Bank reports on climate-related risk in its Corporate Responsibility Report (CRR). In the 2017 CRR, the Bank provided disclosure on its alignment with the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosure (TCFD) which seek to provide a more consistent approach in assessing and reporting climate- related risks and opportunities. The Bank is a member of the United Nations Environment Programme Finance Initiative (UNEP-FI) and is participating in three TCFD pilot studies led by UNEP-FI that seek to develop harmonized industry-wide approaches for climate scenario analysis in bank lending, investments, and insurance portfolios. TDAM is a signatory to the United Nations Principles for Responsible Investment (UNPRI). Under the UNPRI, investors commit to incorporate environmental, social and governance (ESG) issues into investment analysis and decision-making. TDAM applies its Sustainable Investing Policy across its operations. The Policy provides a high level overview of how TDAM fulfills its commitment to the six guiding principles set out by the UNPRI. In 2015, TD Insurance became a signatory to the United Nations Environment Program Finance Initiative Principles for Sustainable Insurance 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 environmental and community organizations, industry associations, and responsible investment organizations. Additional information on TD’s environmental policy, management and performance is included in the Corporate Responsibility Report, which is available on the Bank’s website. TD Ameritrade HOW RISK IS MANAGED AT TD AMERITRADE TD Ameritrade’s management is primarily responsible for managing risk at TD Ameritrade under the oversight of TD Ameritrade’s Board, particularly through the latter’s Risk and Audit Committees. TD monitors the risk management process at TD Ameritrade through management governance, protocols and interaction guidelines 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, protocols and guidelines between the Bank and TD Ameritrade are designed to coordinate necessary intercompany information flow. The Bank has designated the Group Head and Chief Financial Officer to have responsibility for the TD Ameritrade investment. The Group President and Chief Executive Officer and the Group Head and Chief Financial Officer have regular meetings with TD Ameritrade’s Chief Executive Officer and Chief Financial Officer. In addition to regular communication at the Chief Executive Officer and Chief Financial 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 evaluates risk factors, vendor matters, and business issues as part of TD’s oversight of its investment in 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. 103 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSISAs required pursuant to the Federal Reserve Board’s “enhanced prudential standards” under Regulation YY, TD’s investment in TD Ameritrade is held by TDGUS, the IHC. The activities and interactions described above are inclusive of those that fulfill TDGUS’ risk management responsibilities under Regulation YY. 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 currently include the Bank’s Group President and Chief Executive Officer and four independent directors of TD or TD’s U.S. subsidiaries. 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 exceptions. Currently, the directors the Bank designates serve as members on a number of TD Ameritrade Board committees, including chairing the Audit Committee and the Human Resources and Compensation Committee, as well as serving on the Risk Committee and Corporate Governance Committee. ACCOUNTING STANDARDS AND POLICIES Critical Accounting Policies and Estimates The Bank’s accounting policies and estimates 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 2018 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 and changes to accounting standards and policies could have a materially adverse 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, determining estimates, and adopting new accounting standards 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 accounting for impairments of financial assets, the determination of fair value of financial instruments, accounting for derecognition, the valuation of goodwill and other intangibles, accounting for employee benefits, accounting for income taxes, accounting for provisions, accounting for insurance, and the consolidation of structured entities. ACCOUNTING POLICIES AND ESTIMATES The Bank’s 2018 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 2018 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 and changes to accounting standards and policies could have a materially adverse 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, determining estimates, and adopting new accounting standards are well-controlled and occur in an appropriate and systematic manner. CLASSIFICATION AND MEASUREMENT OF FINANCIAL ASSETS Business Model Assessment The Bank determines its business models based on the objective under which its portfolios of financial assets are managed. Refer to Note 2 for details on the Bank’s business models. In determining its business models, the Bank considers the following: • Management’s intent and strategic objectives and the operation of the stated policies in practice; • The primary risks that affect the performance of the business model and how these risks are managed; • How the performance of the portfolio is evaluated and reported to management; and • The frequency and significance of financial asset sales in prior periods, the reasons for such sales and the expected future sales activities. Sales in themselves do not determine the business model and are not considered in isolation. Instead, sales provide evidence about how cash flows are realized. A held-to-collect business model will be reassessed by the Bank to determine whether any sales are consistent with an objective of collecting contractual cash flows if the sales are more than insignificant in value or infrequent. Solely Payments of Principal and Interest Test In assessing whether contractual cash flows are SPPI, the Bank considers the contractual terms of the instrument. This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that they would not be consistent with a basic lending arrangement. In making the assessment, the Bank considers the primary terms as follows and assess if the contractual cash flows of the instruments continue to meet the SPPI test: • Performance-linked features; • Terms that limit the Bank’s claim to cash flows from specified assets (non-recourse terms); • Prepayment and extension terms; • Leverage features; and • Features that modify elements of the time value of money. 104 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSISIMPAIRMENT OF FINANCIAL ASSETS Significant Increase in Credit Risk For retail exposures, criteria for assessing significant increase in credit risk are defined at the appropriate product or portfolio level and vary based on the exposure’s credit risk at origination. The criteria include relative changes in PD, absolute PD backstop, and delinquency backstop when contractual payments are more than 30 days past due. Credit risk has increased significantly since initial recognition when one of the criteria is met. judgment to recommend probability weights to each forecast on a quarterly basis. The proposed macroeconomic forecasts and probability weightings are subject to robust management review and challenge process by a cross-functional committee that includes representation from TD Economics, Risk, Finance, and Business. ECLs calculated under each of the three forecasts are applied against the respective probability weightings to determine the probability-weighted ECLs. Refer to Note 8 of the Consolidated Financial Statements for further details on the macroeconomic variables and ECL sensitivity. For non-retail exposures, BRR is determined on an individual borrower basis using industry and sector-specific credit risk models that are based on historical data. Current and forward-looking information that is specific to the borrower, industry, and sector is considered based on expert credit judgment. Criteria for assessing significant increase in credit risk are defined at the appropriate segmentation level and vary based on the BRR of the exposure at origination. Criteria include relative changes in BRR, absolute BRR backstop, and delinquency backstop when contractual payments are more than 30 days past due. Credit risk has increased significantly since initial recognition when one of the criteria is met. Measurement of Expected Credit Loss For retail exposures, ECLs are calculated as the product of PD, loss given default (LGD), and exposure at default (EAD) at each time step over the remaining expected life of the financial asset and discounted to the reporting date at the effective interest rate. PD estimates represent the point-in-time PD, updated quarterly based on the Bank’s historical experience, current conditions, and relevant forward-looking expectations over the expected life of the exposure to determine the lifetime PD curve. LGD estimates are determined based on historical charge-off events and recovery payments, current information about attributes specific to the borrower, and direct costs. Expected cash flows from collateral, guarantees, and other credit enhancements are incorporated in LGD if integral to the contractual terms. Relevant macroeconomic variables are incorporated in determining expected LGD. EAD represents the expected balance at default across the remaining expected life of the exposure. EAD incorporates forward- looking expectations about repayments of drawn balances and expectations about future draws where applicable. For non-retail exposures, ECLs are calculated based on the present value of cash shortfalls determined as the difference between contractual cash flows and expected cash flows over the remaining expected life of the financial instrument. Lifetime PD is determined by mapping the exposure’s BRR to point-in-time PD over the expected life. LGD estimates are determined by mapping the exposure’s facility risk rating (FRR) to expected LGD which takes into account facility-specific characteristics such as collateral, seniority ranking of debt, and loan structure. Relevant macroeconomic variables are incorporated in determining expected PD and LGD. Expected cash flows are determined by applying the expected LGD to the contractual cash flows to calculate cash shortfalls over the expected life of the exposure. Forward-Looking Information In calculating the ECL, the Bank employs internally developed models that utilize parameters for PD, LGD, and EAD. Forward-looking macroeconomic factors including at the regional level are incorporated in the risk parameters as relevant. Additional risk factors that are industry or segment specific are also incorporated, where relevant. Three forward-looking macroeconomic forecasts are generated by TD Economics as part of the ECL process: A base forecast, an upside forecast, and a downside forecast. The base forecast is updated quarterly. Upside and downside forecasts are generated quarterly using realistically possible outcomes that are statistically derived relative to the base forecast based on historical distribution. TD Economics will apply Expert Credit Judgment ECLs are recognized on initial recognition of the financial assets. Allowance for credit losses represents management’s best estimate of risk of default and ECLs on the financial assets, including any off-balance sheet exposures, at the balance sheet date. Management exercises expert credit judgment in assessing if an exposure has experienced significant increase in credit risk since initial recognition and in determining the amount of ECLs at each reporting date by considering reasonable and supportable information that is not already included in the quantitative models. Management’s judgment is used to determine the point within the range that is the best estimate for the qualitative component contributing to ECLs, based on an assessment of business and economic conditions, historical loss experience, loan portfolio composition, and other relevant indicators and forward-looking information 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 allowance for credit losses. FAIR VALUE MEASUREMENTS 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 transactions 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 judgment. 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. 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. For example, the future decommissioning of Interbank Offered Rates (IBOR) may also have an impact on the fair value of products that reference or use valuation models with IBOR inputs. 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 2018 Consolidated Financial Statements. 105 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS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 accumulated 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. Differences between the actual cash flows and the Bank’s estimate of future cash flows are recognized in trading income. These assumptions are subject to periodic review and may change due to significant changes in the economic environment. GOODWILL AND OTHER INTANGIBLES The recoverable amount of the Bank’s cash-generating units (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 recoverable amount of CGUs, and the use of different assumptions and estimates in the calculations could influence the determination of the existence of impairment and the valuation of goodwill. Management believes that the assumptions and estimates used are reasonable and supportable. Where possible, fair values generated internally are compared to relevant market information. The carrying amounts of the Bank’s CGUs are determined by management using risk based capital models to adjust net assets and liabilities by CGU. These models consider various factors including market risk, credit risk, and operational risk, including investment capital (comprised of goodwill and other intangibles). Any 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 value liabilities is determined by reference to market yields on high quality corporate bonds with terms matching the plans’ specific cash flows. 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 maintains 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 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 provisions 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 information that may impact the assessment of amounts to be incurred. Changes in these assessments may lead to changes in the amount recorded for provisions. 106 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS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 IMPAIRMENT OF FINANCIAL ASSETS PRIOR TO NOVEMBER 1, 2017 UNDER IAS 39 The following is applicable to periods prior to November 1, 2017 for financial instruments accounted for under IAS 39. liabilities is estimated using a range of standard actuarial claims projection techniques in accordance with Canadian accepted actuarial practices. 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. Critical assumptions used in the measurement of life and health insurance contract liabilities are determined by the appointed actuary. Further information on insurance risk assumptions is provided in Note 22. CONSOLIDATION OF STRUCTURED ENTITIES Management judgment is required when assessing whether the Bank should consolidate an entity. 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 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 the entity and absorbs significant variable returns from the entity, it then determines if it is acting as principal 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. Available-for-Sale Securities Impairment losses were recognized on available-for-sale securities if there was objective evidence of impairment as a result of one or more events that occurred after initial recognition and the loss event(s) resulted in a decrease in the estimated cash flows of the instrument. The Bank individually reviewed 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 was considered objective evidence of impairment. For available-for-sale debt securities, a deterioration of credit quality was considered objective evidence of impairment. Other factors considered in the impairment assessment included 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 were recognized on held-to-maturity securities if there was objective evidence of impairment as a result of one or more events that occurred after initial recognition and the loss event(s) resulted in a decrease in the estimated cash flows of the instrument. The Bank reviewed these securities at least quarterly for impairment at the counterparty-specific level. If there was no objective evidence of impairment at the counterparty-specific level then the security was grouped with other held-to-maturity securities with similar credit risk characteristics and collectively assessed for impairment, which considered losses incurred but not identified. A deterioration of credit quality was considered objective evidence of impairment. Other factors considered in the impairment assessment included 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, was considered impaired when there was objective evidence that there had been a deterioration of credit quality subsequent to the initial recognition of the loan to the extent the Bank no longer had reasonable assurance as to the timely collection of the full amount of principal and interest. The Bank assessed loans for objective evidence of impairment individually for loans that were individually significant, and collectively for loans that were not individually significant. The allowance for credit losses represented management’s best estimate of impairment incurred in the lending portfolios, including any off-balance sheet exposures, at the balance sheet date. Management exercised judgment as to the timing of designating a loan as impaired, the amount of the allowance required, and the amount that would be recovered once the borrower defaulted. Changes in the amount that management expected to recover would have a direct impact on the provision for credit losses and may have resulted in a change in the allowance for credit losses. If there was no objective evidence of impairment for an individual loan, whether significant or not, the loan was 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 employed internally developed models that utilized parameters for PD, LGD, and EAD. Management’s judgment was used to determine the point within the range that was the best estimate of losses, based on an assessment of business and economic conditions, historical loss experience, loan portfolio composition, and other relevant indicators that were not fully incorporated into the model calculation. Changes in these assumptions would have a direct impact on the provision for credit losses and may have resulted in a change in the incurred but not identified allowance for credit losses. 107 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSISACCOUNTING STANDARDS AND POLICIES Current and Future Changes in Accounting Policies CURRENT CHANGES IN ACCOUNTING POLICIES The following new standard has been adopted by the Bank on November 1, 2017. IFRS 9 FINANCIAL INSTRUMENTS On November 1, 2017, the Bank adopted IFRS 9, Financial Instruments (IFRS 9), which replaces the guidance in IAS 39, Financial Instruments: Recognition and Measurement (IAS 39). IFRS 9 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. The Bank has made the decision to continue applying the IAS 39 hedge accounting requirements at this time and will comply with the revised annual hedge accounting disclosures as required by the related amendments to IFRS 7, Financial Instruments: Disclosures (IFRS 7). IFRS 9 is effective for annual periods beginning on or after January 1, 2018. In January 2015, OSFI issued the final version of the Advisory titled “Early adoption of IFRS 9 Financial Instruments for Domestic Systemically Important Banks” which mandated that all D-SIBs, including the Bank, were required to early adopt IFRS 9 for the annual period beginning on November 1, 2017. As such, on November 1, 2017, the Bank adopted IFRS 9 retrospectively. 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. However, the Bank made the decision not to restate comparative period financial information and has recognized any measurement differences between the previous carrying amounts and the new carrying amounts on November 1, 2017, through an adjustment to opening retained earnings or accumulated other comprehensive income (AOCI), as applicable. Amendments were also made to IFRS 7 introducing expanded qualitative and quantitative disclosures related to IFRS 9, which the Bank has also adopted for the annual period beginning November 1, 2017. Refer to Notes 2, 3, and 4 of the 2018 Consolidated Financial Statements for further details. FUTURE CHANGES IN ACCOUNTING POLICIES The following standards have been issued, but are not yet effective on the date of issuance of the Bank’s Consolidated Financial Statements. The Bank is currently assessing the impact of the application of these standards on the Consolidated Financial Statements and will adopt these standards when they become effective. Revenue from Contracts with Customers In May 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers (IFRS 15), which establishes the principles for recognizing revenue and cash flows arising from contracts with customers and prescribes the application of a five-step recognition and measurement model. The standard excludes from its scope revenue arising from items such as financial instruments, insurance contracts, and leases. 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. In April 2016, the IASB issued amendments to IFRS 15, which provided additional guidance on the identification of performance obligations, on assessing principal versus agent considerations and on licensing revenue. The amendments also provided additional transitional relief upon initial adoption of IFRS 15 and have the same effective date as the IFRS 15 standard. The Bank is required to adopt the standard for the annual period beginning on November 1, 2018. The standard is to be applied on a modified retrospective basis, recognizing the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings without restating comparative period financial information. As at October 31, 2018, the Bank’s current estimate of the adoption impact of IFRS 15, subject to refinement, is an overall reduction to Shareholder’s Equity of approximately $41 million related to certain expenses not eligible for deferral under IFRS 15. The presentation of certain revenue and expense items will also be reclassified prospectively. These presentation changes are not significant and do not have an impact on net income. Leases In January 2016, the IASB issued IFRS 16, Leases (IFRS 16), which will replace IAS 17, Leases (IAS 17), introducing a single lessee accounting model for all leases by eliminating the distinction between operating and financing leases. IFRS 16 requires lessees to recognize right-of-use assets and lease liabilities for most leases on the balance sheet. Lessees will also recognize depreciation expense on the right-of-use asset, interest expense on the lease liability, and a shift in the timing of expense recognition in the statement of income. Short-term leases, which are defined as those that have a lease term of twelve months or less; and leases of low-value assets are exempt. Lessor accounting remains substantially unchanged. IFRS 16 is effective for annual periods beginning on or after January 1, 2019, which will be November 1, 2019 for the Bank, and is to be applied retrospectively. The Bank is continuing to assess the impact of the new standard on its portfolio of leases, including the impact upon its existing systems and internal controls. Share-based Payment In June 2016, the IASB published amendments to IFRS 2, Share-based Payment (IFRS 2), which provide additional guidance on the classification and measurement of share-based payment transactions. The amendments clarify the accounting for cash-settled share-based payment transactions that include a performance condition, the classification of share-based payment transactions with net settlement features for withholding tax obligations, and the accounting for modifications of share-based payment transactions from cash-settled to equity-settled. The amendments to IFRS 2 are effective for annual periods beginning on or after January 1, 2018, which is November 1, 2018 for the Bank. These amendments will be applied prospectively and will not have a significant impact on the Bank. 108 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSISInsurance Contracts In May 2017, the IASB issued IFRS 17, Insurance Contracts (IFRS 17), which replaces the guidance in IFRS 4, Insurance Contracts and establishes a new model for recognizing insurance policy obligations, premium revenue, and claims-related expenses. IFRS 17 is currently effective for the Bank’s annual reporting period beginning November 1, 2021; however, based on recent IASB meetings, an upcoming amendment to IFRS 17 and a deferral of the transition date by one year is anticipated. Any change to the Bank’s transition date is subject to updates of OSFI’s related Advisory. The Bank is currently assessing the impact of adopting this standard. Conceptual Framework for Financial Reporting In March 2018, the IASB issued the revised Conceptual Framework for Financial Reporting (Revised Conceptual Framework), which provides a set of concepts to assist the IASB in developing standards and to help preparers consistently apply accounting policies where specific accounting standards do not exist. The framework is not an accounting standard and does not override the requirements that exist in other IFRS standards. The Revised Conceptual Framework describes that financial information must be relevant and faithfully represented to be useful, provides revised definitions and recognition criteria for assets and liabilities, and confirms that different measurement bases are useful and permitted. The Revised Conceptual Framework is effective for annual periods beginning on or after January 1, 2020, which will be November 1, 2020 for the Bank, with early adoption permitted. The Bank is currently assessing the impact of adopting the revised framework. ACCOUNTING STANDARDS AND POLICIES Controls and Procedures DISCLOSURE CONTROLS AND PROCEDURES An evaluation was performed under the supervision and with the participation of the Bank’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Bank’s disclosure controls and procedures, as defined in the rules of the SEC and Canadian Securities Administrators, as of October 31, 2018. Based on that evaluation, the Bank’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Bank’s disclosure controls and procedures were effective as of October 31, 2018. The effectiveness 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, 2018. 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, 2018. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING During the year and quarter ended October 31, 2018, 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. The Bank adopted IFRS 9 effective November 1, 2017 and has updated and modified certain internal controls over financial reporting as a result of the new accounting standard. Refer to Notes 2, 3, and 4 of the 2018 Consolidated Financial Statements for further information regarding the Bank’s changes to accounting policies, procedures, and estimates. MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The Bank’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the Bank. The Bank’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records, that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Bank; (2) provide reasonable 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 accordance 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, 2018, the Bank’s internal control over financial reporting was effective based on the applicable criteria. 109 TD BANK GROUP ANNUAL REPORT 2018 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 0 INVESTMENT PORTFOLIO – Securities Maturity Schedule 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 2016 2018 2017 Securities at fair value through other comprehensive income (available-for-sale securities under IAS 39) 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 securities at fair value through other comprehensive income (available-for-sale securities under IAS 39) Fair value Amortized cost Yield $ 3,504 $ 5,614 $ 2,875 $ 5,596 2,869 2.07% 2.19% 3,500 2.03% 290 $ 291 2.40% $ 448 484 2.69% – $ 12,731 $ 16,225 $ 14,717 16,200 14,671 – 12,740 1.91% –% 2.12% 1.79% 676 676 3.00% 1,561 1,553 2,376 2,357 4,691 4,653 2.50% 2.90% 3.45% 203 204 2.97% – 9,507 – 9,443 –% 3.12% 7,922 7,859 2.71% 7,851 7,871 2.73% 2,290 13,188 2,287 13,115 8,890 8,840 2,692 2,656 0.96% 1.46% 1.85% 1.74% – – –% – 27,060 – 26,898 –% 1.58% 27,258 23,892 27,087 23,929 1.58% 1.57% 1,116 1,116 1.82% 4,089 4,022 1,748 1,734 1,613 1,638 10,140 10,449 2.41% 1.95% 2.43% 2.60% – 18,706 – 18,959 –% 2.44% 21,022 10,581 20,995 10,448 2.17% 1.78% 6,991 6,987 0.63% 6,138 6,107 6,643 6,617 1.76% 2.22% 324 323 2.50% 454 454 2.30% 2,696 2,664 3,483 3,457 1.53% 1.70% – – –% – – –% – – –% – 20,096 – 20,034 –% 1.53% 21,122 15,509 21,067 15,574 1.48% 1.35% – 6,633 – 6,575 –% 1.67% 8,812 8,757 1.72% 4,949 4,916 1.72% – – –% – – –% 3,740 3,739 9,213 9,183 2,981 2,966 6,035 6,013 1.84% 2.12% 2.44% 3.07% – 21,969 – 21,901 –% 2.37% 29,981 18,593 29,879 18,665 1.85% 1.49% – – –% – – –% – – –% 472 471 3.06% – – –% 472 471 3.06% 1,715 1,706 2.51% 625 624 1.63% 1,307 1,307 2.20% 3,522 3,518 1,858 1,879 1,796 1,800 2.88% 3.57% 2.39% 24 30 1.94% – 8,507 – 8,534 –% 2.82% 9,790 9,753 2.48% 8,286 8,229 2.80% – – –% – – –% – – –% – – –% – – –% – – –% – – –% – – –% – – –% 1,804 1,804 1,725 1,725 3.43% 3.43% 1,922 1,821 2.88% 2,054 1,934 1.94% – – –% 370 376 4.17% 370 376 4.17% 365 313 4.44% 186 168 4.37% n/a n/a n/a% n/a n/a n/a% n/a n/a n/a% n/a n/a n/a% n/a n/a n/a% n/a n/a n/a% n/a n/a n/a% 277 250 5.51% 328 301 6.01% $ 16,338 $ 40,548 $ 37,086 $ 14,387 $ 17,322 17,651 36,936 16,327 40,314 14,327 $ 2,174 $ 127,855 $ 146,411 $ 107,571 107,330 127,656 145,687 2,101 1.33% 1.89% 2.16% 2.63% 2.77% 3.56% 2.13% 1.88% 1.78% 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, 2018, includes securities issued by Government of Japan of $9.5 billion (as at October 31, 2017, includes securities issued by Government of Japan of $8.9 billion), where the book value was greater than 10% of the shareholders’ equity. 3 Represents contractual maturities. Actual maturities may differ due to prepayment privileges in the applicable contract. 110 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 6 0 INVESTMENT PORTFOLIO – Securities Maturity Schedule (continued) 1,2,3 (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 maturities4 Total Total October 31 October 31 October 31 2018 2017 2016 0.30% 10 10 4.65% $ 1,363 $ 1,364 Debt securities at amortized cost (held-to-maturity securities under IAS 39) Government and government-related securities Canadian government debt Federal Fair value Amortized cost Yield Provinces 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 Asset-backed securities Fair value Amortized cost Yield Non-agency CMO Fair value 332 332 1.91% 1,597 1,606 8,985 8,960 – – –% 1.96% 0.47% 3,788 3,787 49 50 Amortized cost Yield Other issuers Fair value Amortized cost Yield Total debt securities at amortized cost (held-to-maturity securities under IAS 39) Fair value Amortized cost Yield 399 $ 1,136 $ 396 1.80% 2.28% 1,136 – – –% 2.22% 176 176 38 39 0.03% 0.03% 328 $ 1,688 317 1,709 2.18% 3.10% 597 596 3.29% 24 25 0.03% – – –% – – –% $ – $ 4,914 $ 661 $ 661 1.87% – 4,922 –% 1.97% – – –% – – –% 783 782 3.07% 111 114 0.03% 812 802 1.84% n/a n/a n/a% – – –% n/a n/a n/a% – – –% 4,704 4,787 5,912 6,172 10,807 11,028 5,352 5,441 2.19% 2.09% 2.78% 2.66% – 28,372 – 29,034 –% 2.47% 22,417 22,531 22,119 21,845 2.15% 2.03% 7,571 7,529 7,531 7,519 1,681 1,675 0.52% 1.22% 0.66% – – –% – 25,768 – 25,683 –% 0.72% 22,629 22,431 28,923 28,643 0.43% 0.29% 5,738 5,738 5,105 5,096 8,765 8,756 2.53% 2.79% 3.13% 3.05% – 23,728 – 23,709 –% 2.91% n/a n/a n/a% n/a n/a n/a% – – –% – – –% – – –% 15,525 15,867 – – –% 2.85% – 15,525 – 15,867 –% 2.85% 1,847 1,849 2,397 2,391 2,403 2,403 1.79% 1.06% 0.95% 414 414 0.33% 3 3 5.23% – – –% 7,064 7,060 1.17% n/a n/a n/a% n/a n/a n/a% n/a n/a n/a% n/a n/a n/a% $ 14,134 $ 18,908 $ 22,934 $ 18,956 $ 31,333 31,776 23,183 14,121 19,151 18,940 0.83% 1.44% 1.87% 2.63% 2.89% $ – $ 106,265 $ 71,426 $ 84,987 84,395 71,363 – 107,171 –% 2.09% 1.59% 1.35% 1 Certain comparative amounts have been reclassified to conform with the presentation 3 As at October 31, 2018, includes securities issued by Government of Japan of adopted in the current period. 2 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. $9.5 billion (as at October 31, 2017, includes securities issued by Government of Japan of $8.9 billion), where the book value was greater than 10% of the shareholders’ equity. 4 Represents contractual maturities. Actual maturities may differ due to prepayment privileges in the applicable contract. 111 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 6 1 LOAN PORTFOLIO – Maturity Schedule (millions of Canadian dollars) Remaining term-to-maturity Under 1 year 1 to 5 years Over 5 years Total As at Total October 31 October 31 October 31 October 31 October 31 2014 2018 2015 2016 2017 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 $ 32,310 $ 156,837 $ 4,682 $ 193,829 $ 190,325 $ 189,299 $ 185,009 $ 175,125 46,417 39,709 33 86,159 74,937 65,068 61,317 59,568 583 12,188 11,445 24,216 22,282 20,577 19,038 16,475 800 18,574 17,355 16,456 16,075 16,116 16,740 18,046 – 18,046 18,028 18,226 17,941 17,927 114,096 209,768 16,960 340,824 322,927 309,626 299,380 285,211 1,034 – 6,539 8,148 8,016 3,418 14,687 11,434 3,809 18,364 17,981 16,001 14,862 14,604 2,069 13,635 12,832 12,780 11,330 9,768 5,878 31,999 30,813 28,781 26,192 24,372 9,163 111,145 97,033 91,054 84,155 71,814 71,060 30,922 185,156 240,690 26,123 451,969 419,960 400,680 383,535 357,025 668 73 30,387 31,128 31,460 27,662 26,922 23,335 80 10,453 1,801 12,334 12,434 13,208 13,334 11,665 303 17,762 11,805 29,870 29,182 28,370 24,862 18,782 615 314 16,964 7,637 28,702 18,135 44,333 91,170 88,894 83,665 78,085 62,034 693 – 16,964 14,972 13,680 12,274 220 – 745 846 340 874 4,294 3,215 3,219 1,616 2,320 11,050 9,056 22,426 22,163 21,675 18,317 14,037 3,936 14,269 12,271 30,476 29,479 28,527 24,008 18,331 6,852 5,691 7,316 8,050 21,812 54,449 47,829 124,090 119,350 116,713 97,217 69,417 50,514 72,584 92,162 215,260 208,244 200,378 175,302 131,451 14 1,523 1,537 – 685 685 – 50 50 14 2,258 2,272 14 1,579 1,593 16 1,513 1,529 5 1,978 1,983 9 2,124 2,133 n/a 320 320 2,695 1,713 4,408 $ 237,527 $ 313,959 $ 118,468 $ 669,954 $ 633,671 $ 605,235 $ 564,421 $ 495,017 1,674 974 2,648 2,187 1,414 3,601 3,209 665 3,874 n/a – – n/a 453 453 n/a 133 133 T A B L E 6 2 LOAN PORTFOLIO – Rate Sensitivity (millions of Canadian dollars) As at October 31, 2018 October 31, 2017 October 31, 2016 October 31, 2015 October 31, 2014 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 $ 218,098 $ 84,450 $ 197,483 $ 84,080 $ 212,257 $ 82,507 $ 176,316 $ 66,949 $ 155,614 $ 59,555 24,991 $ 313,959 $ 118,468 $ 276,930 $ 120,173 $ 297,396 $ 116,767 $ 248,979 $ 99,157 $ 229,286 $ 84,546 95,861 34,018 79,447 36,093 85,139 34,260 32,208 73,672 72,663 Fixed rate Variable rate Total 112 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS The changes 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 3 ALLOWANCE FOR LOAN 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. 2018 $ 3,475 2,472 2017 $ 3,873 2,216 2016 $ 3,434 2,330 2015 $ 3,028 1,683 2014 $ 2,855 1,557 15 22 18 23 21 8 251 216 557 1,047 2 1 3 75 1,122 11 337 216 595 1,181 1 2 3 75 1,256 16 19 22 387 192 958 1,575 1 10 11 79 1,654 – – – 39 315 152 777 1,302 3 6 9 91 1,393 – – – 11 334 221 623 1,207 3 2 5 107 1,314 22 38 232 121 530 943 3 11 14 76 1,019 – – – 13 224 218 638 1,116 4 3 7 74 1,190 16 47 206 101 454 824 5 22 27 124 948 – – – n/a 2 2 2,778 9 1 10 2,659 14 4 18 2,351 13 6 19 2,157 1 1 58 37 87 184 2 1 90 41 98 232 1 – 91 52 118 262 – – – 17 $ 201 1 – 1 20 $ 252 1 3 4 27 $ 289 1 2 78 58 124 263 1 1 2 33 $ 296 13 207 234 582 1,057 1 3 4 109 1,166 17 43 232 79 288 659 12 18 30 117 776 – – – 5 20 25 1,967 5 5 138 60 109 317 1 2 3 29 $ 346 113 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 6 3 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 loan losses, including off-balance sheet positions Less: Allowance for off-balance sheet positions3 Total allowance for loan losses, at end of period Ratio of net write-offs in the period to average loans outstanding 2018 2017 2016 2015 2014 $ 2 $ 4 $ 9 $ 11 $ 10 4 116 35 173 330 2 7 9 42 372 – – – n/a 16 16 589 (2,189) (46) 49 3,761 212 $ 3,549 11 100 24 154 293 2 8 10 58 351 – – – – 22 22 625 (2,034) (83) (122) 3,850 67 $ 3,783 5 85 26 114 239 4 4 8 54 293 – – – – 20 20 602 (1,749) (2) 47 4,060 187 $ 3,873 5 83 23 113 235 9 9 18 50 285 – 1 1 – 19 19 601 (1,556) (3) 321 3,473 39 $ 3,434 0.34% 0.33% 0.30% 0.30% 5 12 20 60 107 14 15 29 73 180 – – – – 7 7 533 (1,434) – 112 3,090 62 $ 3,028 0.31% 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. 3 The allowance for loan losses for off-balance sheet positions is recorded in Other liabilities on the Consolidated Balance Sheet. T A B L E 6 4 AVERAGE DEPOSITS (millions of Canadian dollars, except as noted) October 31, 2018 October 31, 2017 Average balance Total interest expense Average rate paid Average balance Total interest expense Average rate paid Average balance For the years ended October 31, 2016 Total interest expense Average rate paid 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 $ 13,156 $ 57,030 222,394 223,295 515,875 – 1,094 567 4,215 5,876 10,037 2,859 317,218 52,461 382,575 – 16 3,233 958 4,207 155 1,025 – 37,435 38,615 – 1 – 405 406 –% $ 11,201 $ –% $ 3,674 $ 1.92 0.25 1.89 1.14 57,521 209,939 176,345 455,006 – 648 321 2,730 3,699 1.13 0.15 1.55 0.81 58,124 189,018 168,393 419,209 – 521 249 2,359 3,129 – 0.56 1.02 1.83 1.10 – 0.10 – 1.08 1.05 10,405 3,152 298,639 79,090 391,286 – 11 1,695 973 2,679 (7) 1,442 – 28,153 29,588 – 3 – 234 237 – 0.35 0.57 1.23 0.68 – 0.21 – 0.83 0.80 9,969 3,945 277,744 70,290 361,948 – 7 921 522 1,450 54 1,918 – 27,132 29,104 – 4 – 175 179 –% 0.90 0.13 1.40 0.75 – 0.18 0.33 0.74 0.40 – 0.21 – 0.64 0.62 Total average deposits $ 937,065 $ 10,489 1.12% $ 875,880 $ 6,615 0.76% $ 810,261 $ 4,758 0.59% 1 As at October 31, 2018, deposits by foreign depositors in TD’s Canadian bank offices amounted to $152 billion (October 31, 2017 – $100 billion, October 31, 2016 – $83 billion). Certain comparative amounts have been recast to conform with the presentation adopted in the current period. 114 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 6 5 DEPOSITS – Denominations of $100,000 or greater 1 (millions of Canadian dollars) Canada United States Other international Total Canada United States Other international Total Canada United States Other international Total 1 Deposits in Canada, U.S., and Other international include wholesale and retail deposits. T A B L E 6 6 SHORT-TERM BORROWINGS (millions of Canadian dollars, except as noted) Obligations related to securities sold under repurchase agreements Balance at year-end Average balance during the year Maximum month-end balance Weighted-average rate at October 31 Weighted-average rate during the year Within 3 months 3 months to 6 months 6 months to 12 months Over 12 months Remaining term-to-maturity As at Total $ 65,253 20,203 20,225 $ 105,681 $ 41,862 34,955 20,037 $ 96,854 $ 32,237 23,027 16,033 $ 71,297 $ 22,761 16,547 2,016 $ 41,324 $ 19,392 15,607 9,058 $ 44,057 $ 10,607 13,450 10,582 $ 34,639 $ 37,652 11,654 2,787 $ 52,093 $ 20,623 11,821 3,714 $ 36,158 $ 13,721 17,760 7,297 $ 38,778 October 31, 2018 $ 92,105 2,166 – $ 94,271 $ 217,771 50,570 25,028 $ 293,369 October 31, 2017 $ 79,649 1,390 – $ 81,039 $ 161,526 63,773 32,809 $ 258,108 October 31, 2016 $ 83,304 2,547 10 $ 85,861 $ 139,869 56,784 33,922 $ 230,575 October 31 2018 October 31 2017 As at October 31 2016 $ 93,389 95,286 98,539 1.63% 1.65 $ 88,591 76,136 88,986 0.87% 0.92 $ 48,973 65,511 70,415 0.38% 0.51 115 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 6 7 NET INTEREST INCOME ON AVERAGE EARNING BALANCES1,2,3 (millions of Canadian dollars, except as noted) 2018 2017 2016 Average balance Interest4 Average rate Average balance Interest4 Average rate Average balance Interest4 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 $ 5,204 $ 34,424 102 592 1.96% $ 1.72 5,629 $ 42,899 21 405 0.37% 0.94 $ 6,716 $ 38,658 16 187 0.24% 0.48 55,519 20,496 1,684 517 47,761 155,892 1,219 3,719 3.03 2.52 2.55 2.39 47,985 20,186 1,332 403 48,109 130,611 949 2,378 2.78 2.00 1.97 1.82 45,102 22,605 1,187 401 2.63 1.77 41,531 112,147 614 1,802 1.48 1.61 41,518 44,238 665 1,020 1.60 2.31 33,725 43,087 371 496 1.10 1.15 42,981 31,824 254 189 0.59 0.59 201,772 29,514 5,656 1,110 120,273 41,762 5,215 1,711 2.80 3.76 4.34 4.10 200,251 27,982 4,916 1,041 106,614 41,263 4,704 1,455 2.45 3.72 4.41 3.53 18,708 15,853 2,323 2,550 12.42 16.09 18,571 13,771 2,270 2,213 12.22 16.07 197,925 27,331 4,726 1,029 2.39 3.76 97,881 40,471 18,414 12,598 4,604 1,285 4.70 3.18 2,223 12.07 1,999 15.87 92,348 115,147 102,855 2,943 4,203 1,193 $ 1,143,284 $ 36,422 2,187 80,673 3.19 3,795 112,416 3.65 1.16 896 88,963 3.19% $ 1,062,735 $ 29,832 2.71 3.38 1.01 2.81% 71,869 105,929 77,001 1,929 3,348 767 $ 990,983 $ 26,560 2.68 3.16 1.00 2.68% $ 215,320 $ 1,228 531 238,005 0.57% $ 208,027 $ 0.22 221,560 983 281 0.47% 0.13 $ 193,525 $ 204,697 974 218 0.50% 0.11 11,612 7,214 135 135 248,013 84,575 7,946 4,513 3,541 337 46,981 57,384 27,805 1,091 1,274 586 1.16 1.87 1.82 4.19 4.24 2.32 2.22 2.11 10,686 9,460 71 115 199,236 108,078 9,045 2,645 2,283 391 0.66 1.22 1.33 2.11 4.32 10,528 6,503 191,284 101,620 8,769 55 47 0.52 0.72 2,100 1,185 395 1.10 1.17 4.50 34,719 56,587 29,761 540 696 472 1.56 1.23 1.59 45,098 47,654 32,027 412 346 452 0.91 0.73 1.41 5,706 34 68,074 132 4 676 $ 1,018,669 $ 14,183 92 5,306 2.31 4 34 11.76 0.99 412 48,787 1.39% $ 941,286 $ 8,985 1.73 11.76 0.84 0.95% 4,225 35 45,524 $ 891,489 $ 82 1.94 4 11.43 0.81 0.74% 367 6,637 $ 1,143,284 $ 22,239 1.95% $ 1,062,735 $ 20,847 1.96% $ 990,983 $ 19,923 2.01% 1 Certain comparative amounts have been restated to conform with the presentation 6 Includes average trading deposits with a fair value of $102 billion (2017 – adopted in the current period. $87 billion, 2016 – $77 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 IDA of $1.9 billion (2017 – $1.5 billion, 2016 – $1.2 billion). 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 $11 billion (2017 – $12 billion, 2016 – $11 billion). 8 Includes average securitization liabilities at fair value of $12 billion (2017 – $13 billion, 2016 – $12 billion) and average securitization liabilities at amortized cost of $16 billion (2017 –$17 billion, 2016 – $20 billion). 116 TD BANK GROUP ANNUAL REPORT 2018 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 6 8 ANALYSIS OF CHANGE IN NET INTEREST INCOME1,2,3 (millions of Canadian dollars) 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 2018 vs. 2017 2017 vs. 2016 Increase (decrease) due to changes in Increase (decrease) due to changes in Average volume Average rate Net change Average volume Average rate Net change $ (2) (80) $ 83 $ 267 81 187 $ (3) $ 21 8 197 $ 5 218 210 6 (7) 460 86 13 38 57 603 17 17 334 142 108 352 114 75 (43) 277 881 270 1,341 97 297 208 511 702 12 (92) 239 36 3 294 524 740 69 511 256 53 337 (55) 67 56 25 411 25 19 186 70 45 238 279 172 240 134 (13) (311) 145 28 28 145 2 335 576 117 307 190 12 100 170 47 214 316 92 182 $ 2,342 440 316 115 756 408 297 $ 4,248 $ 6,590 236 205 49 22 242 80 $ 1,668 $ 1,604 258 447 129 $ 3,272 $ 34 21 6 (27) $ 211 $ 245 250 229 $ 73 $ 18 (64) 45 $ 58 47 64 20 15 47 9 63 16 68 648 (496) (48) 1,220 1,754 (6) 1,868 1,258 (54) 191 9 (31) 7 – 195 $ 509 $ 1,833 360 569 145 551 578 114 33 – 69 40 – 264 $ 4,689 $ 5,198 $ (441) $ 1,392 1 21 88 75 12 (95) 65 (32) 457 1,023 (16) 545 1,098 (4) 223 285 52 128 350 20 21 – 33 (11) – 12 $ 280 $ 2,068 (464) $ 1,388 $ 10 – 45 $ 2,348 $ 924 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. 117 TD BANK GROUP ANNUAL REPORT 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS FINANCIAL RESULTS Consolidated Financial Statements PAGE Management’s Responsibility for Financial Information 119 Reports of Independent Registered Public Accounting Firm Consolidated Financial Statements Consolidated Balance Sheet Consolidated Statement of Income Consolidated Statement of Comprehensive Income Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows 120 122 123 124 125 126 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE TOPIC PAGE NOTE TOPIC 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Nature of Operations Summary of Significant Accounting Policies Significant Accounting Judgments, Estimates, and Assumptions Current and Future Changes in Accounting Policies Fair Value Measurements Offsetting Financial Assets and Financial Liabilities Securities Loans, Impaired Loans, and Allowance for Credit Losses Transfers of Financial Assets Structured Entities Derivatives Investment in Associates and Joint Ventures Significant Acquisitions and Disposals Goodwill and Other Intangibles Land, Buildings, Equipment, and Other Depreciable Assets Other Assets Deposits 127 127 139 142 146 157 159 162 169 171 174 182 183 184 186 186 186 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 Other Liabilities Subordinated Notes and Debentures Capital Trust Securities Equity Insurance Share-Based Compensation Employee Benefits Income Taxes Earnings Per Share Provisions, Contingent Liabilities, Commitments, Guarantees, Pledged Assets, and Collateral Related Party Transactions Segmented Information Interest Income and Expense Credit Risk Regulatory Capital Risk Management Information on Subsidiaries Significant and Subsequent Events, and Pending Acquisition PAGE 187 188 189 189 192 194 195 200 202 202 205 206 208 209 211 212 212 214 118 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS 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 reasonable 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, 2018, 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, management has concluded that as at October 31, 2018, the Bank’s internal control over financial reporting is effective. The Bank’s Board of Directors, acting through the Audit Committee which is composed entirely of independent directors, oversees management’s responsibilities for financial reporting. The Audit Committee reviews the Consolidated Financial Statements and recommends them to the Board for approval. Other responsibilities of the Audit Committee include monitoring the Bank’s system of internal control over the financial reporting process and making recommendations to the Board and shareholders regarding the appointment of the external auditor. The Bank’s Chief Auditor, who has full and free access to the Audit Committee, conducts an extensive program of audits. This program supports the system of internal control and is carried out by a professional staff of auditors. The Office of the Superintendent of Financial Institutions Canada, makes such examination and enquiry into the affairs of the Bank as deemed 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, 2018, 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. Bharat B. Masrani Group President and Chief Executive Officer Riaz Ahmed Group Head and Chief Financial Officer Toronto, Canada November 28, 2018 119 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Directors of The Toronto-Dominion Bank Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated financial statements of The Toronto-Dominion Bank (“TD”), which comprise the Consolidated Balance Sheet as at October 31, 2018 and 2017, 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, 2018, and the related notes, comprising a summary of significant accounting policies and other explanatory information (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of TD as at October 31, 2018 and October 31, 2017, and its consolidated financial performance and its consolidated cash flows for each of the years in the three-year period ended October 31, 2018, in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. Adoption of IFRS 9 As discussed in Note 2 to the consolidated financial statements, TD changed its method of accounting for the classification and measurement of financial instruments in 2018 due to the adoption of IFRS 9, Financial Instruments. Our opinion is not qualified with respect to this matter. Report on Internal Control over Financial Reporting We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), TD’s internal control over financial reporting as of October 31, 2018, based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 28, 2018, expressed an unqualified opinion on the effectiveness of TD’s internal control over financial reporting. Basis for Opinion 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 PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement, whether due to error or fraud. Those standards also require that we comply with ethical requirements, including independence. We are required to be independent with respect to TD in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada, the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We are a public accounting firm registered with the PCAOB. An audit includes performing procedures to assess the risks of material misstatements of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included obtaining and examining, on a test basis, audit evidence regarding the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to TD’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 evaluating the appropriateness of accounting policies and principles 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 reasonable basis for our audit opinion. We have served as TD’s sole auditor since 2006. Prior to 2006, we or our predecessor firm have served as joint auditor with various other firms since 1955. Ernst & Young LLP Chartered Professional Accountants Licensed Public Accountants Toronto, Canada November 28, 2018 120 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTSREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Directors of The Toronto-Dominion Bank Opinion on Internal Control over Financial Reporting We have audited The Toronto-Dominion Bank’s (“TD”) internal control over financial reporting as of October 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, TD maintained, in all material respects, effective internal control over financial reporting as of October 31, 2018, 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) (“PCAOB”), the Consolidated Balance Sheet of TD as at October 31, 2018 and 2017, 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, 2018, and the related notes, comprising a summary of significant accounting policies and other explanatory information and our report dated November 28, 2018, expressed an unqualified opinion thereon. Basis for Opinion TD’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 accompanying 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 TD’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to TD in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada, the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable 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 evaluating 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. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and 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 International Financial Reporting Standards as issued by the International Accounting Standards Board, 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. Ernst & Young LLP Chartered Professional Accountants Licensed Public Accountants Toronto, Canada November 28, 2018 121 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTSConsolidated Balance Sheet (As at and in millions of Canadian dollars) ASSETS Cash and due from banks Interest-bearing deposits with banks Trading loans, securities, and other (Notes 5, 7) Non-trading financial assets at fair value through profit or loss (Note 5) Derivatives (Notes 5, 11) Financial assets designated at fair value through profit or loss (Note 5) Financial assets at fair value through other comprehensive income (Notes 5, 7, 8) Available-for-sale securities (Notes 5, 7) Debt securities at amortized cost, net of allowance for credit losses (Note 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 25) 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) 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 (Note 22) Other liabilities (Note 18) Subordinated notes and debentures (Note 19) Total liabilities EQUITY Shareholders’ Equity Common shares (Note 21) Preferred shares (Note 21) Treasury shares – common (Note 21) Treasury shares – preferred (Note 21) Contributed surplus Retained earnings Accumulated other comprehensive income (loss) Non-controlling interests in subsidiaries (Note 21) Total equity Total liabilities and equity 1 Not applicable. The accompanying Notes are an integral part of these Consolidated Financial Statements. Certain comparative amounts have been reclassified to conform with the presentation adopted in the current period. 122 October 31 2018 October 31 2017 $ 4,735 30,720 35,455 127,897 4,015 56,996 3,618 130,600 n/a 323,126 107,171 n/a 127,379 225,191 172,079 35,018 217,654 n/a 649,942 (3,549) 646,393 $ 3,971 51,185 55,156 103,918 n/a 1 56,195 4,032 n/a 146,411 310,556 n/a 71,363 134,429 222,079 157,101 33,007 200,978 3,209 616,374 (3,783) 612,591 17,267 8,445 16,536 2,459 5,324 2,812 26,940 15,596 95,379 $ 1,334,903 17,297 7,784 16,156 2,618 5,313 2,497 29,971 13,264 94,900 $ 1,278,995 $ $ 114,704 48,270 12,618 175,592 477,644 16,712 357,083 851,439 17,269 39,478 93,389 14,683 28,385 6,698 19,190 219,092 8,740 1,254,863 79,940 51,214 12,757 143,911 468,155 25,887 338,782 832,824 17,297 35,482 88,591 16,076 32,851 6,775 20,470 217,542 9,528 1,203,805 21,221 5,000 (144) (7) 193 46,145 6,639 79,047 993 80,040 $ 1,334,903 20,931 4,750 (176) (7) 214 40,489 8,006 74,207 983 75,190 $ 1,278,995 Bharat B. Masrani Group President and Chief Executive Officer Alan N. MacGibbon Chair, Audit Committee TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS Consolidated Statement of Income (millions of Canadian dollars, except as noted) Interest income1 Loans Securities Interest Dividends Deposits with banks Interest expense (Note 30) 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) Income (loss) from non-trading financial instruments at fair value through profit or loss Income (loss) from financial instruments designated at fair value through profit or loss Service charges Card services Insurance revenue (Note 22) Other income (loss) Total revenue Provision for credit losses (Note 8) Insurance claims and related expenses (Note 22) Non-interest expenses Salaries and employee benefits (Note 24) Occupancy, including depreciation Equipment, including depreciation Amortization of other intangibles Marketing and business development Restructuring charges (recovery) Brokerage-related fees Professional and advisory services Other Income before income taxes and equity in net income of an investment in TD Ameritrade Provision for (recovery of) income taxes (Note 25) Equity in net income of an investment in TD Ameritrade (Note 12) Net income Preferred dividends Net income available to common shareholders and non-controlling interests in subsidiaries Attributable to: Common shareholders Non-controlling interests in subsidiaries Earnings per share (Canadian dollars) (Note 26) Basic Diluted Dividends per common share (Canadian dollars) For the years ended October 31 2018 2017 2016 $ 27,790 $ 23,663 $ 21,751 6,685 1,234 713 36,422 10,489 586 337 2,771 14,183 22,239 4,656 1,210 111 1,052 48 (170) 2,716 2,376 4,045 551 16,595 38,834 2,480 2,444 10,377 1,765 1,073 815 803 73 306 1,247 3,678 20,137 13,773 3,182 743 11,334 214 $ 11,120 4,595 1,128 446 29,832 6,615 472 391 1,507 8,985 20,847 4,459 1,130 128 303 n/a (254) 2,648 2,388 3,760 740 15,302 36,149 2,216 2,246 10,018 1,794 992 704 726 2 314 1,165 3,651 19,366 12,321 2,253 449 10,517 193 $ 10,324 $ 11,048 72 $ 10,203 121 $ 6.02 6.01 2.61 $ 5.51 5.50 2.35 3,672 912 225 26,560 4,758 452 395 1,032 6,637 19,923 4,143 1,048 54 395 n/a (20) 2,571 2,313 3,796 92 14,392 34,315 2,330 2,462 9,298 1,825 944 708 743 (18) 316 1,232 3,829 18,877 10,646 2,143 433 8,936 141 $ 8,795 $ 8,680 115 $ 4.68 4.67 2.16 1 Includes $30,639 million, for the year ended October 31, 2018, which has been calculated based on the effective interest rate method (EIRM). Refer to Note 30. The accompanying Notes are an integral part of these Consolidated Financial Statements. Certain comparative amounts have been reclassified to conform with the presentation adopted in the current period. 123 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS Consolidated Statement of Comprehensive Income1 (millions of Canadian dollars) Net income Other comprehensive income (loss), net of income taxes Items that will be subsequently reclassified to net income Net change in unrealized gains (losses) on financial assets at fair value through other comprehensive income (available-for-sale securities under IAS 392) Change in unrealized gains (losses) on available-for-sale securities Change in unrealized gains (losses) on debt securities at fair value through other comprehensive income Reclassification to earnings of net losses (gains) in respect of available-for-sale securities Reclassification to earnings of net losses (gains) in respect of debt securities at fair value through other comprehensive income Reclassification to earnings of changes in allowance for credit losses on debt securities at fair value through other comprehensive income Net change in unrealized foreign currency translation gains (losses) on Investments in foreign operations, net of hedging activities Unrealized gains (losses) on investments in foreign operations Reclassification to earnings of net losses (gains) on investment in foreign operations Net gains (losses) on hedges of investments in foreign operations Reclassification to earnings of net losses (gains) on hedges of investments in foreign operations Net change in gains (losses) on derivatives designated as cash flow hedges Change in gains (losses) on derivatives designated as cash flow hedges Reclassification to earnings of losses (gains) on cash flow hedges Items that will not be subsequently reclassified to net income Actuarial gains (losses) on employee benefit plans Change in net unrealized gains (losses) on equity securities designated at fair value through other comprehensive income Total other comprehensive income (loss), net of income taxes Total comprehensive income (loss), net of income taxes Attributable to: Common shareholders Preferred shareholders Non-controlling interests in subsidiaries 1 The amounts are net of income tax provisions (recoveries) presented in the following table. 2 IAS 39, Financial Instruments: Recognition and Measurement (IAS 39). Income Tax Provisions (Recoveries) in the Consolidated Statement of Comprehensive Income (millions of Canadian dollars) Change in unrealized gains (losses) on available-for-sale securities Change in unrealized gains (losses) on debt securities at fair value through other comprehensive income Less: Reclassification to earnings of net losses (gains) in respect of available-for-sale securities Less: Reclassification to earnings of net losses (gains) in respect of debt securities at fair value through other comprehensive income Less: Reclassification to earnings of changes in allowance for credit losses on debt securities at fair value through other comprehensive income Unrealized gains (losses) on investments in foreign operations Less: Reclassification to earnings of net losses (gains) on investment in foreign operations Net gains (losses) on hedges of investments in foreign operations Less: Reclassification to earnings of net losses (gains) on hedges of investments in foreign operations Change in gains (losses) on derivatives designated as cash flow hedges Less: Reclassification to earnings of losses (gains) on cash flow hedges Actuarial gains (losses) on employee benefit plans Change in net unrealized gains (losses) on equity securities designated at fair value through other comprehensive income Total income taxes The accompanying Notes are an integral part of these Consolidated Financial Statements. For the years ended October 31 2018 2017 $ 11,334 $ 10,517 2016 $ 8,936 n/a (261) n/a (22) (1) (284) 1,323 – (288) – 1,035 (1,624) (455) (2,079) 467 n/a (143) n/a n/a 324 (2,534) (17) 659 4 (1,888) (1,454) (810) (2,264) 622 325 274 n/a (56) n/a n/a 218 1,290 – 34 – 1,324 835 (752) 83 (882) 38 (668) $ 10,666 $ 10,380 214 72 n/a (3,503) $ 7,014 $ 6,700 193 121 n/a 743 $ 9,679 $ 9,423 141 115 2018 $ n/a For the years ended October 31 2017 $ 150 2016 $ 125 (139) n/a 13 – – – (104) – (473) 283 243 n/a (36) n/a n/a – – 237 (1) (789) 258 129 20 (749) $ n/a (494) $ $ n/a 32 n/a n/a – – 9 – 599 533 (340) n/a (172) 124 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS Consolidated Statement of Changes in Equity (millions of Canadian dollars) For the years ended October 31 2018 2017 2016 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 Issuance of stock options, net of options exercised (Note 23) Other Balance at end of year Retained earnings Balance at beginning of year Impact on adoption of IFRS 91 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 Realized gains (losses) on equity securities designated at fair value through other comprehensive income Balance at end of year Accumulated other comprehensive income (loss) Net unrealized gain (loss) on debt securities at fair value through other comprehensive income: Balance at beginning of year Impact on adoption of IFRS 9 Other comprehensive income (loss) Allowance for credit losses Balance at end of year Net unrealized gain (loss) on equity securities designated at fair value through other comprehensive income: Balance at beginning of year Impact on adoption of IFRS 9 Other comprehensive income (loss) Reclassification of loss (gain) to retained earnings Balance at end of year 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 accumulated other comprehensive income Total shareholders’ equity Non-controlling interests in subsidiaries (Note 21) Balance at beginning of year Net income attributable to non-controlling interests in subsidiaries Redemption of REIT preferred shares Other Balance at end of year Total equity $ 20,931 152 366 (228) 21,221 4,750 750 (500) 5,000 (176) (8,295) 8,327 (144) (7) (129) 129 (7) 214 (2) (12) (7) 193 40,489 53 11,262 (4,786) (214) (10) (1,273) 622 2 46,145 510 19 (283) (1) 245 113 (96) 40 (2) 55 n/a n/a n/a 7,791 1,035 8,826 (408) (2,079) (2,487) 6,639 79,047 983 72 – (62) 993 $ 80,040 1 IFRS 9, Financial Instruments (IFRS 9). The accompanying Notes are an integral part of these Consolidated Financial Statements. $ 20,711 148 329 (257) 20,931 $ 20,294 186 335 (104) 20,711 4,400 350 – 4,750 (31) (9,654) 9,509 (176) (5) (175) 173 (7) 203 23 (8) (4) 214 35,452 n/a 10,396 (4,347) (193) (4) (1,140) 325 n/a 40,489 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 299 324 623 9,679 (1,888) 7,791 1,856 (2,264) (408) 8,006 74,207 1,650 121 (617) (171) 983 $ 75,190 2,700 1,700 – 4,400 (49) (5,769) 5,787 (31) (3) (115) 113 (5) 214 26 (28) (9) 203 32,053 n/a 8,821 (4,002) (141) (14) (383) (882) n/a 35,452 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 81 218 299 8,355 1,324 9,679 1,773 83 1,856 11,834 72,564 1,610 115 – (75) 1,650 $ 74,214 125 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS Consolidated Statement of Cash Flows (millions of Canadian dollars) Cash flows from (used in) operating activities Net income before income taxes, including equity in net income of an investment in TD Ameritrade 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 TD Ameritrade (Note 12) Dilution gain (Note 12) Deferred taxes (Note 25) Changes in operating assets and liabilities Interest receivable and payable (Notes 16, 18) Securities sold under repurchase agreements Securities purchased (sold) under reverse repurchase agreements Securities sold short Trading loans and securities Loans net of securitization and sales Deposits Derivatives Non-trading financial assets at fair value through profit or loss Financial assets designated at fair value through profit or loss Securitization liabilities Current taxes Brokers, dealers, and clients amounts receivable and payable Other Net cash from (used in) operating activities Cash flows from (used in) financing activities Issuance of subordinated notes and debentures (Note 19) Redemption or repurchase 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) Redemption of non-controlling interests in subsidiaries (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 financial assets at fair value through other comprehensive income (Note 7) Purchases Proceeds from maturities Proceeds from sales Activities in available-for-sale securities (Note 7) Purchases Proceeds from maturities Proceeds from sales Activities in debt securities at amortized cost (Note 7) Purchases Proceeds from maturities Proceeds from sales Activities in held-to-maturity securities (Note 7) Purchases Proceeds from maturities Proceeds from sales Activities in debt securities classified as loans Purchases Proceeds from maturities Proceeds from sales Net purchases of land, buildings, equipment, and other depreciable assets Net cash acquired from (paid for) divestitures, acquisitions, and the purchase 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 flows from operating activities 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 For the years ended October 31 2018 2017 2016 $ 14,516 $ 12,770 $ 11,079 2,480 576 815 (111) (743) – 385 (104) 4,798 7,050 3,996 (24,065) (45,620) 53,379 (3,745) 5,257 (468) (1,532) (780) (1,435) (8,956) 5,693 1,750 (2,468) 128 740 (1,501) (500) – 8,454 (8,424) (4,634) (72) (6,527) 2,216 603 704 (128) (449) (204) 175 (283) 39,618 (48,377) 2,367 (4,661) (22,332) 40,150 1,836 n/a 251 (1,575) (419) 2,459 1,406 26,127 1,500 (2,536) 125 346 (1,397) – (626) 9,705 (9,829) (4,211) (112) (7,035) 2,330 629 708 (54) (433) – 103 7 (18,183) 11,312 (5,688) (4,100) (44,158) 81,885 5,403 n/a 95 (3,321) 845 (247) (811) 37,401 3,262 (979) 152 1,686 (487) – – 5,926 (5,884) (3,808) (115) (247) 20,465 2,529 (11,231) (20,269) 30,101 2,731 n/a n/a n/a (51,663) 20,101 670 n/a n/a n/a n/a n/a n/a (587) – 1,549 49 764 3,971 $ 4,735 $ 3,535 13,888 34,789 1,202 n/a n/a n/a (63,339) 30,775 4,977 n/a n/a n/a (17,807) 27,729 452 (2,471) 337 447 (434) (2,129) (18,934) (94) 64 3,907 $ 3,971 $ 2,866 8,957 28,393 1,153 n/a n/a n/a (52,775) 28,454 4,665 n/a n/a n/a (20,575) 15,193 – (41) 654 1 (797) – (36,452) 51 753 3,154 $ 3,907 $ 1,182 6,559 25,577 921 The accompanying Notes are an integral part of these Consolidated Certain comparative amounts have been reclassified to conform with the Financial Statements. presentation adopted in the current period. 126 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS Notes to Consolidated Financial Statements 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 Financial Institutions Canada (OSFI). The Consolidated Financial Statements are presented in Canadian dollars, unless otherwise indicated. 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 “variable 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 exercisable or convertible are considered in assessing whether the Bank controls an entity. Subsidiaries are consolidated from the date the Bank obtains control and continue to be consolidated until the date when control ceases to exist. These Consolidated Financial Statements were prepared using the accounting policies as described in Notes 2 and 4. Certain comparative amounts have been restated/reclassified to conform with the presentation adopted in the current period. The preparation of the Consolidated 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 November 28, 2018. Certain disclosures are included in the shaded sections of the “Managing Risk” section of the accompanying 2018 Management’s Discussion and Analysis (MD&A), as permitted by IFRS, and form an integral part of the Consolidated Financial Statements. The Consolidated Financial Statements were prepared under a historical cost basis, except for certain items carried at fair value as discussed in Note 2. The Bank may consolidate certain subsidiaries where it owns 50% or less of the voting rights. Most of those subsidiaries are structured entities 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, partnership, 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. 127 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS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 to reflect any impairment in the value of such entities. These increases or decreases, together with any gains and losses realized on disposition, are reported on the Consolidated Statement of Income. 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 not measured at fair value through profit or loss is recognized as net 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 incremental costs that are directly attributable to the instrument and all other premiums or discounts. Investment and securities services Investment and securities services income include asset management fees, administration and commission fees, and investment banking fees. The Bank recognizes asset management and administration fees based on time elapsed, which depicts the rendering of investment management and related services over time. The fees are primarily calculated based on average daily or point in time assets under management (AUM) or assets under administration (AUA) depending on investment mandate. Commission fees include sales, trailer and brokerage commissions. Sales and brokerage commissions are generally recognized at a point in time when the transaction is executed. Trailer commissions are recognized over time and are generally calculated based on the average daily net asset value of the fund during the period. Investment banking fees include advisory fees and underwriting fees and are generally recognized at a point in time as income upon successful completion of the engagement. Credit fees Credit fees include liquidity fees, restructuring fees, letter of credit fees, and loan syndication fees. Liquidity, restructuring, and letter of credit fees are recognized in income over the period in which the service is provided. Loan syndication fees are generally recognized at a point in time upon completion of the financing placement. Service charges Service charges income is earned on personal and commercial deposit accounts and consists of account fees and transaction-based service charges. Account fees relate to account maintenance activities and are recognized in income over the period in which the service is provided. Transaction-based service charges are recognized as earned at a point in time when the transaction is complete. Card services Card services income includes interchange income as well as card fees such as annual and transactional fees. Interchange income is recognized at a point in time when the transaction is authorized and funded. Card fees are recognized as earned at the transaction date with the exception of annual fees, which are recognized over a twelve-month period. IFRS 9 FINANCIAL INSTRUMENTS On November 1, 2017, the Bank adopted IFRS 9, Financial Instruments (IFRS 9), which replaces the guidance in IAS 39, Financial Instruments: Recognition and Measurement (IAS 39). IFRS 9 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. The Bank has made the decision to continue applying the IAS 39 hedge accounting requirements at this time and will comply with the revised annual hedge accounting disclosures as required by the related amendments to IFRS 7, Financial Instruments: Disclosures (IFRS 7). Refer to Note 4 for further details. Classification and Measurement of Financial Assets The Bank classifies its financial assets into the following categories: • Amortized cost; • Fair value through other comprehensive income (FVOCI); • Held-for-trading; • Non-trading fair value through profit or loss (FVTPL); and • Designated at FVTPL. The Bank continues to recognize financial assets on a trade date basis. Debt Instruments The classification and measurement for debt instruments is based on the Bank’s business models for managing its financial assets and whether the contractual cash flows represent solely payments of principal and interest (SPPI). Refer to Note 3 for judgment with respect to business models and SPPI. The Bank has determined its business models as follows: • Held-to-collect: the objective is to collect contractual cash flows; • Held-to-collect-and-sell: the objective is both to collect contractual cash flows and sell the financial assets; and • Held-for-sale and other business models: the objective is neither of the above. 128 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTSThe Bank performs the SPPI test for financial assets held within the held-to-collect and held-to-collect-and-sell business models. If these financial assets have contractual cash flows which are inconsistent with a basic lending arrangement, they are classified as non-trading financial assets measured at FVTPL. In a basic lending arrangement, interest includes only consideration for time value of money, credit risk, other basic lending risks, and a reasonable profit margin. assets held within the held-to-collect or held-to-collect-and-sell business models that do not pass the SPPI test are also classified as non-trading financial assets measured at FVTPL. Changes in fair value as well as any gains or losses realized on disposal are recognized in income (loss) from non-trading financial instruments at FVTPL. Interest income from debt instruments is included in interest income on an accrual basis. Debt Securities and Loans Measured at Amortized Cost Debt securities and loans held within a held-to-collect business model where their contractual cash flows pass the SPPI test are measured at amortized cost. The carrying amount of these financial assets is adjusted by an allowance for credit losses recognized and measured as described in the Impairment – Expected Credit Loss Model section of this Note, as well as any 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 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 commitment 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 appropriate portion of the fee is recognized as a yield adjustment in interest income over the term of the loan. Debt Securities and Loans Measured at Fair Value through Other Comprehensive Income Debt securities and loans held within a held-to-collect-and-sell business model where their contractual cash flows pass the SPPI test are measured at FVOCI. Fair value changes are recognized in OCI, except for impairment gains or losses, interest income and foreign exchange gains and losses on the instrument’s amortized cost, which are recognized in the Consolidated Statement of Income. The expected credit loss (ECL) allowance is recognized and measured as described in the Impairment – Expected Credit Loss Model section of this Note. When the financial asset is derecognized, the cumulative gain or loss previously recognized in OCI is reclassified from equity to income and recognized in net securities gain (loss). Interest income from these financial assets is included in interest income using EIRM. Financial Assets Held-for-Trading This held-for-sale business model includes financial assets held within a trading portfolio if they have been originated, acquired, or incurred principally for the purpose of selling in the near term, or if they form part of a portfolio of identified financial instruments that are managed together and for which there is evidence of short-term profit-taking. Financial assets held within this business model consist of trading securities, trading loans, as well as certain debt securities and financing-type physical commodities that are recorded as securities purchased under reverse repurchase agreements on the Consolidated Balance Sheet. Trading portfolio assets 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. Transaction costs are expensed as incurred. Dividends are recognized on the ex-dividend date and interest is recognized on an accrual basis. Both dividends and interest are included in interest income. Non-Trading Financial Assets Measured at Fair Value through Profit or Loss Non-trading financial assets measured at FVTPL include financial assets held within the held-for-sale and other business models, for example debt securities and loans managed on a fair value basis. Financial Financial Assets Designated at Fair Value through Profit or Loss Debt instruments in a held-to-collect or held-to-collect-and-sell business model can be designated at initial recognition as measured at FVTPL, provided the designation can eliminate or significantly reduce an accounting mismatch that would otherwise arise from measuring these financial assets on a different basis. The FVTPL designation is available only for those financial instruments for which a reliable estimate of fair value can be obtained. Once financial assets are designated at FVTPL, the designation is irrevocable. Changes in fair value as well as any gains or losses realized on disposal are recognized in income (loss) from financial instruments designated at FVTPL. Interest income from these financial assets is included in interest income on an accrual basis. 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. Equity Instruments Equity investments are required to be measured at FVTPL (classified as non-trading financial assets measured at FVTPL), except where the Bank has elected at initial recognition to irrevocably designate an equity investment, held for purposes other than trading, at FVOCI. If such an election is made, the fair value changes, including any associated foreign exchange gains or losses, are recognized in OCI and are not subsequently reclassified to net income, including upon disposal. Realized gains and losses are transferred directly to retained earnings upon disposal. Consequently, there is no review required for impairment. Dividends will normally be recognized in interest income unless the dividends represent a recovery of part of the cost of the investment. Gains and losses on non-trading equity investments measured at FVTPL are included in income (loss) from non-trading financial instruments at FVTPL. Classification and Measurement for Financial Liabilities The Bank classifies its financial liabilities into the following categories: • Held-for-trading; • Designated at FVTPL; and • Other liabilities. Financial Liabilities Held-for-Trading Financial liabilities are held within a trading portfolio if they have been incurred principally for the purpose of repurchasing in the near term, or 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. Financial liabilities held-for-trading are primarily trading deposits, securitization liabilities at fair value, obligations related to securities sold short and obligations related to certain securities sold under repurchase agreements. Trading portfolio liabilities are recognized on a trade date basis and are accounted for at fair value, with changes in fair value and any gains or losses recognized in trading income. Transaction costs are expensed as incurred. Interest is recognized on an accrual basis and included in interest expense. 129 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTSFinancial Liabilities Designated at Fair Value through Profit or Loss Certain financial liabilities that do not meet the definition of trading may be designated at FVTPL. To be designated at FVTPL, financial liabilities must meet one of the following criteria: (1) the designation eliminates or significantly reduces a measurement or recognition inconsistency; (2) a group of financial liabilities 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 derivatives unless a) the embedded derivative does not significantly modify the cash flows that otherwise would be required by the contract, or b) it is clear with little or no analysis that separation of the embedded derivative from the financial instrument is prohibited. In addition, the FVTPL designation is available only for those financial instruments for which a reliable estimate of fair value can be obtained. Once financial liabilities are designated at FVTPL, the designation is irrevocable. Liabilities designated at FVTPL 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 (loss), except for the amount of change in fair value attributable to changes in the Bank’s own credit risk, which is presented in OCI. This exception does not apply to loan commitments or financial guarantee contracts. Interest is included in interest expense on an accrual basis. Other Financial Liabilities Deposits Deposits, other than deposits included in a trading portfolio, are accounted for at amortized cost. Accrued interest on deposits is included in Other liabilities on the Consolidated Balance Sheet. Interest, including capitalized transaction costs, is recognized on an accrual basis using EIRM as Interest expense on the Consolidated Statement of Income. Subordinated Notes and Debentures Subordinated notes and debentures are accounted for at amortized cost. Accrued interest on subordinated notes and debentures is included in Other liabilities on the Consolidated Balance Sheet. Interest, including capitalized transaction costs, is recognized on an accrual basis using EIRM as Interest expense on the Consolidated Statement of Income. Reclassification of Financial Assets and Liabilities Financial assets and financial liabilities are not reclassified subsequent to their initial recognition, except for financial assets for which the Bank changes its business model for managing financial assets. Such reclassifications of financial assets are expected to be rare in practice. Impairment – Expected Credit Loss Model The ECL model applies to financial assets, including loans and debt securities measured at amortized cost, loans and debt securities measured at FVOCI, loan commitments, and financial guarantees that are not measured at FVTPL. The ECL model consists of three stages: Stage 1 – twelve-month ECLs for performing financial assets, Stage 2 – Lifetime ECLs for financial assets that have experienced a significant increase in credit risk since initial recognition, and Stage 3 – Lifetime ECLs for financial assets that are impaired. ECLs are the difference between all contractual cash flows that are due to the Bank in accordance with the contract and all the cash flows the Bank expects to receive, discounted at the original effective interest rate. If a significant increase in credit risk has occurred since initial recognition, impairment is measured as lifetime ECLs. Otherwise, impairment is measured as twelve-month ECLs which represent the portion of lifetime ECLs that are expected to occur based on default events that are possible within twelve months after the reporting date. 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 reverts back to being measured based on twelve-month ECLs. Significant Increase in Credit Risk For retail exposures, significant increase in credit risk is assessed based on changes in the twelve-month probability of default (PD) since initial recognition, using a combination of individual and collective information that incorporates borrower and account specific attributes and relevant forward-looking macroeconomic variables. For non-retail exposures, significant increase in credit risk is assessed based on changes in the internal risk rating (borrower risk ratings (BRR)) since initial recognition. The Bank defines default as delinquency of 90 days or more for most retail products and BRR 9 for non-retail exposures. Exposures are considered impaired and migrate to Stage 3 when they are 90 days or more past due for retail exposures, rated BRR 9 for non-retail exposures, or when there is objective evidence that there has been a deterioration of credit quality to the extent the Bank no longer has reasonable assurance as to the timely collection of the full amount of principal and interest. When determining whether there has been a significant increase in credit risk since initial recognition of a financial asset, the Bank considers all reasonable and supportable information that is available without undue cost or effort about past events, current conditions, and forecast of future economic conditions. Refer to Note 3 for additional details. Measurement of Expected Credit Losses ECLs are measured as the probability-weighted present value of expected cash shortfalls over the remaining expected life of the financial instrument and consider reasonable and supportable information about past events, current conditions, and forecasts of future events and economic conditions that impact the Bank’s credit risk assessment. Expected life is the maximum contractual period the Bank is exposed to credit risk, including extension options for which the borrower has unilateral right to exercise. For certain financial instruments that include both a loan and an undrawn commitment, and the Bank’s contractual ability to demand repayment and cancel the undrawn commitment does not limit the Bank’s exposure to credit losses to the contractual notice period, ECLs are measured over the period the Bank is exposed to credit risk. For example, ECLs for credit cards are measured over the borrowers’ expected behavioural life, incorporating survivorship assumptions and borrower-specific attributes. The Bank leverages its Advanced Internal Ratings Based (AIRB) models used for regulatory capital purposes and incorporates adjustments where appropriate to calculate ECLs. Forward-Looking Information and Expert Credit Judgment Forward-looking information is considered when determining significant increase in credit risk and measuring ECLs. Forward-looking macroeconomic factors are incorporated in the risk parameters as relevant. Qualitative factors that are not already considered in the modelling are incorporated by exercising expert credit judgment in determining the final ECL. Refer to Note 3 for additional details. Modified Loans In cases where a borrower experiences financial difficulties, the Bank may grant certain concessionary modifications to the terms and conditions of a loan. Modifications may include payment deferrals, extension of amortization periods, rate reductions, principal forgiveness, debt consolidation, forbearance and other modifications intended to minimize 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. If the Bank determines that a modification results in expiry of cash flows, the original asset is derecognized while a new asset is recognized based on the new contractual terms. Significant increase in credit risk is assessed relative to the risk of default on the date of modification. 130 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTSIf the Bank determines that a modification does not result in derecognition, significant increase in credit risk is assessed based on the risk of default at initial recognition of the original asset. Expected cash flows arising from the modified contractual terms are considered when calculating the ECL for the modified asset. For loans that were modified while having lifetime ECLs, the loans can revert to having twelve-month ECLs after a period of performance and improvement in the borrower’s financial condition. Allowance for Loan Losses, Excluding Acquired Credit-Impaired (ACI) Loans The allowance for loan losses represents management’s best estimate of ECLs in the lending portfolios, including any off-balance sheet exposures, at the balance sheet date. The allowance for loan losses for lending portfolios reported on the Consolidated Balance Sheet, which includes credit-related allowances for residential mortgages, consumer instalment and other personal, credit card, business and government loans, is deducted from Loans on the Consolidated Balance Sheet. The allowance for loan losses for loans measured at FVOCI is presented on the Consolidated Statement of Changes in Equity. The allowance for loan 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 methodology. The allowance is increased by the provision for credit losses and decreased by write-offs net of recoveries and disposals. Each quarter, allowances are reassessed and adjusted based on any changes in management’s estimate of ECLs. Loan losses on impaired loans in Stage 3 continue to be recognized by means of an allowance for loan losses until a loan is written off. A loan is written off against the related allowance for loan 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 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. The time period over which the Bank performs collection activities of the contractual amount outstanding of financial assets that are written off varies from one jurisdiction to another and generally spans between less than one year to five years. Allowance for Credit Losses on Debt Securities The allowance for credit losses on debt securities represents management’s best estimate of ECLs. Debt securities measured at amortized cost are presented net of the allowance for credit losses on the Consolidated Balance Sheet. The allowance for credit losses on debt securities measured at FVOCI are presented on the Consolidated Statement of Changes in Equity. The allowance for credit losses is increased by the provision for credit losses and decreased by write-offs net of recoveries and disposals. Each quarter, allowances are reassessed and adjusted based on any changes in management’s estimate of ECLs. 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 current market rates. On acquisition, twelve-month ECLs are recognized on the acquired loans, resulting in the carrying amount for acquired loans to be lower than fair value. 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 contractually required principal and interest payments, they are generally considered to be ACI loans, with no ECLs recognized on acquisition. Acquired performing loans are subsequently accounted for at amortized cost based on their contractual cash flows and any acquisition related discount or premium, including credit-related discounts, is considered to be an adjustment to the loan yield and is recognized in interest income using EIRM over the term of the loan, or the expected life of the loan for acquired loans with revolving terms. 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 individually significant ACI loans, accounting is applied individually at the loan level. The remaining ACI loans are aggregated provided 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 effective interest rate as compared to the carrying value of the loan. The ECL in excess of the initial credit-related discount is recorded through the provision for credit losses. Interest income on ACI loans is calculated by multiplying the credit-adjusted effective interest rate to the amortized cost of ACI loans. 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 on the Consolidated Statement of Income. Issued instruments are classified as equity when there is no contractual 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. 131 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS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 represent 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 requirements 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 guarantee 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 contracts which are over-the-counter (OTC) contracts designed to transfer the credit risk in an underlying financial instrument from one counterparty to another. DERIVATIVES Derivatives are instruments that derive their value from changes in underlying interest rates, foreign exchange rates, credit spreads, commodity prices, equities, or other financial or non-financial measures. Such instruments include interest rate, foreign exchange, equity, commodity, and credit derivative contracts. The Bank uses these instruments for trading and non-trading purposes. 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 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 (loss). 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, they are presented 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 presented 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-interest income on the Consolidated Statement of Income, along with changes in the fair value of the assets, liabilities, or group thereof that are attributable to the hedged risk. Any change in fair value relating to the ineffective portion of the hedging relationship is recognized 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 or Non-interest income, as applicable, on the Consolidated Statement of Income. Cash Flow Hedges The Bank is exposed to variability in future cash flows attributable to interest rate, foreign exchange rate, and equity price risks. 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 initially 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 in accumulated other comprehensive income attributable to interest rate, foreign exchange rate, and equity price components, as applicable, are reclassified to Net interest income or Non-interest income 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 accumulated other comprehensive income at that time remains in accumulated 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 accumulated other comprehensive income is immediately reclassified to Net interest income or Non-interest income, as applicable, on the Consolidated Statement of Income. 132 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS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 instrument relating to the ineffective portion is recognized immediately on the Consolidated Statement of Income. Gains and losses in accumulated 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 certain instruments, including financial liabilities, (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 designated 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 for the period. Translation gains and losses are included in non-interest income except for equity investments designated at FVOCI where unrealized translation gains and losses are recorded in other comprehensive income. 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 prevailing 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 in accumulated 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 exchange rates prevailing at the balance sheet date 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 establishing 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 transactions involving the same or similar instrument, without modification or repackaging, or is based on a valuation technique which maximizes the use of observable market inputs. The Bank recognizes various types of valuation adjustments to account for factors that market participants would use in determining fair value which are not included in valuation techniques due to system limitations or measurement uncertainty. Valuation adjustments reflect the Bank’s assessment of factors that market participants would use in pricing the asset or liability. These include, but are not limited to, the unobservability of inputs used in the pricing model, or assumptions about risk, such as creditworthiness of each counterparty and risk premiums that market participants would require given the inherent risk in the pricing model. If there is a difference between the initial transaction price and the value based on a valuation technique, the difference is referred to as inception profit or loss. Inception profit or loss is recognized in trading income upon initial recognition of the instrument only if the fair value is based on observable inputs. 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 technique at initial recognition is recognized in trading 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 risks and rewards have been transferred by quantitatively comparing the variability in cash flows before and after the transfer. If the variability in cash flows does not change significantly as a result of the transfer, the Bank has retained substantially all of the risks and rewards of ownership. 133 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS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. 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 accumulated other comprehensive income. To determine the value of the retained interest initially recorded, the previous carrying value of the transferred asset is allocated between the amount derecognized from the balance sheet and the retained interest recorded, in proportion to their relative fair values on the date of transfer. Subsequent to initial recognition, as market prices are generally not available for retained interests, fair value is determined by estimating the present value of future expected cash flows using management’s best estimates of key assumptions that market 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 recognized 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 collateralized 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 agreements 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 necessary, transfers additional collateral and may require counterparties to return collateral pledged. Certain transactions that do not meet derecognition criteria 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 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 counterparty and receives collateral in the form of cash or securities. If cash collateral is received, the Bank records the cash along with an obligation 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 income 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 included in Interest income and Interest expense, respectively, on the Consolidated Statement of Income. Physical commodities purchased or sold with an agreement to sell or repurchase the physical 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 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 generates cash flows largely independent of the cash inflows from other assets or groups of assets. Each CGU or group of CGUs, to which 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. 134 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS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 of disposal 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 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 internally generated software. The Bank’s intangible assets consist primarily of core deposit intangibles, credit card related intangibles, and software intangibles. Intangible assets are initially recognized at fair value and are amortized over their estimated useful lives (3 to 20 years) proportionate to their expected economic benefits, except for software which is amortized over its estimated useful life (3 to 7 years) on a straight-line basis. The Bank assesses its intangible assets for impairment on a quarterly basis. When impairment indicators are present, the recoverable amount of the asset, which is the higher of its estimated fair value less costs of disposal 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. Where it is not possible to estimate the recoverable amount of an individual asset, the Bank estimates the recoverable amount of the CGU to which the asset belongs. An impairment loss is recognized on the Consolidated Statement of Income in the period in which the impairment is identified. Impairment losses recognized previously are assessed and reversed if the circumstances leading to the impairment are no longer present. Reversal of any impairment loss will not exceed the carrying amount of the intangible asset that would have been determined had no impairment loss been recognized for the asset in prior periods. LAND, BUILDINGS, EQUIPMENT, AND OTHER DEPRECIABLE ASSETS Land is recognized at cost. Buildings, computer equipment, furniture and fixtures, other equipment, and leasehold improvements are recognized at cost less accumulated depreciation and provisions for impairment, if any. Gains and losses on disposal are included in Non-interest income on the Consolidated Statement of Income. 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 2 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. Where it is not possible to estimate the recoverable amount of an individual asset, the Bank estimates the recoverable amount of the CGU to which the asset belongs. An impairment loss is recognized on the Consolidated Statement of Income in the period in which the impairment 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. 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 hedging activities, 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 determine 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 determined by reference to market yields on high quality corporate 135 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS bonds with terms matching the plans’ specific cash flows. 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 amendment, 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 cumulative 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 contributions 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. INSURANCE Premiums for short-duration insurance contracts are deferred as unearned premiums and reported in non-interest income on a straight-line basis over the contractual term of the underlying policies, usually twelve months. Such premiums are recognized net of amounts ceded for reinsurance and apply primarily to property and casualty contracts. Unearned premiums are reported in insurance-related liabilities, gross of premiums ceded to reinsurers which are recognized in other assets. Premiums from life and health insurance policies are recognized as income when earned in insurance revenue. For property and casualty insurance, insurance claims and policy benefit liabilities represent current claims and estimates for future claims related to insurable events occurring at or before the Consolidated 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. Actuarial liabilities are reported in insurance-related liabilities with changes 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 expenditure 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. INCOME TAXES Income tax is comprised of current and deferred tax. Income tax is recognized on the Consolidated Statement of Income, except to the extent that it relates to items recognized in other comprehensive income or directly in equity, in which case the related taxes are also recognized in other comprehensive income or directly in equity, respectively. Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities on the Consolidated Balance Sheet and the amounts attributed to such assets and liabilities for tax purposes. Deferred tax assets and liabilities are determined based on the tax rates that are expected to apply when the assets or liabilities are reported for tax purposes. Deferred tax assets are recognized only when it is probable that sufficient taxable profit will be available in future periods against which deductible temporary differences may be utilized. Deferred tax liabilities are not recognized on temporary differences arising on investments in subsidiaries, branches, and 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 temporary difference will not reverse in the foreseeable future. The Bank records a provision for uncertain tax positions if it is probable 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 provision for (recovery of) income taxes in the period in which management determines they are no longer required or as determined by statute. FINANCIAL INSTRUMENTS OTHER THAN DERIVATIVES PRIOR TO NOVEMBER 1, 2017 UNDER IAS 39 The following is applicable to periods prior to November 1, 2017 for financial instruments accounted for under IAS 39, to the extent not already discussed earlier in this Note. Classification and Measurement of Financial Assets and Financial Liabilities Available-for-Sale Securities Financial assets not classified as trading, designated at fair value through profit or loss, held-to-maturity or loans, were classified as available-for-sale and included equity securities and debt securities. Available-for-sale securities were recognized on a trade date basis and were generally 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 were calculated on a weighted-average cost basis and were recognized in net securities gains (losses) in non-interest income. Dividends were recognized on the ex-dividend date and interest income was recognized on an accrual basis using EIRM. Both dividends and interest were included in Interest income on the Consolidated Statement of Income. Impairment losses were recognized if there was objective evidence of impairment as a result of one or more events that occurred (a ‘loss event’) and the loss event(s) resulted in a decrease in the estimated future cash flows of the instrument. A significant or prolonged decline in fair value below cost was considered objective evidence of impairment for available-for-sale equity securities. A deterioration in credit quality was considered objective evidence of impairment for available-for-sale debt securities. Qualitative factors were also considered when assessing impairment for available-for-sale securities. When impairment was identified, the cumulative net loss previously recognized in other comprehensive income, less any impairment loss previously recognized on the Consolidated Statement of Income, was 136 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTSremoved from other comprehensive income and recognized in Net securities gains (losses) in Non-interest income on the Consolidated Statement of Income. Consolidated Balance Sheet as Derivatives and measured at fair value with subsequent changes recognized in Non-interest income on the Consolidated Statement of Income. If the fair value of a previously impaired equity security subsequently increased, the impairment loss was not reversed through the Consolidated Statement of Income. Subsequent increases in fair value were recognized in other comprehensive income. If the fair value of a previously impaired debt security subsequently increased and the increase could be objectively related to an event occurring after the impairment was recognized on the Consolidated Statement of Income, then the impairment loss was reversed through the Consolidated Statement of Income. An increase in fair value in excess of impairment recognized previously on the Consolidated Statement of Income was recognized in other comprehensive income. Held-to-Maturity Securities Debt securities with fixed or determinable payments and fixed maturity dates, that did not meet the definition of loans and receivables, and that the Bank intended and had the ability to hold to maturity were classified as held-to-maturity and were carried at amortized cost, net of impairment losses. Securities classified as held-to-maturity were assessed for objective evidence of impairment at the counterparty- specific level. If there was no objective evidence of impairment at the counterparty-specific level then the security was grouped with other held-to-maturity securities with similar credit risk characteristics and was collectively assessed for impairment, which considered losses incurred but not identified. Interest income was recognized using EIRM and was included in Interest income on the Consolidated Statement of Income. Financial Assets and Liabilities Designated at Fair Value through Profit or Loss Certain financial assets and financial liabilities that did not meet the definition of trading could be designated at FVTPL on initial recognition. To be designated at FVTPL, financial assets and financial liabilities had to meet one of the following criteria: (1) the designation eliminated or significantly reduced a measurement or recognition inconsistency (also referred to as “an accounting mismatch”); (2) a group of financial assets, financial liabilities, or both, was managed and its performance was evaluated on a fair value basis in accordance with a documented risk management or investment strategy; or (3) the instrument contained one or more embedded derivatives unless a) the embedded derivative did not significantly modify the cash flows that otherwise would be required by the contract, or b) it was clear with little or no analysis that separation of the embedded derivative from the financial instrument was prohibited. In addition, the FVTPL designation was available only for those financial instruments for which a reliable estimate of fair value could be obtained. Once financial assets and financial liabilities were designated at FVTPL, the designation was irrevocable. Financial assets and financial liabilities designated at FVTPL were 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 income (loss) from financial instruments designated at fair value at profit or loss. Interest was recognized on an accrual basis and was included in interest income or interest expense. Embedded Derivatives Derivatives that were embedded in financial assets and liabilities were separated from their host instruments and treated as separate derivatives when their characteristics and risks were not closely related to those of the host instrument, a separate instrument with the same terms as the embedded derivative met the definition of a derivative, and the combined contract was not held-for-trading or designated at fair value through profit or loss. These embedded derivatives, which were bifurcated from the host contract, were recognized on the Impairment – Allowance for Credit Losses Loan Impairment, Excluding Acquired Credit-Impaired Loans A loan, including a debt security classified as a loan, was considered impaired when there was objective evidence that there had been a deterioration of credit quality subsequent to the initial recognition of the loan (a ‘loss event’) to the extent the Bank no longer had reasonable assurance as to the timely collection of the full amount of principal and interest. Indicators of impairment could include, but were 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 would enter bankruptcy or other financial reorganization; or • The disappearance of an active market for that financial asset. A loan was reclassified back to performing status when it had been determined that there was 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 had been remedied. For gross impaired debt securities classified as loans, subsequent to any recorded impairment, interest income continued to be recognized using 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 experienced financial difficulties the Bank may have granted certain concessionary modifications to the terms and conditions of a loan. Modifications may have included payment deferrals, extension of amortization periods, rate reductions, principal forgiveness, debt consolidation, forbearance and other modifications intended to minimize the economic loss and to avoid foreclosure or repossession of collateral. The Bank had policies in place to determine the appropriate remediation strategy based on the individual borrower. Once modified, additional impairment was recorded where the Bank identified a decrease in the modified loan’s estimated realizable value as a result of the modification. Modified loans were assessed for impairment, consistent with the Bank’s policies for impairment. Allowance for Credit Losses, Excluding Acquired Credit-Impaired Loans The allowance for credit losses represented 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 included credit-related allowances for residential mortgages, consumer instalment and other personal, credit card, business and government loans, and debt securities classified as loans, was deducted from Loans on the Consolidated Balance Sheet. The allowance for credit losses for off-balance sheet instruments, which related to certain guarantees, letters of credit, and undrawn lines of credit, was recognized in Other liabilities on the Consolidated Balance Sheet. Allowances for lending portfolios reported on the balance sheet and off-balance sheet exposures were calculated using the same methodology. The allowance was increased by the provision for credit losses and decreased by write-offs net of recoveries and disposals. The Bank maintained both counterparty-specific and collectively assessed allowances. Each quarter, allowances were 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 were recognized by means of an allowance for credit losses until a loan was written off. 137 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTSA loan was written off against the related allowance for credit losses when there was no realistic prospect of recovery. Non-retail loans were generally written off when all reasonable collection efforts had been exhausted, such as when a loan was sold, when all security had been realized, or when all security had been resolved with the receiver or bankruptcy court. Non-real estate secured retail loans were generally written off when contractual payments were 180 days past due, or when a loan was sold. Real-estate secured retail loans were generally written off when the security was realized. Counterparty-Specific Allowance Individually significant loans, such as the Bank’s medium-sized business and government loans and debt securities classified as loans, were assessed for impairment at the counterparty-specific level. The impairment assessment was based on the counterparty’s credit ratings, overall financial condition, and where applicable, the realizable value of the collateral. Collateral was reviewed at least annually and when conditions arose indicating an earlier review was necessary. An allowance, if applicable, was measured as the difference between the carrying amount of the loan and the estimated recoverable amount. The estimated recoverable amount was 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, were collectively assessed for impairment. Allowances were calculated using a formula that incorporated recent loss experience, historical default rates which were delinquency levels in interest or principal payments that indicated impairment, other applicable observable data, and the type of collateral pledged. Collectively Assessed Allowance for Incurred but Not Identified Credit Losses If there was no objective evidence of impairment for an individual loan, whether significant or not, the loan was included in a group of assets with similar credit risk characteristics and collectively assessed for impairment for losses incurred but not identified. This allowance was referred to as the allowance for incurred but not identified credit losses. The level of the allowance for each group depended upon an assessment of business and economic conditions, historical loss experience, loan portfolio composition, and other relevant indicators. Historical loss experience was adjusted based on observable data to reflect the effects of conditions which existed at the time. The allowance for incurred but not identified credit losses was calculated using credit risk models that considered probability of default (loss frequency), loss given credit default (loss severity), and exposure at default (EAD). For purposes of measuring the collectively assessed allowance for incurred but not identified credit losses, default was defined as delinquency levels in interest or principal payments that would indicate impairment. Acquired Loans Acquired loans were initially measured at fair value which considered incurred and expected future credit losses estimated at the acquisition date and also reflected adjustments based on the acquired loan’s interest rate in comparison to market rates. As a result, no allowance for credit losses was recorded on the date of acquisition. When loans were acquired with evidence of incurred credit loss where it was probable at the purchase date that the Bank would be unable to collect all contractually required principal and interest payments, they were generally considered to be ACI loans. Acquired performing loans were subsequently accounted for at amortized cost based on their contractual cash flows and any acquisition-related discount or premium was considered to be an adjustment to the loan yield and recognized in interest income using 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 were not accreted. Acquired loans were 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 were 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 were accounted for based on the present value of expected cash flows as opposed to their contractual cash flows. The Bank determined the fair value of these loans at the acquisition date by discounting expected cash flows at a discount rate that reflected 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 were reflective of market conditions. With respect to certain individually significant ACI loans, accounting was applied individually at the loan level. The remaining ACI loans were aggregated provided that they were acquired in the same fiscal quarter and had common risk characteristics. Aggregated loans were accounted for as a single asset with aggregated cash flows and a single composite interest rate. Subsequent to acquisition, the Bank regularly reassessed and updated its cash flow estimates for changes to assumptions relating to default rates, loss severities, the amount and timing of prepayments, and other factors that were reflective of market conditions. Probable decreases in expected cash flows triggered the recognition of additional impairment, which was 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 was 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 have increased or decreased which may have resulted 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 was recognized. 138 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS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 and changes to accounting standards and policies could have a materially adverse 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, determining estimates, and adopting new accounting standards are well-controlled and occur in an appropriate and systematic manner. For non-retail exposures, BRR is determined on an individual borrower basis using industry and sector-specific credit risk models that are based on historical data. Current and forward-looking information that is specific to the borrower, industry, and sector is considered based on expert credit judgment. Criteria for assessing significant increase in credit risk are defined at the appropriate segmentation level and vary based on the BRR of the exposure at origination. Criteria include relative changes in BRR, absolute BRR backstop, and delinquency backstop when contractual payments are more than 30 days past due. Credit risk has increased significantly since initial recognition when one of the criteria is met. CLASSIFICATION AND MEASUREMENT OF FINANCIAL ASSETS Business Model Assessment The Bank determines its business models based on the objective under which its portfolios of financial assets are managed. Refer to Note 2 for details on the Bank’s business models. In determining its business models, the Bank considers the following: • Management’s intent and strategic objectives and the operation of the stated policies in practice; • The primary risks that affect the performance of the business model and how these risks are managed; • How the performance of the portfolio is evaluated and reported to management; and • The frequency and significance of financial asset sales in prior periods, the reasons for such sales and the expected future sales activities. Sales in themselves do not determine the business model and are not considered in isolation. Instead, sales provide evidence about how cash flows are realized. A held-to-collect business model will be reassessed by the Bank to determine whether any sales are consistent with an objective of collecting contractual cash flows if the sales are more than insignificant in value or infrequent. Solely Payments of Principal and Interest Test In assessing whether contractual cash flows are SPPI, the Bank considers the contractual terms of the instrument. This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that they would not be consistent with a basic lending arrangement. In making the assessment, the Bank considers the primary terms as follows and assess if the contractual cash flows of the instruments continue to meet the SPPI test: • Performance-linked features; • Terms that limit the Bank’s claim to cash flows from specified assets (non-recourse terms); • Prepayment and extension terms; • Leverage features; and • Features that modify elements of the time value of money. IMPAIRMENT OF FINANCIAL ASSETS Significant Increase in Credit Risk For retail exposures, criteria for assessing significant increase in credit risk are defined at the appropriate product or portfolio level and vary based on the exposure’s credit risk at origination. The criteria include relative changes in PD, absolute PD backstop, and delinquency backstop when contractual payments are more than 30 days past due. Credit risk has increased significantly since initial recognition when one of the criteria is met. Measurement of Expected Credit Loss For retail exposures, ECLs are calculated as the product of PD, loss given default (LGD), and exposure at default (EAD) at each time step over the remaining expected life of the financial asset and discounted to the reporting date at the effective interest rate. PD estimates represent the point-in-time PD, updated quarterly based on the Bank’s historical experience, current conditions, and relevant forward-looking expectations over the expected life of the exposure to determine the lifetime PD curve. LGD estimates are determined based on historical charge-off events and recovery payments, current information about attributes specific to the borrower, and direct costs. Expected cash flows from collateral, guarantees, and other credit enhancements are incorporated in LGD if integral to the contractual terms. Relevant macroeconomic variables are incorporated in determining expected LGD. EAD represents the expected balance at default across the remaining expected life of the exposure. EAD incorporates forward- looking expectations about repayments of drawn balances and expectations about future draws where applicable. For non-retail exposures, ECLs are calculated based on the present value of cash shortfalls determined as the difference between contractual cash flows and expected cash flows over the remaining expected life of the financial instrument. Lifetime PD is determined by mapping the exposure’s BRR to point-in-time PD over the expected life. LGD estimates are determined by mapping the exposure’s facility risk rating (FRR) to expected LGD which takes into account facility- specific characteristics such as collateral, seniority ranking of debt, and loan structure. Relevant macroeconomic variables are incorporated in determining expected PD and LGD. Expected cash flows are determined by applying the expected LGD to the contractual cash flows to calculate cash shortfalls over the expected life of the exposure. Forward-Looking Information In calculating the ECL, the Bank employs internally developed models that utilize parameters for PD, LGD, and EAD. Forward-looking macroeconomic factors including at the regional level are incorporated in the risk parameters as relevant. Additional risk factors that are industry or segment-specific are also incorporated, where relevant. Forward-looking macroeconomic forecasts are generated by TD Economics as part of the ECL process: A base economic forecast is accompanied with upside and downside estimates of realistically possible economic conditions. All economic forecasts are updated quarterly for each variable on a regional basis where applicable and incorporated as relevant into the quarterly modelling of base, upside and downside risk parameters used in the calculation of ECL scenarios and probability-weighted ECL. The macroeconomic variable estimations are statistically derived relative to the base 139 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTSforecast based on the historical distribution of each variable. TD Economics will apply judgment to recommend probability weights to each forecast on a quarterly basis. The proposed macroeconomic forecasts and probability weightings are subject to robust management review and challenge process by a cross-functional committee that includes representation from TD Economics, Risk, Finance, and Business. ECLs calculated under each of the three forecasts are applied against the respective probability weightings to determine the probability-weighted ECLs. Refer to Note 8 for further details on the macroeconomic variables and ECL sensitivity. Expert Credit Judgment ECLs are recognized on initial recognition of the financial assets. Allowance for credit losses represents management’s best estimate of risk of default and ECLs on the financial assets, including any off-balance sheet exposures, at the balance sheet date. Management exercises expert credit judgment in assessing if an exposure has experienced significant increase in credit risk since initial recognition and in determining the amount of ECLs at each reporting date by considering reasonable and supportable information that is not already included in the quantitative models. Management’s judgment is used to determine the point within the range that is the best estimate for the qualitative component contributing to ECLs, based on an assessment of business and economic conditions, historical loss experience, loan portfolio composition, and other relevant indicators and forward-looking information 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 allowance for credit losses. FAIR VALUE MEASUREMENTS 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 transactions 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 judgment. 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. 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. For example, the future decommissioning of Interbank Offered Rates (IBOR) may also have an impact on the fair value of products that reference or use valuation models with IBOR inputs. 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 accumulated 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. Differences between the actual cash flows and the Bank’s estimate of future cash flows are recognized in trading income. These assumptions are subject to periodic review and may change due to significant changes in the economic environment. GOODWILL AND OTHER INTANGIBLES The recoverable amount of the Bank’s cash-generating units (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 recoverable amount of CGUs, and the use of different assumptions and estimates in the calculations could influence the determination of the existence of impairment and the valuation of goodwill. Management believes that the assumptions and estimates used are reasonable and supportable. Where possible, fair values generated internally are compared to relevant market information. The carrying amounts of the Bank’s CGUs are determined by management using risk based capital models to adjust net assets and liabilities by CGU. These models consider various factors including market risk, credit risk, and operational risk, including investment capital (comprised of goodwill and other intangibles). Any 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 140 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTSdata and considers if the market-related data indicates there is any prolonged or significant impact on the assumptions. The discount rate used to value liabilities is determined by reference to market yields on high quality corporate bonds with terms matching the plans’ specific cash flows. 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 maintains 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 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 provisions 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 information that may impact the assessment of amounts to be incurred. Changes in these assessments may lead to changes in the amount recorded for provisions. INSURANCE The assumptions used in establishing the Bank’s insurance claims and policy benefit liabilities are based on best estimates of possible outcomes. For property and casualty insurance, the ultimate cost of claims liabilities is estimated using a range of standard actuarial claims projection techniques in accordance with Canadian accepted actuarial practices. 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. Critical assumptions used in the measurement of life and health insurance contract liabilities are determined by the appointed actuary. Further information on insurance risk assumptions is provided in Note 22. CONSOLIDATION OF STRUCTURED ENTITIES Management judgment is required when assessing whether the Bank should consolidate an entity. 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 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 the entity and absorbs significant variable returns from the entity, it then determines if it is acting as principal 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. 141 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTSIMPAIRMENT OF FINANCIAL ASSETS PRIOR TO NOVEMBER 1, 2017 UNDER IAS 39 The following is applicable to periods prior to November 1, 2017 for financial instruments accounted for under IAS 39. Available-for-Sale Securities Impairment losses were recognized on available-for-sale securities if there was objective evidence of impairment as a result of one or more events that occurred after initial recognition and the loss event(s) resulted in a decrease in the estimated cash flows of the instrument. The Bank individually reviewed 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 was considered objective evidence of impairment. For available-for-sale debt securities, a deterioration of credit quality was considered objective evidence of impairment. Other factors considered in the impairment assessment included 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 were recognized on held-to-maturity securities if there was objective evidence of impairment as a result of one or more events that occurred after initial recognition and the loss event(s) resulted in a decrease in the estimated cash flows of the instrument. The Bank reviewed these securities at least quarterly for impairment at the counterparty-specific level. If there was no objective evidence of impairment at the counterparty-specific level then the security was grouped with other held-to-maturity securities with similar credit risk characteristics and collectively assessed for impairment, which considered losses incurred but not identified. A deterioration of credit quality was considered objective evidence of impairment. Other factors considered in the impairment assessment included 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, was considered impaired when there was objective evidence that there had been a deterioration of credit quality subsequent to the initial recognition of the loan to the extent the Bank no longer had reasonable assurance as to the timely collection of the full amount of principal and interest. The Bank assessed loans for objective evidence of impairment individually for loans that were individually significant, and collectively for loans that were not individually significant. The allowance for credit losses represented management’s best estimate of impairment incurred in the lending portfolios, including any off-balance sheet exposures, at the balance sheet date. Management exercised judgment as to the timing of designating a loan as impaired, the amount of the allowance required, and the amount that would be recovered once the borrower defaulted. Changes in the amount that management expected to recover would have a direct impact on the provision for credit losses and may have resulted in a change in the allowance for credit losses. If there was no objective evidence of impairment for an individual loan, whether significant or not, the loan was 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 employed internally developed models that utilized parameters for PD, LGD, and EAD. Management’s judgment was used to determine the point within the range that was the best estimate of losses, based on an assessment of business and economic conditions, historical loss experience, loan portfolio composition, and other relevant indicators that were not fully incorporated into the model calculation. Changes in these assumptions would have a direct impact on the provision for credit losses and may have resulted in a change in the incurred but not identified allowance for credit losses. N O T E 4 CURRENT AND FUTURE CHANGES IN ACCOUNTING POLICIES CURRENT CHANGES IN ACCOUNTING POLICIES The following new standard has been adopted by the Bank on November 1, 2017. IFRS 9 FINANCIAL INSTRUMENTS On November 1, 2017, the Bank adopted IFRS 9, Financial Instruments (IFRS 9), which replaces the guidance in IAS 39, Financial Instruments: Recognition and Measurement (IAS 39). IFRS 9 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. The Bank has made the decision to continue applying the IAS 39 hedge accounting requirements at this time and will comply with the revised annual hedge accounting disclosures as required by the related amendments to IFRS 7, Financial Instruments: Disclosures (IFRS 7). IFRS 9 is effective for annual periods beginning on or after January 1, 2018. In January 2015, OSFI issued the final version of the Advisory titled “Early adoption of IFRS 9 Financial Instruments for Domestic Systemically Important Banks” which mandated that all domestic systemically important banks (D-SIBs), including the Bank, were required to early adopt IFRS 9 for the annual period beginning on November 1, 2017. As such, on November 1, 2017, the Bank adopted IFRS 9 retrospectively. 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. However, the Bank made the decision not to restate comparative period financial information and has recognized any measurement differences between the previous carrying amounts and the new carrying amounts on November 1, 2017, through an adjustment to opening retained earnings or AOCI, as applicable. Refer to Note 2 for accounting policies under IAS 39 applied during those periods. Amendments were also made to IFRS 7 introducing expanded qualitative and quantitative disclosures related to IFRS 9, which the Bank has also adopted for the annual period beginning November 1, 2017. Refer to Notes 2 and 3 for further details. Summary of impact upon adoption of IFRS 9 – Classification and measurement The following table summarizes the classification and measurement impact as at November 1, 2017. Reclassifications represent movements of the carrying amount of financial assets and liabilities which have changed their classification. Remeasurement represents changes in the carrying amount of the financial assets and liabilities due to changes in their measurement. 142 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTSFINANCIAL ASSETS (millions of Canadian dollars) IAS 39 Cash and due from banks Interest-bearing deposits with banks Trading loans, securities, and other Debt securities Equity securities Loans Commodities and other As at Oct. 31, 2017 As at Nov. 1, 2017 IAS 39 Measurement Category IAS 39 Re- Carrying Amount classifications measurement Re- IFRS 9 Carrying Amount IFRS 9 Measurement Category IFRS 9 $ – $ 3,971 Amortized Cost Cash and due from banks Interest-bearing deposits – 51,185 Amortized Cost with banks Amortized Cost $ 3,971 $ Amortized Cost 51,185 FVTPL FVTPL FVTPL FVTPL 53,402 32,010 11,235 7,271 103,918 – – – – (86) – (86) – – – – – 53,402 32,010 11,149 7,271 103,832 3,734 369 264 2,857 1,918 86 44 9,272 56,195 3,150 – – 3,150 139,193 – 2,091 1,823 143,107 3,734 369 196 2,857 1,917 86 44 9,203 – – (369) (513) (882) (3,734) (1,197) (196) 1,823 (3,304) – 3,209 1,197 513 (155) 4,764 – – 68 – 1 – – 69 – – – – – – – – – – 29 – (7) – 8 30 Trading loans, securities, and other FVTPL Debt securities FVTPL Equity securities FVTPL Loans FVTPL Commodities and other Non-trading financial assets at FVTPL FVTPL Debt securities FVTPL Debt securities FVTPL Equity securities FVTPL Loans FVTPL Loans FVTPL Loans FVTPL Loans FVTPL Derivatives Financial assets designated at FVTPL FVTPL Debt securities FVTPL Debt securities FVTPL Debt securities Financial assets at FVOCI FVOCI Debt securities FVOCI Debt securities FVOCI Equity securities FVOCI Loans (2) (9) (4)(10) (11) Debt securities at amortized cost, net of allowance for credit losses 71,392 Amortized Cost Debt securities 3,209 Amortized Cost Debt securities 1,190 Amortized Cost Debt securities 513 Amortized Cost Debt securities (147) Allowance for security losses (12) (13) (9) (8) (14) 76,157 Securities purchased under reverse repurchase agreements Securities purchased under reverse Derivatives Financial assets designated at FVTPL Debt securities Debt securities Debt securities Available-for-sale securities Debt securities Debt securities Equity securities Loans FVTPL 56,195 FVTPL FVTPL FVTPL 3,150 369 513 4,032 FVOCI 142,927 1,197 FVOCI 2,287 FVOCI – FVOCI 146,411 Held-to-maturity securities Debt securities Amortized Cost 71,363 Securities purchased under reverse repurchase agreements Securities purchased under reverse repurchase agreements Securities purchased under reverse 71,363 FVTPL 1,345 repurchase agreements Amortized Cost 133,084 134,429 Loans Residential mortgages Consumer instalment and 653 (653) – – – – 1,998 FVTPL repurchase agreements Securities purchased under reverse 132,431 Amortized Cost 134,429 repurchase agreements Loans Amortized Cost 222,079 (2,857) – 219,222 Amortized Cost Residential mortgages other personal Amortized Cost 157,101 33,007 Amortized Cost Credit card Amortized Cost 199,053 Business and government 1,925 Business and government Amortized Cost 3,209 Debt securities classified as loans Amortized Cost 616,374 Total Loans before allowance (3,783) Allowance for loan losses Loans, net of allowance for (44) – (1,823) (1,925) (3,209) (9,858) 156 – – – – – – 152 606,516 (3,475) 612,591 (9,702) 152 603,041 Consumer instalment and 157,057 Amortized Cost 33,007 Amortized Cost Credit card other personal 197,230 Amortized Cost Business and government – Amortized Cost Business and government – Amortized Cost Amortized Cost 17,297 Amortized Cost Amortized Cost 29,971 4,556 51,824 1,235,919 43,076 $ 1,278,995 – – 8 8 1 – 1 $ – (28) (28) 51,804 223 1,236,143 43,078 $ 225 $ 1,279,221 2 – 17,297 Amortized Cost 29,971 Amortized Cost dealers, and clients 4,536 Amortized Cost Other financial assets Amounts receivable from brokers, Total Loans before allowance Allowance for loan losses Loans, net of allowance for loan losses Other Customers’ liability under acceptances Total financial assets Non-financial assets Total assets loan losses Other Customers’ liability under acceptances Amounts receivable from brokers, dealers, and clients Other financial assets Total financial assets Non-financial assets Total assets Note (1) (2) (3) (4) (5) (6) (1) (5) (7) (3) (8) (15) (15) (5) (5) (11) (6) (13) (14) (16) 143 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS FINANCIAL LIABILITIES (millions of Canadian dollars) IAS 39 Trading deposits Derivatives Securitization liabilities at fair value Deposits Acceptances Obligations related to securities sold short Obligations related to securities sold under repurchase agreements Securitization liabilities at amortized cost IAS 39 Measurement Category FVTPL $ FVTPL FVTPL Amortized Cost Amortized Cost FVTPL Amortized Cost/ FVTPL 88,591 Amortized Cost 16,076 Amounts payable to brokers, dealers, and clients Amortized Cost Subordinated notes and debentures Amortized Cost Other financial liabilities Amortized Cost Total financial liabilities Non-financial liabilities Total liabilities Retained earnings Accumulated other comprehensive income Other equity Total liabilities and equity 32,851 9,528 9,934 1,186,494 17,311 1,203,805 40,489 8,006 26,695 $ 1,278,995 As at Oct. 31, 2017 As at Nov. 1, 2017 Re- IAS 39 Re- Carrying Amount classifications measurement 79,940 51,214 12,757 832,824 17,297 $ – – – – – $ – $ – – – – IFRS 9 Carrying Amount 79,940 51,214 12,757 IFRS 9 Measurement Category IFRS 9 Note FVTPL Trading deposits FVTPL Derivatives FVTPL Securitization liabilities at fair value 832,824 Amortized Cost Deposits 17,297 Amortized Cost Acceptances Obligations related to securities 35,482 – – 35,482 FVTPL sold short – – – – – – – – – 1 – $ 1 – – 250 250 1,186,744 17,311 250 1,204,055 40,542 53 – (78) – 7,929 26,695 $ 225 $ 1,279,221 – 88,591 Amortized Obligations related to securities Cost/ FVTPL sold under repurchase agreements Securitization liabilities at – 16,076 Amortized Cost amortized cost Amounts payable to brokers, 32,851 Amortized Cost dealers, and clients 9,528 Amortized Cost Subordinated notes and debentures 10,184 Amortized Cost Other financial liabilities (14) Total financial liabilities Non-financial liabilities Total liabilities Retained earnings Accumulated other comprehensive income Other equity Total liabilities and equity 1 Certain loans that met the definition of trading under IAS 39 have been reclassified to non-trading financial assets at FVTPL, as these loans are held within a business model that is managed on a fair value basis but are not subject to active and frequent buying and selling with the objective of generating a profit from short-term fluctuations in price. 2 Certain available-for-sale (AFS) debt securities under IAS 39 are required to be measured at FVTPL under IFRS 9 as these securities do not pass the SPPI test. Previously recognized changes in fair value on these securities were reclassified to retained earnings. 3 Certain debt securities designated at FVTPL under IAS 39 are required to be measured at FVTPL under IFRS 9 as they do not pass the SPPI test. 4 Certain equity securities classified as AFS under IAS 39 have been reclassified to non-trading financial assets at FVTPL. Unrealized gains (losses) on the AFS equity securities were reclassified to retained earnings. In addition, certain AFS equity securities were measured at cost under IAS 39 as they did not have a quoted market price in an active market and their fair value could not be reliably measured. Under IFRS 9, these equity securities are required to be measured at fair value as the exception under IAS 39 is no longer available. The difference between the cost and the fair value was recorded in retained earnings. 5 Certain loans are held in a business model managed on a fair value basis under IFRS 9 and are therefore reclassified to non-trading financial assets at FVTPL. 6 Certain business and government loans are required to be measured at FVTPL as they do not pass the SPPI test. The carrying value of these loans was adjusted to reflect their fair value with the difference recorded in retained earnings. 7 Certain debt securities designated at FVTPL under IAS 39 have been similarly re-designated to be measured at FVTPL to achieve a significant reduction in accounting mismatch. Consolidated Statement of Income would not have been material during the year ended October 31, 2018. The effective interest rate of these debt securities determined on November 1, 2017 ranged from 0.55% to 1.38% and interest income of $11 million was recognized during the year ended October 31, 2018. 9 Certain debt securities classified as AFS under IAS 39 were held within a business model with an objective to hold assets to collect contractual cash flows. The carrying value of these debt securities as at November 1, 2017 has been adjusted to amortized cost through AOCI. The fair value of these debt securities was $1.2 billion as at October 31, 2018. Had the Bank not reclassified these debt securities to amortized cost, the change in unrealized gains (losses) on AFS securities recognized on the Consolidated Statement of Comprehensive Income would have been a loss of $27 million during the year ended October 31, 2018. 10 Certain equity securities classified as AFS under IAS 39 have been designated to be measured at FVOCI under IFRS 9. Previously recognized impairment associated with these equity securities has been reclassified from retained earnings to AOCI. 11 Certain business and government loans measured at amortized cost under IAS 39 are included in a held-to-collect-and-sell business model under IFRS 9 and are measured at FVOCI. 12 Under IAS 39, certain debt securities were reclassified out of the AFS category to HTM at their fair value as of the reclassification date. Under IFRS 9, these debt securities are held within a held-to-collect business model and are measured at amortized cost. On transition, the carrying amount of these debt securities was adjusted through AOCI to reflect amortized cost measurement since their inception. 13 Debt securities classified as loans have been reclassified as debt securities at amortized cost under IFRS 9. 14 Refer to the impairment allowance reconciliation for remeasurement of credit 8 Certain debt securities held by the Bank were designated at FVTPL under IAS 39. losses under IFRS 9. Under IFRS 9, the designation was revoked and these debt securities are held within a held-to-collect business model and are measured at amortized cost. Previously recognized changes in fair value of these securities were reversed through retained earnings. The fair value of these debt securities was $1,143 million as at October 31, 2018. Had the Bank not reclassified these debt securities to amortized cost, the change in fair value recognized on the 15 Certain securities purchased under reverse repurchase agreements were measured at amortized cost under IAS 39. These securities are included in a held-for-sale business model with a purpose to hold these instruments for trading and are measured at FVTPL. 16 Tax impact related to the adoption of IFRS 9. 144 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS Summary of Impact upon adoption of IFRS 9 – Impairment The reconciliation of the Bank’s closing allowances for credit losses in accordance with IAS 39 and provisions for loan commitments and financial guarantee contracts in accordance with IAS 37 to the Bank’s opening ECL determined in accordance with IFRS 9, as at November 1, 2017, is shown in the following table: Reconciliation of the Closing Allowance for Credit Losses under IAS 39/IAS 37 to Opening Allowance for Credit Losses under IFRS 91 (millions of Canadian dollars) IAS 39/IAS 37 closing balance as at October 31, 2017 IFRS 9 opening balance as at November 1, 2017 Incurred but Counterparty- specific not identified Individually insignificant Total IAS 39/ IAS 37 closing balance Re- classifications2 measurement3 Re- Stage 1 Stage 2 Total IFRS 9 opening balance Stage 3 Loans Residential mortgages Consumer instalment and other personal Credit card Business and government Debt securities classified as loans Acquired credit-impaired loans Total loans, including off-balance sheet instruments Less: Off-balance sheet instruments4 Total allowance for loan losses5 Debt securities at amortized cost6,7 Debt securities at fair value through other comprehensive income $ 36 $ – $ 42 $ 78 $ – $ 17 $ 24 $ 26 $ 45 $ 95 689 1,231 1,526 20 3,502 – – – 134 126 260 3 147 335 29 – 553 32 836 1,566 1,689 146 4,315 35 – – (10) (146) (156) – 214 529 39 763 (172) 706 355 521 627 166 321 174 1,050 1,605 1,507 – – 98 2,022 – – – 1,529 – – 706 35 – 4,257 35 3,502 263 585 4,350 (156) 98 2,022 1,529 741 4,292 567 – – 567 – 250 488 329 – 817 2,935 263 585 3,783 (156) (152) 1,534 1,200 741 3,475 – – – – 155 (8) – 21 126 147 $ – $ – $ – $ – $ 1 $ 4 $ 3 $ 2 $ – $ 5 1 Stage 3 allowance under IFRS 9 and counterparty-specific and individually insignifi- cant allowance under IAS 39 represent allowance for credit losses on impaired financial assets. 2 Reclassifications represent the impact of classification and measurement changes on impairment allowances. 3 Remeasurement includes the impact of adopting the ECL model under IFRS 9, which has been recorded as an adjustment to opening retained earnings on November 1, 2017. 4 The allowance for credit losses for off-balance sheet instruments is recorded in Other liabilities on the Consolidated Balance Sheet. FUTURE CHANGES IN ACCOUNTING POLICIES The following standards have been issued, but are not yet effective on the date of issuance of the Bank’s Consolidated Financial Statements. The Bank is currently assessing the impact of the application of these standards on the Consolidated Financial Statements and will adopt these standards when they become effective. Revenue from Contracts with Customers In May 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers (IFRS 15), which establishes the principles for recognizing revenue and cash flows arising from contracts with customers and prescribes the application of a five-step recognition and measurement model. The standard excludes from its scope revenue arising from items such as financial instruments, insurance contracts, and leases. 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. In April 2016, the IASB issued amendments to IFRS 15, which provided additional guidance on the 5 Excludes allowance on securities purchased under reverse repurchase agreements, amounts receivable from brokers, dealers, and clients, and other assets which are netted against the related assets. The allowance for credit losses related to customers’ liability under acceptances is included in business and government. 6 Impairment allowances related to held-to-maturity securities were previously included in the allowances for business and government loans under IAS 39. 7 Previously held-to-maturity securities and debt securities classified as loans under IAS 39. identification of performance obligations, on assessing principal versus agent considerations and on licensing revenue. The amendments also provided additional transitional relief upon initial adoption of IFRS 15 and have the same effective date as the IFRS 15 standard. The Bank is required to adopt the standard for the annual period beginning on November 1, 2018. The standard is to be applied on a modified retrospective basis, recognizing the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings without restating comparative period financial information. As at October 31, 2018, the Bank’s current estimate of the adoption impact of IFRS 15, subject to refinement, is an overall reduction to Shareholder’s Equity of approximately $41 million related to certain expenses not eligible for deferral under IFRS 15. The presentation of certain revenue and expense items will also be reclassified prospectively. These presentation changes are not significant and do not have an impact on net income. 145 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS Leases In January 2016, the IASB issued IFRS 16, Leases (IFRS 16), which will replace IAS 17, Leases (IAS 17), introducing a single lessee accounting model for all leases by eliminating the distinction between operating and financing leases. IFRS 16 requires lessees to recognize right-of-use assets and lease liabilities for most leases on the balance sheet. Lessees will also recognize depreciation expense on the right-of-use asset, interest expense on the lease liability, and a shift in the timing of expense recognition in the statement of income. Short-term leases, which are defined as those that have a lease term of twelve months or less; and leases of low-value assets are exempt. Lessor accounting remains substantially unchanged. IFRS 16 is effective for annual periods beginning on or after January 1, 2019, which will be November 1, 2019 for the Bank, and is to be applied retrospectively. The Bank is continuing to assess the impact of the new standard on its portfolio of leases, including the impact upon its existing systems and internal controls. Share-based Payment In June 2016, the IASB published amendments to IFRS 2, Share-based Payment (IFRS 2), which provide additional guidance on the classification and measurement of share-based payment transactions. The amendments clarify the accounting for cash-settled share-based payment transactions that include a performance condition, the classification of share-based payment transactions with net settlement features for withholding tax obligations, and the accounting for modifications of share-based payment transactions from cash-settled to equity-settled. The amendments to IFRS 2 are effective for annual periods beginning on or after January 1, 2018, which is November 1, 2018 for the Bank. These amendments will be applied prospectively and will not have a significant impact on the Bank. 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, non-trading financial assets at fair value through profit or loss, assets and liabilities designated at fair value through profit or loss, financial assets at fair value through other comprehensive income, 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 various 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 include consideration of the reliability, relevancy, and timeliness of data. Insurance Contracts In May 2017, the IASB issued IFRS 17, Insurance Contracts (IFRS 17), which replaces the guidance in IFRS 4, Insurance Contracts and establishes a new model for recognizing insurance policy obligations, premium revenue, and claims-related expenses. IFRS 17 is currently effective for the Bank’s annual reporting period beginning November 1, 2021; however, based on recent IASB meetings, an upcoming amendment to IFRS 17 and a deferral of the transition date by one year is anticipated. Any change to the Bank’s transition date is subject to updates of OSFI’s related Advisory. The Bank is currently assessing the impact of adopting this standard. Conceptual Framework for Financial Reporting In March 2018, the IASB issued the revised Conceptual Framework for Financial Reporting (Revised Conceptual Framework), which provides a set of concepts to assist the IASB in developing standards and to help preparers consistently apply accounting policies where specific accounting standards do not exist. The framework is not an accounting standard and does not override the requirements that exist in other IFRS standards. The Revised Conceptual Framework describes that financial information must be relevant and faithfully represented to be useful, provides revised definitions and recognition criteria for assets and liabilities, and confirms that different measurement bases are useful and permitted. The Revised Conceptual Framework is effective for annual periods beginning on or after January 1, 2020, which will be November 1, 2020 for the Bank, with early adoption permitted. The Bank is currently assessing the impact of adopting the revised framework. 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 transaction 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. 146 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTSThe fair value of residential mortgage-backed securities is 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 is based on broker quotes, third-party vendor prices, or other valuation techniques, such as discounted cash flow techniques. Market inputs used in the other 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 valuation 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 its relative fair market value. Subsequently, the fair value of retained interests recognized by the Bank is determined by estimating the present value of future expected cash flows. 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 reflects changes in market price that have occurred since the loans were originated or purchased. For fixed-rate performing loans, estimated fair value is determined by discounting the expected future cash flows related to these loans at current market interest rates for loans with similar credit risks. For floating-rate performing loans, changes in interest rates have minimal impact on fair value since loans reprice to market frequently. On that basis, fair value is assumed to approximate carrying value. The fair value of loans is not adjusted for the value of any credit protection the Bank has purchased to mitigate credit risk. 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. The fair value of loans carried at fair value through other comprehensive income is assumed to approximate amortized cost as they are generally floating rate performing loans that are short term in nature. Commodities The fair value of commodities is based on quoted prices in active markets, where available. The Bank also transacts 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 financial instruments is estimated using well established valuation techniques, such as discounted cash flow techniques, the Black-Scholes model, and Monte Carlo simulation. The valuation models incorporate 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. 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. A funding valuation adjustment (FVA) is recognized against the model value of OTC derivatives to recognize the market implied funding costs and benefits 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 Bank will continue to monitor industry practice, and may refine the methodology and the products to which FVA applies to as market practices evolve. 147 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS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. 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. 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 and mortgage-backed security (MBS) 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 and bonds purchased or sold with an agreement to sell or repurchase 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. Portfolio Exception IFRS 13, Fair Value Measurement 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 carried at Fair Value The fair value of assets and liabilities subsequently not carried at fair value include most loans, most deposits, certain securitization liabilities, most securities purchased under reverse repurchase agreements, most obligations relating to securities sold under repurchase agreements, and subordinated 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, securities purchased under reverse repurchase agreements, customers’ liability under acceptances, amounts receivable from brokers, dealers, and clients, other assets, acceptances, obligations related to securities sold under repurchase agreements, amounts payable to brokers, dealers, and clients, and other liabilities. Carrying Value and Fair Value of Financial Instruments not carried at Fair Value The fair values in the following table exclude 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. 148 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTSFinancial Assets and Liabilities not carried at Fair Value1,2 (millions of Canadian dollars) FINANCIAL ASSETS Debt securities at amortized cost, net of allowance for credit losses Government and government-related securities Other debt securities Total debt securities at amortized cost, net of allowance for credit losses Held-to-maturity securities Government and government-related securities Other debt securities Total held-to-maturity securities Loans, net of allowance for loan losses Debt securities classified as loans Total loans, net of allowance for loan losses Total financial assets not carried at fair value FINANCIAL LIABILITIES Deposits Securitization liabilities at amortized cost Subordinated notes and debentures Total financial liabilities not carried at fair value Carrying value October 31, 20181 Fair value As at October 31, 2017 Carrying value Fair value $ 60,535 46,636 107,171 $ 59,948 46,316 106,264 $ $ n/a n/a n/a n/a n/a n/a n/a n/a n/a 646,393 n/a 646,393 $ 753,564 n/a n/a n/a 642,542 n/a 642,542 $ 748,806 45,623 25,740 71,363 609,529 3,062 612,591 $ 683,954 45,708 25,719 71,427 610,491 3,156 613,647 $ 685,074 $ 851,439 14,683 8,740 $ 874,862 $ 846,148 14,654 9,027 $ 869,829 $ 832,824 16,076 9,528 $ 858,428 $ 833,475 16,203 10,100 $ 859,778 1 Balances as at October 31, 2018 are prepared in accordance with IFRS 9. Prior period comparatives are based on IAS 39. Refer to Note 4 for further details. 2 This table excludes financial assets and liabilities where the carrying amount is a reasonable approximation of fair value. 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 methodologies, or similar techniques. The following table presents the levels within the fair value hierarchy for each of the assets and liabilities measured at fair value on a recurring basis as at October 31. Fair Value Hierarchy IFRS requires disclosure of a three-level hierarchy for fair value measurements based upon the observability 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 for identical assets or liabilities that are traded in an active exchange market or highly liquid and 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. 149 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS Fair Value Hierarchy for Assets and Liabilities Measured at Fair Value on a Recurring Basis (millions of Canadian dollars) Level 1 Level 2 October 31, 20181 Total2 Level 3 Level 1 Level 2 As at October 31, 2017 Total2 Level 3 FINANCIAL ASSETS AND COMMODITIES Trading loans, securities, and other3 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 Non-trading financial assets at fair value through profit or loss4 Securities Loans Derivatives Interest rate contracts Foreign exchange contracts Credit contracts Equity contracts Commodity contracts Financial assets designated at fair value through profit or loss Securities3 Financial assets at fair value through other comprehensive income 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 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 shares5,6 Preferred shares Debt securities reclassified from trading Securities purchased under reverse repurchase agreements 150 $ 127 $ 14,335 7,535 – $ – $ 14,462 $ 7,538 3 390 $ 8,678 6,524 – $ – $ 9,068 6,524 – – – – 19,732 3,324 2,029 – 19,732 3,324 – 2,029 – 605 – – 16,862 5,047 1,906 – – 5,630 14,459 1 5,631 16 14,475 – – 3,337 10,007 43,699 33 – 5,540 – 49,399 53 26 10,990 340 25 78,478 – 43,752 31,921 68 – 59 – 10,990 – 5,880 7,139 – – – 20 127,897 40,123 25 21 – 11,235 132 32 63,781 – – – 17,467 5,047 1,906 6 8 3,343 10,015 – – – – – 14 31,942 68 11,235 7,271 32 103,918 176 – 176 2,095 1,317 3,412 408 19 427 2,679 1,336 4,015 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 33 24 – – 144 201 12,365 39,647 9 3,170 1,112 56,303 – 12,398 4 39,675 9 – 3,623 453 1,291 35 492 56,996 21 9 – – 96 126 15,324 37,817 34 1,303 677 55,155 – 1 – 908 5 914 15,345 37,827 34 2,211 778 56,195 – – 3,618 3,618 – – 3,618 3,618 220 220 3,699 3,699 113 113 4,032 4,032 – – 12,731 9,507 – – – – – – 45,766 19,896 6,633 21,407 472 8,483 – 12,731 9,507 – – 45,766 200 20,096 6,633 – 562 21,969 472 8,507 – 24 309 235 – 544 3 – 2,745 127,643 1,492 135 – 1,804 370 2,745 2,413 130,600 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a – – – – – – – – n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 16,225 7,922 48,280 21,122 8,812 – – 16,225 7,922 – – – 48,280 21,122 8,812 29,428 1,715 9,768 553 – 22 29,981 1,715 9,790 341 242 – 583 3 – 2 143,277 1,572 123 275 2,545 1,916 365 277 146,405 – 3,920 – 3,920 – 1,345 – 1,345 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS Fair Value Hierarchy for Assets and Liabilities Measured at Fair Value on a Recurring Basis (continued) (millions of Canadian dollars) Level 1 Level 2 October 31, 20181 Total2 Level 3 Level 1 Level 2 As at October 31, 2017 Total2 Level 3 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 short3 Obligations related to securities sold under repurchase agreements $ – $ 111,680 $ 3,024 $ 114,704 $ – $ 77,419 $ 2,521 $ 79,940 24 18 – – 134 176 – 9,646 34,897 386 1,319 695 46,943 12,618 63 9,733 3 34,918 386 – 2,396 1,077 837 8 1,151 48,270 – 12,618 15 10 – – 97 122 – 12,730 33,599 356 1,999 534 49,218 12,757 70 – – 1,801 3 1,874 – 12,815 33,609 356 3,800 634 51,214 12,757 – 1,142 2 38,336 14 – 16 – 39,478 2,068 1 33,414 7 – 8 35,482 – 3,797 – 3,797 – 2,064 – 2,064 1 Balances as at October 31, 2018 are prepared in accordance with IFRS 9. Prior period comparatives have not been restated. Refer to Note 4 for further details. 2 Fair value is the same as carrying value. 3 Balances reflect the reduction of securities owned (long positions) by the amount of identical securities sold but not yet purchased (short positions). 4 Refer to Note 4 for further details on financial assets that were re-classified to non-trading as a result of adoption of IFRS 9. 5 As at October 31, 2017, includes Federal Reserve stock and Federal Home Loan Bank stock of $1.4 billion. These are redeemable by the issuer at cost which approximates fair value. 6 As at October 31, 2017, the carrying values of certain available-for-sale equity securities of $6 million are assumed to approximate fair value in the absence of quoted market prices in an active market and are excluded from the table above. As at October 31, 2018, these were included as FVOCI securities in the table above. • Transfers from Level 2 to Level 3 occur when an instrument’s fair value, which was previously determined using valuation techniques with significant observable market inputs, is now determined using valuation techniques with significant non-observable inputs. Due to the unobservable nature of the inputs used to value Level 3 financial instruments there may be uncertainty about the valuation of these instruments. The fair value of Level 3 instruments may be drawn from a range of reasonably possible alternatives. In determining the appropriate levels for these unobservable inputs, parameters are chosen so that they are consistent with prevailing market evidence and management 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. During the year ended October 31, 2018, the Bank transferred $20 million securities from Non-trading financial assets at fair value through profit or loss from Level 1 to Level 2. During the year ended October 31, 2017, the Bank transferred $164 million and $48 million of treasury securities designated at fair value through profit or loss and Obligations related to securities sold short respectively from Level 1 to Level 2 as they are now off-the-run and traded less frequently. 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. 151 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS 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 Fair value as at November 1 20171 Included in income2 Included in OCI3 Purchases Issuances Other4 Into Level 3 Transfers Change in unrealized gains (losses) on Out of October 31 instruments still held5 Level 3 Fair value as at 2018 FINANCIAL ASSETS Trading loans, securities, and other Government and government- related securities Canadian government debt Provinces Other debt securities Canadian issuers Other issuers Non-trading financial assets at fair value through profit or loss Securities Loans Financial assets at fair value through other comprehensive income Government and government- related securities Other OECD government guaranteed debt Other debt securities Asset-backed securities Corporate and other debt Equity securities Common shares Preferred shares $ – $ – $ – $ 1 $ – $ – $ 2 $ – $ 3 $ – 6 8 14 – (5) (5) 305 15 320 60 (4) 56 – – – – – – 203 15 (18) 553 95 – 12 (2) 2 – 46 47 54 8 62 – – – 1,469 108 $ 2,428 – – $ 27 (5) 27 $ 4 23 – $ 23 $ – – – – – – – – – – – – (4) (31) (35) (11) – (11) – 11 (85) 5 – $ (69) $ 1 172 175 (2) (174) (176) 1 16 20 (1) (2) (3) – – – – – – – – – – – – – – – – – – $ 408 19 427 51 (4) 47 200 (18) 562 24 (2) 2 1,492 135 $ 2,413 (7) 26 $ 1 Total realized and unrealized losses (gains) Movements Fair value as at November 1 20171 Included in income2 Included in OCI3 Purchases Issuances Other4 Into Level 3 Transfers Change in unrealized losses (gains) on Out of October 31 instruments still held5 Level 3 Fair value as at 2018 FINANCIAL LIABILITIES Trading deposits6 Derivatives7 Interest rate contracts Foreign exchange contracts Equity contracts Commodity contracts Other financial liabilities designated at fair value through profit or loss Obligations related to securities sold short $ 2,521 $ (78) $ – $ (443) $ 1,729 $ (685) $ 46 $ (66) $ 3,024 $ (122) 70 (1) 893 (2) 960 (10) – (131) (43) (184) 7 14 – – – – – – – – – – – (75) – (75) – – – – 196 – 196 3 (1) (260) 18 (240) 117 (124) – (4) – – – – – – 4 – 1 1 – 2 – – 63 (1) 624 (27) 659 (6) (3) (125) (26) (160) 14 11 – – 1 Balances as at November 1, 2017 are prepared in accordance with IFRS 9. Refer to Note 4 for further details. 4 Consists of sales, settlements, and foreign exchange. 5 Changes in unrealized gains (losses) on financial assets at FVOCI (AFS under 2 Gains (losses) on financial assets and liabilities are recognized in Net securities IAS 39) are recognized in AOCI. gains (losses), Trading income (loss), and Other income (loss) on the Consolidated Statement of Income. 6 Issuances and repurchases of trading deposits are reported on a gross basis. 7 As at October 31, 2018, consists of derivative assets of $0.5 billion 3 Includes realized gains/losses transferred to retained earnings on disposal of equities designated at FVOCI. Refer to Note 7 for further details. (November 1, 2017 – $0.9 billion) and derivative liabilities of $1.2 billion (November 1, 2017 – $1.9 billion), which have been netted on this table for presentation purposes only. 152 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS Reconciliation of Changes in Fair Value for Level 3 Assets and Liabilities (millions of Canadian dollars) Total realized and unrealized gains (losses) Movements Transfers Fair value as at November 1 2016 Included in income1 Included in OCI Purchases Issuances Other2 Into Level 3 Fair value as at Out of October 31 2017 Level 3 FINANCIAL ASSETS Trading loans, securities, and other Government and government- related securities Canadian government debt Federal Provinces Other OECD government guaranteed debt Other debt securities Canadian issuers Other issuers Equity securities Common shares Retained interests Financial assets designated at fair value through profit or loss Securities Available-for-sale securities Government and government- related securities 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 FINANCIAL LIABILITIES Trading deposits4 Derivatives5 Interest rate contracts Foreign exchange contracts Equity contracts Commodity contracts Other financial liabilities designated at fair value through profit or loss Obligations related to securities sold short Change in unrealized gains (losses) on instruments still held3 $ – – – – 1 – – 1 (3) (3) – – 2 (26) 26 3 $ 5 Change in unrealized losses (gains) on instruments still held3 $ 34 – 73 15 148 65 31 366 157 157 6 – 20 $ (2) – $ 7 – 2 – – – – – – 6 13 – – – $ $ 3 – 17 1 253 – – 274 (3) (3) – – 13 13 – – – – – 2 – 553 – 1,594 98 36 6 (26) 26 153 4 279 $ 1,997 (2) $ 40 3 $ 5 – $ 710 $ – – – – – – – – – – – – – – – – – $ (32) – $ – 7 $ (3) (7) $ (58) 20 (59) (15) (312) 9 138 (4) (221) (65) – (482) – – 174 – (37) (331) (54) (54) – – (6) – – (185) (11) – – – – – – – – – – – – – – – 6 8 – – 14 113 113 – 553 22 1,572 123 (3) $ (205) 1 1 $ (3) (3) 275 $ 2,545 $ Total realized and unrealized losses (gains) Movements Transfers Fair value as at November 1 2016 Included in income1 Included in OCI Purchases Issuances Other2 Into Level 3 Fair value as at Out of October 31 2017 Level 3 $ 2,214 $ 212 $ – $ (790) $ 1,380 $ (448) $ 33 $ (80) $ 2,521 $ 195 95 (4) 679 (5) 765 (20) 4 321 2 307 13 54 14 – – – – – – – – – – (73) – (73) – – 174 – 174 (5) – (208) – (213) – 119 (179) (14) – – – (2) – – (2) – – – 1 – 1 2 – – 70 (1) 893 (2) 960 (20) (1) 330 – 309 7 – 47 – 1 Gains (losses) on financial assets and liabilities are recognized in Net securities 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 AFS securities are recognized in AOCI. 4 Issuances and repurchases of trading deposits are reported on a gross basis. 5 As at October 31, 2017, consists of derivative assets of $0.9 billion (November 1, 2016 – $0.7 billion) and derivative liabilities of $1.9 billion (November 1, 2016 – $1.5 billion), which have been netted on this table for presentation purposes only. 153 TD BANK GROUP ANNUAL REPORT 2018 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 unobservable 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 securities, 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 creditworthy than the benchmark against which the spread is calculated. A wider credit spread represents decreasing creditworthiness. 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 loan 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. 154 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTSValuation techniques and inputs used in the fair value measurement of Level 3 assets and liabilities The following table presents 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, 2018 October 31, 2017 As at Lower range Upper range Lower range Upper range Unit Government and government- related securities Market comparable Bond price equivalent 76 172 100 177 points Other debt securities Market comparable Bond price equivalent – 104 – 114 points Equity securities1 Market comparable Discounted cash flow EBITDA multiple Market comparable New issue price Discount rate Earnings multiple Price equivalent n/a 6 5.0 84 100 8 0.3 50 n/a n/a 9 20.5 117 100 40 5.3 50 n/a 100 6 5.5 50 n/a n/a n/a n/a n/a 100 9 20.5 118 % % times % n/a n/a n/a n/a n/a % % times % Market comparable Discounted cash flow EBITDA multiple Market comparable Price-based New issue price Discount rates Earnings multiple Liquidity Discount Net Asset Value Non-trading financial assets at fair value through profit or loss Other financial assets designated at fair value through profit or loss Derivatives Interest rate contracts Price-based Net Asset Value n/a n/a n/a n/a Swaption model Discounted cash flow Option model Currency-specific volatility Inflation rate swap curve Funding ratio 15 1 65 7 346 2 75 14 Foreign exchange contracts Option model Currency-specific volatility Credit contracts Discounted cash flow Credit spread n/a n/a Equity contracts Option model Commodity contracts Option model Market comparable Trading deposits Option model Swaption model Price correlation Quanto correlation Dividend yield Equity volatility New issue price Quanto correlation Swaption correlation Price correlation Quanto correlation Dividend yield Equity volatility Currency-specific volatility 1 (65) – 10 100 (66) n/a 1 (85) – 8 15 96 68 8 105 100 (46) n/a 96 68 13 131 346 11 1 55 7 40 (9) (38) – 8 n/a (65) 29 (9) (38) – 7 11 338 2 75 10 40 97 17 8 74 n/a (45) 41 97 18 10 68 338 % % % % bps2 % % % % % % % % % % % % Other financial liabilities designated at fair value through profit or loss Option model Funding ratio 2 70 5 67 % 1 As at October 31, 2018, common shares exclude the fair value of Federal Reserve stock and Federal Home Loan Bank stock of $1.4 billion (October 31, 2017 – $1.4 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. 155 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS The following table summarizes the potential effect of using reasonably 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 derivative contracts, 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, correlation, or the price and volatility of the underlying equity instrument. For equity securities at fair value through other comprehensive income, the sensitivity was calculated based on an upward and downward shock of the fair value reported. 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 Non-trading financial assets at fair value through profit or loss Securities Loans Derivatives Equity contracts Commodity contracts Financial assets designated at fair value through profit or loss Securities Financial assets at fair value through other comprehensive income Other debt securities Asset-backed securities Corporate and other debt Equity securities Common shares Preferred shares Available-for-sale securities Other debt securities Asset-backed securities Corporate and other debt Equity securities Common shares Preferred shares FINANCIAL LIABILITIES Trading deposits Derivatives Interest rate contracts Equity contracts Other financial liabilities designated at fair value through profit or loss Total October 31, 2018 Impact to net assets As at October 31, 2017 Impact to net assets Decrease in fair value Increase in fair value Decrease in fair value Increase in fair value $ 46 2 48 16 1 17 – – 40 2 4 26 72 n/a n/a n/a n/a $ 26 2 28 21 1 22 – – 40 2 2 7 51 n/a n/a n/a n/a $ n/a n/a 12 – 12 6 6 n/a n/a n/a n/a 11 2 26 21 60 $ n/a n/a 10 – 10 6 6 n/a n/a n/a n/a 11 2 8 6 27 18 26 11 16 15 45 60 2 $ 217 12 36 48 2 $ 177 16 20 36 1 $ 126 14 22 36 1 $ 96 The best evidence of a financial instrument’s fair value at initial recognition 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 difference 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 recognized 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. (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 2018 $ 19 25 (30) $ 14 2017 $ 41 35 (57) $ 19 156 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS FINANCIAL ASSETS DESIGNATED AT FAIR VALUE Securities Designated at Fair Value through Profit or Loss Certain securities supporting insurance reserves within the Bank’s insurance underwriting subsidiaries have been designated at FVTPL to eliminate or significantly reduce an accounting mismatch. The actuarial valuation of the insurance reserve is measured using a discount factor which is based on the yield of the supporting invested assets, which includes the securities designated at FVTPL, with changes in the discount factor being recognized on the Consolidated Statement of Income. The unrealized gains or losses on securities designated at FVTPL are recognized on the Consolidated Statement of Income in the same period as gains or losses resulting from changes to the discount rate used to value the insurance liabilities. In addition, certain debt securities are economically hedged with derivatives as doing so eliminates or significantly reduces an accounting mismatch. As a result, these debt securities 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. 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, 2018 As at October 31, 2017 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total ASSETS Debt securities at amortized cost, net of allowance for credit losses Government and government-related securities Other debt securities Total debt securities at amortized cost, net of allowance for credit losses Held-to-maturity securities Government and government-related securities Other debt securities Total held-to-maturity securities Loans, net of allowance for loan losses Debt securities classified as loans Total Loans Total assets with fair value disclosures LIABILITIES Deposits Securitization liabilities at amortized cost Subordinated notes and debentures Total liabilities with fair value disclosures $ 119 $ 59,828 $ 43,826 – 1 $ 59,948 2,490 46,316 $ n/a n/a $ 119 103,654 2,491 106,264 n/a $ n/a n/a n/a n/a $ n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a – n/a – n/a n/a n/a 208,794 433,748 642,542 n/a 208,794 433,748 642,542 $ 119 $ 312,448 $ 436,239 $ 748,806 n/a n/a $ $ – $ 846,148 $ 14,654 – – 9,027 – $ 869,829 $ – $ 846,148 – 14,654 – 9,027 – $ 869,829 45,708 25,719 71,427 204,695 2,487 207,182 – 45,708 – – 25,719 – – 71,427 – 405,796 610,491 – 3,156 – – 406,465 613,647 – $ 278,609 $ 406,465 $ 685,074 669 – $ 833,475 $ 16,203 – – 10,100 – $ 859,778 $ – $ 833,475 – 16,203 – 10,100 – $ 859,778 $ $ $ 1 This table excludes financial assets and liabilities where the carrying amount is a reasonable approximation of fair value. 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 counterparties 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 transactions 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. 157 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS 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, 2018 Amounts subject to an enforceable master netting arrangement or similar agreement that are not offset in the Consolidated Balance Sheet2,3 Gross amounts of recognized financial instruments before balance sheet netting Gross amounts of recognized financial instruments offset 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 Derivatives4 Securities purchased under reverse repurchase agreements Total Financial Liabilities Derivatives Obligations related to securities sold under repurchase agreements Total $ 59,661 $ 2,665 $ 56,996 157,832 217,493 30,453 33,118 127,379 184,375 50,935 2,665 48,270 123,842 $ 174,777 30,453 $ 33,118 93,389 $ 141,659 Financial Assets Derivatives Securities purchased under reverse repurchase agreements Total Financial Liabilities Derivatives Obligations related to securities sold under repurchase agreements Total $ 82,219 $ 26,024 $ 56,195 149,402 231,621 14,973 40,997 134,429 190,624 77,238 26,024 51,214 103,564 $ 180,802 14,973 $ 40,997 88,591 $ 139,805 $ 34,205 7,452 41,657 34,205 7,452 $ 41,657 $ 36,522 8,595 45,117 36,522 8,595 $ 45,117 Collateral Net Amount $ 11,678 $ 11,113 119,797 131,475 130 11,243 12,127 1,938 85,793 $ 97,920 144 $ 2,082 October 31, 2017 $ 9,731 $ 9,942 125,479 135,210 355 10,297 12,571 2,121 79,697 $ 92,268 299 $ 2,420 1 Certain comparative amounts have been restated to conform with the presentation 4 The decrease in gross amounts of recognized financial instruments before balance adopted in the current period. 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. sheet netting and gross amounts of recognized financial instruments offset in the Consolidated Balance Sheet reflects rule changes adopted by certain central clearing counterparties that require or allow entities to elect to treat daily variation margin as settlement of the related derivative fair values. This change is accounted for prospectively effective January 2018. 158 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS N O T E 7 SECURITIES 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 Securities designated at fair value through profit or loss Government and government-related securities Canadian government debt Federal Provinces U.S. federal, state, municipal governments, and agencies debt Other OECD government-guaranteed debt Other debt securities Canadian issuers Other issuers Total FVO securities Securities at fair value through other comprehensive income 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 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 to years maturity 10 years Over 10 Total Total As at October 31 October 31 2017 2018 $ 6,788 $ 2,526 $ 2,127 $ 1,901 $ 1,120 $ 1,223 1,641 1,278 1,040 2,081 659 1,166 2,948 779 1,540 6,274 433 2,569 6,788 175 348 6 11,284 1,017 7 7,330 581 11 7,612 – 59 10,207 – – 10,652 – $ 14,462 $ 9,068 6,524 7,538 – 17,467 – 19,732 5,047 3,324 – 1,946 – – 83 – 47,085 1,784 122 40,012 829 3,885 4,714 1,704 5,509 7,213 1,324 2,853 4,177 1,053 1,970 3,023 721 258 979 – 5,631 – 14,475 – 20,106 3,343 10,015 13,358 – – – – 31,942 68 32,010 32 $ 15,998 $ 14,545 $ 11,798 $ 13,244 $ 11,631 $ 43,811 $ 111,027 $ 85,412 43,752 43,752 59 43,811 43,811 25 – – – – 14 – – – 9 – – – 2 – – – – 59 $ $ 30 $ 63 – 649 742 13 238 251 993 $ – $ – 127 80 207 – $ – $ 15 $ 71 – 42 113 216 – – 216 104 – – 119 45 $ – $ 454 – 127 – – 771 – 1,397 713 718 – 688 2,119 376 237 613 820 $ 1,020 $ 770 137 907 450 – 450 666 $ – – – 119 $ 1,188 1,609 – 725 612 – – 2,221 1,913 – $ 3,618 $ 4,032 $ 3,504 $ 5,614 $ 2,875 $ 290 $ 676 3,406 6,991 454 15,031 1,561 17,277 6,138 2,696 33,286 2,376 10,638 6,643 3,483 26,015 4,691 4,305 324 – 9,610 448 $ 203 10,140 – – 10,791 – – 1,307 1,307 3,740 – 3,522 7,262 9,213 – 1,858 11,071 2,981 – 1,796 4,777 6,035 472 24 6,531 – $ 12,731 $ – 9,507 – 45,766 – 20,096 – 6,633 – 94,733 – 21,969 – 472 – 8,507 – 30,948 – – – – – – – – – – – – – – – 1,804 370 1,804 370 2,174 2,174 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Total securities at fair value through other comprehensive income $ 16,338 $ 40,548 $ 37,086 $ 14,387 $ 17,322 $ 2,174 $ 127,855 $ n/a 1 Represents contractual maturities. Actual maturities may differ due to prepayment privileges in the applicable contract. 159 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS Securities Maturity Schedule (continued) (millions of Canadian dollars) 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 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 to years maturity 10 years Over 10 Total Total As at October 31 October 31 2017 2018 $ n/a $ n/a n/a $ n/a n/a $ n/a n/a $ n/a n/a $ n/a n/a $ n/a n/a $ 16,225 7,922 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 48,280 21,122 8,812 102,361 29,981 1,715 9,790 41,486 n/a n/a n/a n/a n/a $ n/a n/a n/a n/a n/a $ n/a n/a n/a n/a n/a $ n/a n/a n/a n/a n/a $ n/a n/a n/a n/a n/a $ n/a n/a n/a n/a n/a $ 1,922 n/a 365 n/a 2,287 n/a n/a 277 n/a $ 146,411 Debt securities reclassified from trading Total available-for-sale securities Debt securities at amortized cost, net of allowance for credit losses Government and government-related securities Canadian government debt Federal Provinces U.S. federal, state, municipal governments, and agencies debt Other OECD government guaranteed debt $ $ 1,364 $ 396 $ 1,136 $ 10 1,606 8,960 11,940 – 4,837 7,529 12,762 176 6,211 7,519 15,042 317 $ 1,709 $ 596 11,053 1,675 13,641 – 5,441 – 7,150 – $ 4,922 $ – 782 – 29,148 – 25,683 – 60,535 – 23,709 – 15,867 – 7,060 – 46,636 n/a n/a n/a n/a n/a n/a n/a n/a n/a Other debt securities Asset-backed securities Non-agency collateralized mortgage obligation portfolio Other issuers 332 – 1,849 2,181 3,787 – 2,391 6,178 5,738 – 2,403 8,141 5,096 – 414 5,510 8,756 15,867 3 24,626 Total debt securities at amortized cost, net of allowance for credit losses $ 14,121 $ 18,940 $ 23,183 $ 19,151 $ 31,776 $ – $ 107,171 $ n/a 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 $ n/a $ n/a n/a n/a n/a $ n/a n/a n/a n/a $ n/a n/a n/a n/a $ n/a n/a n/a n/a $ n/a n/a n/a n/a $ n/a n/a n/a n/a $ n/a n/a n/a 661 22,531 22,431 45,623 n/a n/a n/a n/a n/a 8,837 10,728 6,175 25,740 71,363 $ 47,450 $ 74,853 $ 73,087 $ 47,448 $ 60,848 $ 45,985 $ 349,671 $ 307,218 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 1 Represents contractual maturities. Actual maturities may differ due to prepayment privileges in the applicable contract. 160 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS Unrealized Securities Gains (Losses) The following table summarizes the unrealized gains and losses as at October 31. Unrealized Securities Gains (Losses) for Securities at Fair Value Through Other Comprehensive Income (IAS 39 – Available-for-Sale Securities) (millions of Canadian dollars) October 31, 2018 As at October 31, 2017 Cost/ Gross amortized unrealized unrealized (losses) Gross cost1 gains Cost/ Gross Fair amortized unrealized unrealized (losses) cost1 Gross gains value Fair value Securities at Fair Value Through Other Comprehensive Income (IAS 39 – 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 Debt securities reclassified from trading Total debt securities Equity securities Common shares Preferred shares Total securities at fair value through other comprehensive income $ 12,740 9,443 45,857 20,034 6,575 94,649 21,901 471 8,534 30,906 n/a 125,555 1,725 376 2,101 $ 38 75 265 65 59 502 87 1 31 119 n/a 621 118 20 138 $ (47) $ 12,731 $ 16,200 (11) 7,859 9,507 (356) 45,766 48,082 (3) 20,096 21,067 8,757 (1) 6,633 (418) 94,733 101,965 (19) 21,969 29,879 1,706 472 – 9,753 8,507 (58) (77) 30,948 41,338 n/a 250 n/a (495) 125,681 143,553 (39) (26) (65) 1,804 370 2,174 1,821 313 2,134 $ 53 66 310 69 56 554 135 9 63 207 27 788 114 52 166 $ (3) (28) $ 16,225 7,922 (112) 48,280 (14) 21,122 8,812 (158) 102,361 (1) (33) 29,981 1,715 – 9,790 (26) (59) 41,486 277 (217) 144,124 – (13) – (13) 1,922 365 2,287 $ 127,656 $ 759 $ (560) $ 127,855 $ 145,687 $ 954 $ (230) $ 146,411 1 Includes the foreign exchange translation of amortized cost balances at the period-end spot rate. Equity Securities Designated at Fair Value Through Other Comprehensive Income The Bank designated certain equity securities shown in the following table as equity securities at FVOCI under IFRS 9. The designation was made because the investments are held for purposes other than trading. Equity Securities Designated at Fair Value Through Other Comprehensive Income (millions of Canadian dollars) As at For the year ended Common shares Preferred shares Total October 31, 2018 October 31, 2018 Fair value $ 1,804 370 $ 2,174 Dividend income recognized $ 71 16 $ 87 The Bank disposed of equity securities with a fair value of $22 million during the year ended October 31, 2018. The Bank realized a cumulative gain/(loss) of $2 million during the year ended October 31, 2018, on disposal of these equity securities and recognized dividend income of nil during the year ended October 31, 2018. Net Securities Gains (Losses) (millions of Canadian dollars) Debt securities at amortized cost Net realized gains (losses) Debt securities at fair value through other comprehensive income Net realized gains (losses) Held-to-maturity securities Net realized gains (losses) Available-for-sale securities2 Net realized gains (losses) Impairment (losses) Total For the year ended October 31 October 31 2017 20181 $ 76 $ n/a 35 n/a n/a (8) n/a n/a $ 111 147 (11) $ 128 1 Amounts for the year ended October 31, 2018 are prepared in accordance with IFRS 9. Prior period comparatives are based on IAS 39. Refer to Note 4 for further details. 2 Under IFRS 9, realized gains (losses) on equity securities at FVOCI are no longer recognized in income, rather they are recognized in Retained earnings. Prior to the adoption of IFRS 9, realized gains (losses) from AFS equity securities were included in Net securities gain (loss). 161 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS Credit Quality of Debt Securities The Bank evaluates non-retail credit risk on an individual borrower basis, using both a BRR and FRR, and this system is used to assess all non-retail exposures, including debt securities. Refer to the shaded areas of the “Managing Risk” section of the 2018 MD&A for further details, as well as the mapping of the Bank’s 21-point BRR scale to risk levels and external ratings. The following table provides the gross carrying amounts of debt securities measured at amortized cost and debt securities at FVOCI by internal risk ratings for credit risk management purposes, presenting separately those debt securities that are subject to Stage 1, Stage 2, and Stage 3 allowances. Debt Securities by Risk Ratings (millions of Canadian dollars) Debt securities Investment grade Non-Investment grade Watch and classified Default Total debt securities Allowance for credit losses on debt securities at amortized cost Debt securities, net of allowance As at October 31, 2018 Stage 1 Stage 2 Stage 3 Total $ 230,488 2,140 n/a n/a 232,628 1 $ 232,627 $ – 54 11 n/a 65 4 $ 61 $ n/a n/a n/a 234 234 70 $ 164 $ 230,488 2,194 11 234 232,927 75 $ 232,852 As at October 31, 2018, the allowance for credit losses on debt securities at FVOCI was $5 million, inclusive within the FVOCI balance. For the year ended October 31, 2018, the Bank reported $2 million recovery of credit losses on debt securities at amortized cost and $10 million of provision for credit losses on debt securities at FVOCI. The difference between probability-weighted ECL and base ECL on debt securities at FVOCI and at amortized cost at October 31, 2018, was insignificant. Refer to Note 3 for further details. N O T E 8 LOANS, IMPAIRED LOANS, AND ALLOWANCE FOR CREDIT LOSSES Credit Quality of Loans In the retail portfolio, including individuals and small businesses, the Bank manages exposures on a pooled basis, using predictive credit scoring techniques. For non-retail exposures, each borrower is assigned a BRR that reflects the PD of the borrower using proprietary industry and sector-specific risk models and expert judgement. Refer to the shaded areas of the “Managing Risk” section of the 2018 MD&A for further details, as well as the mapping of PD ranges to risk levels for retail exposures and TD’s 21-point BRR scale to risk levels and external ratings for non-retail exposures. The following table provides the gross carrying amounts of loans and credit risk exposures on loan commitments and financial guarantee contracts by internal risk ratings for credit risk management purposes, presenting separately those that are subject to Stage 1, Stage 2, and Stage 3 allowances. 162 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS Loans by Risk Ratings1 (millions of Canadian dollars) Residential mortgages2,3,4 Low Risk Normal Risk Medium Risk High Risk Default Total Allowance for loan losses Loans, net of allowance Consumer instalment and other personal5 Low Risk Normal Risk Medium Risk High Risk Default Total Allowance for loan losses Loans, net of allowance Credit card Low Risk Normal Risk Medium Risk High Risk Default Total Allowance for loan losses Loans, net of allowance Business and government2,3,4 Investment grade or Low/Normal Risk Non-Investment grade or Medium Risk Watch and classified or High Risk Default Total Allowance for loan losses Loans, net of allowance Total loans Total Allowance for loan losses Total loans, net of allowance Off-balance sheet credit instruments Retail Exposures6 Low Risk Normal Risk Medium Risk High Risk Default Non-Retail Exposures7 Investment grade Non-Investment grade Watch and classified Default Total off-balance sheet credit instruments Allowance for off-balance sheet credit instruments Total off-balance sheet credit instruments, net of allowance Acquired credit-impaired loans Allowance for loan losses Acquired credit-impaired loans, net of allowance for loan losses Stage 1 Stage 2 Stage 3 Total As at October 31, 2018 $ 168,690 47,821 5,106 892 n/a 222,509 24 222,485 $ 32 176 267 1,264 n/a 1,739 34 1,705 87,906 48,008 23,008 6,158 n/a 165,080 574 164,506 7,234 9,780 11,347 4,435 n/a 32,796 379 32,417 118,414 108,678 666 n/a 227,758 651 227,107 648,143 1,628 $ 646,515 $ 246,575 51,961 12,298 1,765 n/a 167,993 60,002 13 n/a 540,607 550 540,057 n/a n/a n/a $ 983 1,190 1,063 2,386 n/a 5,622 349 5,273 11 66 246 1,445 n/a 1,768 283 1,485 57 5,272 3,746 n/a 9,075 551 8,524 18,204 1,217 $ 16,987 $ 2,576 1,129 469 638 n/a 323 2,309 1,949 n/a 9,393 479 8,914 n/a n/a n/a $ $ n/a n/a n/a 317 392 709 47 662 n/a n/a n/a 817 514 1,331 178 1,153 n/a n/a n/a 333 121 454 341 113 n/a n/a 97 563 660 120 540 3,154 686 $ 2,468 $ n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 453 18 435 $ $ 168,722 47,997 5,373 2,473 392 224,957 105 224,852 88,889 49,198 24,071 9,361 514 172,033 1,101 170,932 7,245 9,846 11,593 6,213 121 35,018 1,003 34,015 118,471 113,950 4,509 563 237,493 1,322 236,171 669,501 3,531 $ 665,970 $ 249,151 53,090 12,767 2,403 n/a 168,316 62,311 1,962 n/a 550,000 1,029 548,971 453 18 435 $ 1 Includes loans that are measured at FVOCI and customers’ liability under 5 Includes Canadian government-insured real estate personal loans of $14 billion acceptances. as at October 31, 2018. 2 As at October 31, 2018, impaired loans with a balance of $124 million did not have a related allowance for loan losses. An allowance was not required for these loans as the balance relates to loans where the realizable value of the collateral exceeded the loan amount. 6 As at October 31, 2018, includes $302 billion of personal lines of credit and credit card lines, which are unconditionally cancellable at the Bank’s discretion at any time. 7 As at October 31, 2018, includes $37 billion of the undrawn component of 3 Excludes trading loans and non-trading loans at FVTPL with a fair value of uncommitted credit and liquidity facilities. $11 billion and $1 billion, respectively, as at October 31, 2018. 4 Includes insured mortgages of $95 billion as at October 31, 2018. 163 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS The following table presents the Bank’s loans, impaired loans, and related allowance for credit losses under IAS 39. Loans, Impaired Loans, and Allowance for Loan Losses (millions of Canadian dollars) 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 Neither past due nor impaired Past due but not impaired $ 218,653 $ 2,382 6,258 149,473 1,800 30,783 1,173 198,893 $ 597,802 $ 11,613 Gross Loans Total Impaired2 $ 750 $ 221,785 1,312 157,043 424 33,007 599 200,665 $ 3,085 $ 612,500 3,209 665 $ 616,374 As at October 31, 2017 Counter- party specific Individually insignificant impaired loans Allowance for loan losses1 Incurred Total but not allowance for loan losses identified loan losses Net loans $ – – – 134 $ 134 126 3 $ 263 $ 42 147 335 29 $ 553 – 32 $ 585 $ 36 $ 78 $ 221,707 803 156,240 656 1,264 31,743 929 1,457 199,208 1,294 $ 2,915 $ 3,602 $ 608,898 3,063 630 $ 2,935 $ 3,783 $ 612,591 146 35 20 – 1 Excludes allowance for off-balance sheet instruments. 2 As at October 31, 2017, impaired loans exclude $0.6 billion of gross impaired debt securities classified as loans. 3 Excludes trading loans with a fair value of $11 billion as at October 31, 2017, and amortized cost of $11 billion as at October 31, 2017. 5 As at October 31, 2017, impaired loans with a balance of $99 million did not have a related allowance for loan losses. 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 $16 billion 4 Includes insured mortgages of $106 billion as at October 31, 2017. as at October 31, 2017. The following table presents information related to the Bank’s impaired loans as at October 31. Impaired Loans1 (millions of Canadian dollars) Residential mortgages Consumer instalment and other personal Credit card Business and government Total Unpaid principal balance2 $ 776 1,465 454 726 $ 3,421 Carrying value $ 709 1,331 454 660 $ 3,154 October 31, 2018 Related allowance for credit losses Average gross impaired loans $ 47 $ 726 178 341 120 $ 686 1,325 422 580 $ 3,053 Unpaid principal balance2 $ 790 1,477 424 687 $ 3,378 Carrying value $ 750 1,312 424 599 $ 3,085 As at October 31, 2017 Related allowance for credit losses $ 42 147 335 163 $ 687 Average gross impaired loans $ 801 1,349 391 706 $ 3,247 1 Balances as at October 31, 2018 exclude ACI loans. As at October 31, 2017, balances exclude both ACI loans and debt securities classified as loans. 2 Represents contractual amount of principal owed. 164 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS The changes to the Bank’s allowance for loan losses, as at and for the year ended October 31, 2018 are shown in the following tables. Allowance for Loan Losses – Residential Mortgages (millions of Canadian dollars) Allowance for loan losses as at November 1, 2017 Provision for credit losses Transfer to Stage 11 Transfer to Stage 2 Transfer to Stage 3 Net remeasurement due to transfers2 New originations or purchases3 Net repayments4 Derecognition of financial assets (excluding disposals and write-offs)5 Changes to risk, parameters, and models6 Other changes Disposals Foreign exchange and other adjustments Write-offs Recoveries Total allowance for loan losses as at October 31, 2018 Stage 1 $ 24 Stage 2 $ 26 Acquired credit-impaired loans $ 12 Stage 3 $ 45 24 (4) – 20 (14) 14 (1) (3) (16) – – – – – – $ 24 (23) 8 (9) (24) 6 n/a (1) (2) 29 8 – – – – – $ 34 (1) (4) 9 4 – n/a (1) (4) 29 28 – 2 (31) 3 (26) $ 47 – – – – – – (4) – (5) (9) – 2 – – 2 $ 5 Total $ 107 – – – – (8) 14 (7) (9) 37 27 – 4 (31) 3 (24) $ 110 1 Transfers represent stage transfer movements prior to ECLs remeasurement. 2 Represents the remeasurement between twelve-month and lifetime ECLs due to stage transfers, excluding the change to risk, parameters, and models. 5 Represents the decrease in the allowance resulting from loans that were fully repaid and excludes the decrease associated with loans that were disposed or fully written off. 3 Represents the increase in the allowance resulting from loans that were newly 6 Represents the change in the allowance related to changes in risk including changes originated, purchased, or renewed. to macroeconomic factors, level of risk, associated parameters, and models. 4 Represents the changes in the allowance related to cash flow changes associated with new draws or repayments on loans outstanding. Allowance for Loan Losses – Consumer Instalment and Other Personal (millions of Canadian dollars) Allowance for loan losses, including off-balance sheet instruments, as at November 1, 2017 Provision for credit losses Transfer to Stage 11 Transfer to Stage 2 Transfer to Stage 3 Net remeasurement due to transfers1 New originations or purchases1 Net draws (repayments)1 Derecognition of financial assets (excluding disposals and write-offs)1 Changes to risk, parameters, and models1 Other changes Disposals Foreign exchange and other adjustments Write-offs Recoveries Balance as at October 31, 2018 Less: Allowance for off-balance sheet instruments2 Total allowance for loan losses as at October 31, 2018 Stage 1 Stage 2 Stage 3 Acquired credit-impaired loans Total $ 529 $ 355 $ 166 $ 5 $ 1,055 303 (114) (21) 168 (125) 322 (49) (126) (127) 63 – 7 – – 7 599 25 $ 574 (285) 152 (172) (305) 139 n/a (24) (97) 321 34 – 3 – – 3 392 43 $ 349 (18) (38) 193 137 11 n/a (11) (45) 744 836 – 1 (1,076) 251 (824) 178 – $ 178 – – – – – – (4) – – (4) – – (1) 2 1 2 – $ 2 – – – – 25 322 (88) (268) 938 929 – 11 (1,077) 253 (813) 1,171 68 $ 1,103 1 For explanations regarding this line item, refer to the “Allowance for Loan Losses – 2 The allowance for loan losses for off-balance sheet instruments is recorded in Residential Mortgages” table in this Note. Other liabilities on the Consolidated Balance Sheet. 165 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS Allowance for Loan Losses – Credit Card (millions of Canadian dollars) Allowance for loan losses, including off-balance sheet instruments, as at November 1, 2017 Provision for credit losses Transfer to Stage 12 Transfer to Stage 2 Transfer to Stage 3 Net remeasurement due to transfers2 New originations or purchases2 Net draws (repayments)2 Derecognition of financial assets (excluding disposals and write-offs)2 Changes to risk, parameters, and models2 Other changes Disposals Foreign exchange and other adjustments Write-offs Recoveries Balance as at October 31, 2018 Less: Allowance for off-balance sheet instruments3 Total allowance for loan losses as at October 31, 2018 1 Credit cards are considered impaired and migrate to Stage 3 when they are 90 days past due and written off at 180 days past due. Refer to Note 2 for further details. 2 For explanations regarding this line item, refer to the “Allowance for Loan Losses – Residential Mortgages” table in this Note. Allowance for Loan Losses – Business and Government1 (millions of Canadian dollars) Allowance for loan losses, including off-balance sheet instruments, as at November 1, 2017 Provision for credit losses Transfer to Stage 12 Transfer to Stage 2 Transfer to Stage 3 Net remeasurement due to transfers2 New originations or purchases2 Net draws (repayments)2 Derecognition of financial assets (excluding disposals and write-offs)2 Changes to risk, parameters, and models2 Other changes Disposals Foreign exchange and other adjustments Write-offs Recoveries Balance as at October 31, 2018 Less: Allowance for off-balance sheet instruments3 Total allowance for loan losses as at October 31, 2018 Stage 1 Stage 2 Stage 31 Total $ 763 $ 521 $ 321 $ 1,605 590 (192) (38) 360 (209) 171 125 (102) (276) 69 (21) 8 – – (13) 819 440 $ 379 (521) 259 (475) (737) 249 n/a (51) (106) 705 60 (12) 11 – – (1) 580 297 $ 283 (69) (67) 513 377 63 n/a 39 (371) 1,168 1,276 (8) 7 (1,515) 260 (1,256) 341 – 341 $ – – – – 103 171 113 (579) 1,597 1,405 (41) 26 (1,515) 260 (1,270) 1,740 737 $ 1,003 3 The allowance for loan losses for off-balance sheet instruments is recorded in Other liabilities on the Consolidated Balance Sheet. Stage 1 Stage 2 Stage 3 Acquired credit-impaired loans Total $ 706 $ 627 $ 174 $ 18 $ 1,525 133 (106) (6) 21 (38) 467 (4) (338) (89) 19 – 11 – – 11 736 85 $ 651 (129) 114 (56) (71) 68 n/a (26) (365) 447 53 – 10 – – 10 690 139 $ 551 (4) (8) 62 50 5 n/a (25) (54) 76 52 (5) (6) (154) 59 (106) 120 – $ 120 – – – – – – (2) (3) (8) (13) – (7) (1) 14 6 11 – $ 11 – – – – 35 467 (57) (760) 426 111 (5) 8 (155) 73 (79) 1,557 224 $ 1,333 1 Includes the allowance for credit losses related to customers’ liability 3 The allowance for loan losses for off-balance sheet instruments is recorded in under acceptances. Other liabilities on the Consolidated Balance Sheet. 2 For explanations regarding this line item, refer to the “Allowance for Loan Losses – Residential Mortgages” table in this Note. 166 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS The allowance for credit losses on all remaining financial assets in scope for IFRS 9 is not significant. The changes to the Bank’s allowance for credit losses under IAS 39, as at and for the year ended October 31, 2017, are shown in the following table. 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 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 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 Total allowance for credit losses Less: Allowance for off-balance sheet positions2 Allowance for loan losses Balance as at November 1 2016 Provision for credit losses Write-offs Recoveries Disposals Foreign exchange and other adjustments Balance as at October 31 2017 $ 189 206 $ $ 48 – $ – (63) $ (9) (6) $ 134 126 (19) (2) (21) (4) (25) 29 788 1,173 59 $ (75) (9) (84) – (84) (41) (1,070) (1,372) (91) 395 4 399 49 166 290 30 48 17 65 6 267 252 30 535 58 2,049 (34) (2,574) (1) 555 5 593 2,015 (2,575) 560 48 685 1,169 1,424 55 3,381 97 851 1,459 1,643 261 4,311 62 4,373 500 $ 3,873 (11) 17 91 140 (11) 226 18 805 1,264 180 (13) 2,254 (38) 2,216 79 $ 2,137 – – – – – – (41) (1,070) (1,372) (166) (9) (2,658) (1) (2,659) – $ (2,659) – – – – – – 6 267 252 78 – 603 22 625 – $ 625 (63) – (63) (15) (14) (29) – – – – – – – – – – – (20) (1) (4) (8) 1 (12) 4 (8) (1) (13) (29) (38) (4) 260 3 263 42 147 335 29 553 32 585 36 689 1,231 1,526 20 (20) (85) 3,502 – – – – (83) (83) – (83) – $ (83) (2) (17) (37) (46) (10) (112) (10) (122) (12) $ (110) 78 836 1,566 1,689 146 4,315 35 4,350 567 $ 3,783 1 Includes all Federal Deposit Insurance Corporation (FDIC) covered loans and other 2 The allowance for credit losses for off-balance sheet instruments is recorded in ACI loans. Other liabilities on the Consolidated Balance Sheet. 167 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS FORWARD-LOOKING INFORMATION Relevant macroeconomic factors are incorporated in the risk parameters as appropriate. Additional macroeconomic factors that are industry-specific or segment-specific are also incorporated where relevant. The key macroeconomic variables that are incorporated in determining ECLs include regional unemployment rates for all retail exposures and regional housing price index for residential mortgages and home equity lines of credit. For business and government loans, the key macroeconomic variables include gross domestic product, unemployment rates, interest rates, and credit spreads. Refer to Note 2 for a discussion on how forward- looking information is considered in determining whether there has been a significant increase in credit risk and in the measurement of ECLs. Forward-looking macroeconomic forecasts are generated by TD Economics as part of the ECL process: A base economic forecast is accompanied with upside and downside estimates of realistically possible economic conditions. All economic forecasts are updated quarterly for each variable on a regional basis where applicable and incorporated as relevant into the quarterly modelling of base, upside and downside risk parameters used in the calculation of ECL scenarios and probability-weighted ECL. The macroeconomic variable estimations are statistically derived relative to the base forecast based on the historical distribution of each variable. Select macroeconomic variables are projected over the forecast period, and they could have a material impact in determining ECLs. As the forecast period increases, information about the future becomes less readily available and projections are anchored on assumptions around structural relationships between economic parameters that are inherently much less certain. The following table represents the average values of the macroeconomic variables over the next twelve months and the remaining 4-year forecast period for the base forecast and 5-year forecast period for the upside and downside estimations. Macroeconomic Variables Unemployment rate (%) Canada United States Real gross domestic product (GDP) (annual % change) Canada United States Home prices (annual % change) Canada (average home price)2 United States (CoreLogic HPI)3 Central bank policy interest rate (%) Canada United States U.S. 10-year treasury yield (%) U.S. 10-year BBB spread (%) Exchange rate (U.S. dollar/Canadian dollar) Next 12 months1 Base Forecasts Remaining 4-year period1 Downside Upside 5-year period1 5-year period1 6.0 3.7 2.3 2.9 3.4 5.1 1.88 2.88 3.20 1.80 0.79 6.0 3.9 1.7 1.8 3.4 4.0 2.47 2.97 3.13 1.80 0.80 7.4 5.7 1.1 1.3 0.3 2.7 1.74 2.25 2.39 2.02 0.75 5.5 3.5 2.3 2.3 4.9 4.9 2.80 3.66 4.43 1.58 0.85 1 The numbers represent average values for the quoted periods. 2 The average home price is the average transacted sale price of homes sold via the Multiple Listing Service (MLS); data is collected by the Canadian Real Estate Association (CREA). 3 The CoreLogic home price index (HPI) is a repeat-sales index which tracks increases and decreases in the same home’s sales price over time. SENSITIVITY OF ALLOWANCE FOR CREDIT LOSSES The allowance for credit losses is sensitive to the inputs used in internally developed models, macroeconomic variables in the forward-looking forecasts and respective probability weightings in determining the probability-weighted ECL, and other factors considered when applying expert credit judgment. Changes in these inputs, assumptions, models, and judgments would have an impact on the assessment for significant increase in credit risk and the measurement of ECLs. The following table presents the base ECL scenario compared to the probability-weighted ECL derived from using three ECL scenarios for performing loans and off-balance sheet instruments. The difference reflects the impact of deriving multiple scenarios around the base ECL and resultant change in ECL due to non-linearity and sensitivity to using macroeconomic forecasts. lifetime ECLs respectively. Transfers from Stage 1 to Stage 2 ACLs result from a significant increase in credit risk since initial recognition of the loan. The following table presents the estimated impact of staging on ACL for performing loans and off-balance sheet instruments if they were all calculated using twelve-month ECLs compared to the current aggregate probability-weighted ECL, holding all risk profiles constant. Incremental Lifetime ECL Impact (millions of Canadian dollars) Aggregate Stage 1 and 2 probability-weighted ECL All performing loans and off-balance sheet instruments using 12-month ECL Incremental lifetime ECL impact As at October 31, 2018 $ 3,874 3,441 $ 433 Change from Base to Probability-Weighted ECL (millions of Canadian dollars, except as noted) Probability-weighted ECL Base ECL Difference – in amount Difference – in percentage As at October 31, 2018 $ 3,874 3,775 99 2.6% $ The allowance for credit losses for performing loans and off-balance sheet instruments consists of an aggregate amount of Stage 1 and Stage 2 probability-weighted ECL which are twelve-month ECLs and 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 $81 million as at October 31, 2018 (October 31, 2017 – $78 million), and were recorded in Other assets on the Consolidated Balance Sheet. 168 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS 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. Loans Past Due but not Impaired1,2 (millions of Canadian dollars) Residential mortgages Consumer instalment and other personal Credit card Business and government Total 1-30 days $ 1,471 5,988 1,403 1,314 $ 10,176 31-60 days $ 358 811 340 444 $ 1,953 October 31, 2018 61-89 days Total 1-30 days $ 101 $ 1,930 $ 1,852 5,257 241 1,278 213 28 1,007 $ 583 $ 12,712 $ 9,394 7,040 1,956 1,786 31-60 days $ 419 781 323 133 $ 1,656 As at October 31, 2017 61-89 days Total $ 111 $ 2,382 6,258 220 1,800 199 33 1,173 $ 563 $ 11,613 1 Includes loans that are measured at FVOCI. 2 Balances as at October 31, 2018 exclude ACI loans. As at October 31, 2017, the balances exclude both ACI loans and debt securities classified as loans. MODIFIED FINANCIAL ASSETS The amortized cost of financial assets with lifetime allowance that were modified during the year ended October 31, 2018 was $408 million before modification, with insignificant modification gain or loss. As at October 31, 2018, there have been no significant modified financial assets for which the loss allowance has changed from lifetime to twelve-month expected credit losses. COLLATERAL As at October 31, 2018, the collateral held against total gross impaired loans represents 81% of total gross impaired 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. 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 derecognition since in most 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, they are not derecognized from the balance sheet, retained interests are not recognized, and a securitization liability is recognized for the cash proceeds received. Certain transaction costs incurred are also capitalized and amortized using EIRM. The Bank securitizes insured residential mortgages under the National Housing Act Mortgage-Backed Securities (NHA MBS) program sponsored by the Canada Mortgage and Housing Corporation (CMHC). The MBS that are created through the NHA MBS program are sold to the Canada Housing Trust (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 residential mortgages with U.S. government agencies which qualify for derecognition 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 credit card receivables, consumer instalment and other personal loans to structured entities that the Bank consolidates. Refer to Note 10 for further details. 169 TD BANK GROUP ANNUAL REPORT 2018 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 Other financial assets transferred related to securitization1 Total Associated liabilities2 October 31, 2018 October 31, 2017 Fair value Carrying amount Fair value Carrying amount $ 23,124 4,230 27,354 $ (27,272) $ 23,334 4,235 27,569 $ (27,301) $ 24,986 3,964 28,950 $ (28,960) $ 24,985 3,969 28,954 $ (28,833) 1 Includes asset-backed securities, asset-backed commercial paper (ABCP), cash, repurchase agreements, and Government of Canada securities used to fulfill funding requirements of the Bank’s securitization structures after the initial securitization of mortgage loans. 2 Includes securitization liabilities carried at amortized cost of $15 billion as at October 31, 2018 (October 31, 2017 – $16 billion), and securitization liabilities carried at fair value of $13 billion as at October 31, 2018 (October 31, 2017 – $13 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 transactions 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 2018 2017 $ 24,333 $ 20,482 22,015 42,497 27,124 51,457 $ 24,701 $ 20,264 1 Includes $2.0 billion, as at October 31, 2018, of assets related to repurchase agreements or swaps that are collateralized by physical precious metals (October 31, 2017 – $2.1 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, 2018, the fair value of retained interests was $25 million (October 31, 2017 – $32 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, 2018, the trading income recognized on the retained interest was nil (October 31, 2017 – $15 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, 2018, the carrying value of these servicing rights was $39 million (October 31, 2017 – $31 million) and the fair value was $57 million (October 31, 2017 – $40 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, 2018, was $18 million (October 31, 2017 – $21 million). 170 TD BANK GROUP ANNUAL REPORT 2018 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 sponsored structured entities. Securitizations The Bank securitizes its own assets and facilitates the securitization of client assets through structured entities, such as conduits, which issue ABCP or other securitization entities which issue longer-dated term securities. Securitizations are an important 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 securitization 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 experiences 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 consolidate 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 portfolio 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 investment 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 mortgages 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. As disclosed in Note 27, on April 22, 2016, the Fund was discontinued and merged with another mutual fund managed by the Bank. The mortgages held by the Fund were not merged into the other mutual fund and as a result of the Fund’s discontinuation, the mortgages were repurchased from the Fund at a fair value of $155 million. Prior to the discontinuation of the Fund, during the year ended October 31, 2016, the fair value of the mortgages repurchased from the Fund as a result of a liquidity event was $21 million. Although the Bank had power over the Fund, the Fund was not consolidated by the Bank prior to its discontinuation as the Bank did not absorb a significant proportion of variable returns. The variability related primarily to the credit risk of the underlying mortgages which are government guaranteed. 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. 171 TD BANK GROUP ANNUAL REPORT 2018 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 funding. These structured entities include: (1) TD Capital Trust III and TD Capital Trust IV (together the “CaTS Entities”) and (2) TD Covered Bond (Legislative) Guarantor Limited Partnership (the “Covered Bond Entity”). 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 distribution 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 program where the principal and interest payments of the notes are guaranteed by the Covered Bond Entity. The Bank sold a portfolio of assets to the Covered Bond Entity and provided a loan to the Covered Bond Entity to facilitate the purchase. The Bank is restricted from accessing the Covered Bond Entity’s assets under the relevant agreement. 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 consolidates the Covered Bond Entity as it has power over the key economic activities and retains all the variable returns in this entity. 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 variable 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, predominantly 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. 172 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 Consolidated 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 involvement 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 unconsolidated 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 and commitments to certain U.S. municipal funds. 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. TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTSn/a – 30 n/a – n/a – – 2,872 2,916 n/a 13 193 n/a 66,237 n/a 42,095 4,174 2,880 123,610 – – – 935 493 3,335 3,828 18,731 Carrying Amount and Maximum Exposure to Unconsolidated Structured Entities (millions of Canadian dollars) Securitizations Investment funds and trusts Other Total Securitizations October 31, 2018 Investment funds and trusts As at October 31, 2017 Other Total FINANCIAL ASSETS Trading loans, securities, and other $ 9,460 $ 719 $ 11 $ 10,190 $ 7,395 $ 609 $ 14 $ 8,018 Non-trading financial assets at fair value through profit or loss Derivatives1 Financial assets designated at fair value through profit or loss Financial assets at fair value through 1,810 – – 367 826 3 – – – 2,177 826 3 n/a – – other comprehensive income Available-for-sale securities Debt securities at amortized cost, 47,575 n/a 1,262 n/a – n/a 48,837 n/a n/a 63,615 net of allowance for credit losses 68,736 n/a 2,438 6 130,025 Held-to-maturity securities Loans Other Total assets – n/a – – 3,177 – n/a – 2,897 2,908 68,736 n/a 2,438 2,903 136,110 n/a 42,095 4,174 8 117,287 n/a 13 163 n/a 2,622 n/a – – – 3,407 – 59 – 59 – 493 2,937 2,937 16,172 629 688 3,450 – – 1,164 3,566 3,625 20,786 2,330 2,330 14,702 1,005 1,498 3,094 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 $ 143,260 $ 5,939 $ 4,072 $ 153,271 $ 129,659 $ 5,003 $ 3,851 $ 138,513 $ 10,216 $ 11,162 $ 1,750 $ 23,128 $ 13,020 $ 1,860 $ 1,750 $ 16,630 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 commitments 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 entities, 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 $1.9 billion (October 31, 2017 − $1.8 billion) for the year ended October 31, 2018. The total AUM in these entities as at October 31, 2018, was $196.1 billion (October 31, 2017 − $196.8 billion). 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 arrangements to provide financial support to unconsolidated structured entities. 173 TD BANK GROUP ANNUAL REPORT 2018 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 bilaterally 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 certain options and futures. The Bank’s derivative transactions relate to trading and non-trading activities. The purpose of derivatives held for non-trading activities is primarily for managing interest rate, foreign exchange, and equity risk related to the Bank’s funding, lending, investment activities, and other asset/liability management activities. The Bank’s risk management strategy for these risks is discussed in shaded sections of the ‘Managing Risk’ section of the MD&A. The Bank also enters into derivative transactions to economically hedge certain exposures that do not otherwise qualify for hedge accounting, or where hedge accounting is not considered feasible. Where hedge accounting is applied, only a specific or a combination of risk components are hedged, including benchmark interest rate, foreign exchange rate, and equity price components. All these risk components are observable in the relevant market environment and the change in the fair value or the variability in cash flows attributable to these risk components can be reliably measured for hedged items. Where the derivatives are in hedge relationships, the main sources of ineffectiveness can be attributed to differences between hedging instruments and hedged items: • Differences in fixed rates, when contractual coupons of the fixed rate hedged items are designated; • Differences in the discounting factors, when hedging derivatives are collateralized and discounted using Overnight Indexed Swaps (OIS) curves, which are not applied to the fixed rate hedged items; • CRVA on the hedging derivatives; and • Mismatch in critical terms such as tenor and timing of cash flows between hedging instruments and hedged items. To mitigate a portion of the ineffectiveness, the Bank designates the benchmark risk component of contractual cash flows of hedged items and executes hedging derivatives with high quality counterparties. The majority of the Bank’s hedging derivatives are collateralized. Interest Rate Derivatives 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. Forward rate agreements are OTC contracts that effectively fix a future interest rate for a period of time. A typical forward rate agreement 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 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 174 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. The Bank uses interest rate swaps to hedge its exposure to benchmark interest rate risk by modifying the repricing or maturity characteristics of existing and/or forecasted assets and liabilities, including funding and investment activities. These swaps are designated in either fair value hedge against fixed rate asset/liability or cash flow hedge against floating rate asset/liability. For fair value hedges, the Bank assesses and measures the hedge effectiveness based on the change in the fair value or cash flows of the derivative hedging instrument relative to the change in the fair value or cash flows of the hedged item attributable to benchmark interest rate risk. For cash flow hedges, the Bank uses the hypothetical derivative having terms that identically match the critical terms of the hedged item as the proxy for measuring the change in fair value or cash flows of the hedged item. Foreign Exchange Derivatives Foreign exchange forwards are OTC contracts in which one counterparty 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. Where hedge accounting is applied, the Bank assesses and measures the hedge effectiveness based on the change in the fair value of the hedging instrument relative to translation gains and losses of net investment in foreign operations or the change in cash flows of the foreign currency denominated asset/liability attributable to foreign exchange risk, using the hypothetical derivative method. The Bank uses non-derivative instruments such as foreign currency deposit liabilities and derivative instruments such as cross-currency swaps and foreign exchange forwards to hedge its foreign currency exposure. These hedging instruments are designated in either net investment hedges or cash flow hedges. 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 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS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 rating 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. 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. Where hedge accounting is applied, the Bank uses equity forwards and total return swaps to hedge its exposure to equity price risk. These derivatives are designated as cash flow hedges. The Bank assesses and measures the hedge effectiveness based on the change in the fair value of the hedging instrument relative to the change in the cash flows of the hedged item attributable to movement in equity price, using the hypothetical derivative method. Fair Value of Derivatives (millions of Canadian dollars) Derivatives held or issued for trading purposes Interest rate contracts Futures Forward rate agreements Swaps Options written Options purchased Total interest rate contracts Foreign exchange contracts Futures Forward contracts Swaps Cross-currency interest rate swaps Options written Options purchased Total foreign exchange contracts Credit derivative contracts 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 derivative contracts Credit default swaps – protection purchased Total credit derivative contracts Other contracts Equity contracts Total other contracts Fair value – non-trading Total fair value October 31, 2018 Fair value as at balance sheet date October 31, 2017 Fair value as at balance sheet date Positive Negative Positive Negative $ – 37 9,931 – 516 10,484 – 17,638 – 18,489 – 486 36,613 – 9 9 2,537 1,291 3,828 50,934 2 1,893 – 19 1,914 333 – 2,729 3,062 – – 1,086 1,086 6,062 $ 56,996 $ – 39 7,229 566 – 7,834 – 15,943 – 15,692 543 – 32,178 230 1 231 1,362 837 2,199 42,442 – 1,898 1 – 1,899 327 – 2,413 2,740 155 155 1,034 1,034 5,828 $ 48,270 $ 1 69 13,861 – 358 14,289 – 16,461 – 16,621 – 330 33,412 – 34 34 534 778 1,312 49,047 1 1,023 – 32 1,056 647 – 3,768 4,415 – – 1,677 1,677 7,148 $ 56,195 $ – 72 11,120 326 – 11,518 – 14,589 – 15,619 310 – 30,518 250 1 251 2,093 634 2,727 45,014 – 1,296 1 – 1,297 639 – 2,452 3,091 105 105 1,707 1,707 6,200 $ 51,214 175 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS The following table distinguishes 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. As at October 31, 2018 Derivative Liabilities Derivatives not in qualifying hedging relationships Total $ 854 27 155 1,034 $ 2,070 $ 1,899 2,740 155 1,034 $ 5,828 October 31, 2017 Fair Value of Non-Trading Derivatives1,2 (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 Derivatives held or issued for non-trading purposes Interest rate contracts Foreign exchange contracts Credit derivative contracts Other contracts Fair value – non-trading Derivatives held or issued for non-trading purposes Interest rate contracts Foreign exchange contracts Credit derivative contracts Other contracts Fair value – non-trading $ 1,050 – – – $ 1,050 $ (62) 2,948 – 594 $ 3,480 $ 494 – – – $ 494 $ (250) 4,376 – 760 $ 4,886 $ 4 4 – – $ 8 $ – 2 – – $ 2 $ 922 $ 1,914 3,062 – 1,086 $ 1,524 $ 6,062 110 – 492 $ 858 – – – $ 858 $ 187 2,399 – – $ 2,586 $ – 314 – – $ 314 $ 812 $ 1,056 4,415 – 1,677 $ 1,766 $ 7,148 37 – 917 $ 56 – – – $ 56 $ 777 2,733 – 5 $ 3,515 $ 12 316 – – $ 328 $ 452 42 105 1,702 $ 2,301 $ 1,297 3,091 105 1,707 $ 6,200 1 Certain comparative amounts have been reclassified to conform with the 2 Certain derivatives assets qualify to be offset with certain derivative liabilities on the presentation adopted in the current period. Consolidated Balance Sheet. Refer to Note 6 for further details. Fair Value Hedges The following table presents the effects of fair value hedges on the Consolidated Balance Sheet and the Consolidated Statement of Income. Fair Value Hedges (millions of Canadian dollars) Assets1 Interest rate risk Debt securities at amortized cost Financial assets at fair value through other comprehensive income Loans Total assets Liabilities1 Interest rate risk Deposits Securitization liabilities at amortized cost Subordinated notes and debentures Total liabilities Total Total for the year ended October 31, 2017 Total for the year ended October 31, 2016 Change in value of hedged items for ineffectiveness measurement Change in fair value of hedging instruments for ineffectiveness measurement Hedge ineffectiveness For the year ended or as at October 31, 2018 Carrying amounts for hedged items Accumulated amount of fair value hedge adjustments on hedged items Accumulated amount of fair value hedge adjustments on de-designate hedged items $ (501) $ 507 $ 6 $ 30,032 $ (618) (1,874) (792) (3,167) 2,182 71 112 2,365 (802) $ $ (933) (4) 1,869 792 3,168 (2,179) (73) (112) (2,364) $ 804 $ 914 23 (5) – 1 86,804 45,157 161,993 93,150 4,960 4,027 102,137 3 (2) – 1 $ 2 $ (19) 19 (2,699) (726) (4,043) (2,301) (52) (230) (2,583) $ – (172) (8) (180) (4) – (143) (147) 1 The Bank has portfolios of fixed rate financial assets and liabilities whereby the notional amount changes frequently due to originations, issuances, maturities and prepayments. The interest rate risk hedges on these portfolios are rebalanced dynamically. 176 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS Cash Flow Hedges and Net Investment Hedges The following table presents the effects of cash flow hedges and net investment hedges on the Bank’s Consolidated Statement of Income and the Consolidated Statement of Comprehensive Income. Cash Flow and Net Investment Hedges (millions of Canadian dollars) Change in value of hedged items for ineffectiveness measurement Change in fair value of hedging instruments for ineffectiveness measurement Hedge ineffectiveness For the year ended October 31, 2018 Hedging gains (losses) recognized in other comprehensive income1 Amount reclassified from accumulated other comprehensive income (loss) to earnings1 Net change in other comprehensive income (loss)1 Cash flow hedges2 Interest rate risk Assets3 Liabilities3 Foreign exchange risk4,5 Assets6 Liabilities6 Equity price risk Liabilities Total cash flow hedges Total for the year ended October 31, 2017 Total for the year ended October 31, 2016 Net investment hedges Total for the year ended October 31, 2017 Total for the year ended October 31, 2016 $ 2,744 (159) (121) (328) (66) $ 2,070 121 328 66 $ (2,072) $ 392 $ (392) $ (2,747) 160 $ (3) 1 $ (2,687) 159 $ 382 (47) $ (3,069) 206 – – – (2) $ $ (2) (11) $ $ – – – 269 93 66 $ (2,100) $ (2,229) 1,448 $ $ (392) 890 36 (193) 249 (31) $ (2,838) $ (392) 462 (156) 97 $ 738 $ 1,077 1,285 $ $ – (8) – 1 Effects on other comprehensive income are presented on a pre-tax basis. 2 During the years ended October 31, 2018 and October 31, 2017, there were no instances where forecasted hedged transactions failed to occur. 3 Assets and liabilities include forecasted interest cash flows on loans, deposits, and securitization liabilities. 4 For non-derivative instruments designated as hedging foreign exchange risk, fair value change is measured as the gains and losses due to spot foreign exchange movements. 5 Cross-currency swaps may be used to hedge foreign exchange risk or a combination of interest rate risk and foreign exchange risk in a single hedging relationship. These hedges are disclosed in the above risk category (foreign exchange risk). 6 Assets and liabilities include principal and interest cash flows on foreign denominated securities, loans, deposits, other liabilities, and subordinated notes and debentures. Reconciliation of Accumulated Other Comprehensive Income (Loss)1,2 (millions of Canadian dollars) Accumulated other comprehensive income (loss) at beginning of year Net changes in other comprehensive income (loss) For the year ended October 31, 2018 Accumulated other comprehensive income (loss) at end of year Accumulated other comprehensive income (loss) on designated hedges Accumulated comprehensive income (loss) on de-designated hedges Cash flow hedges Interest rate risk Assets Liabilities Foreign exchange risk Assets Liabilities Equity price risk Total cash flow hedges Net investment hedges Foreign translation risk $ (533) (260) (243) 434 51 (551) $ $ (3,069) 206 (193) 249 (31) $ (2,838) $ (3,602) (54) (436) 683 20 $ (3,389) $ (2,420) 175 (436) 683 20 $ (1,978) $ (1,182) (229) – – – $ (1,411) $ (5,297) $ (392) $ (5,689) $ (5,689) $ – 1 The Accumulated other comprehensive income (loss) is presented on a pre-tax basis. 2 Excludes the Bank’s equity in the AOCI of an investment in TD Ameritrade. 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, 2017. Hedged Cash Flows (millions of Canadian dollars) Cash flow hedges Cash inflows Cash outflows Net cash flows Within 1 year Over 1 year to 3 years Over 3 years to 5 years Over 5 years to 10 years Over 10 years Total $ 15,674 (18,249) (2,575) $ $ 18,375 (20,458) (2,083) $ $ 9,856 (14,388) $ (4,532) $ 3,048 (6,831) $ (3,783) $ 85 – $ 85 $ 47,038 (59,926) $ (12,888) As at October 31, 2017 177 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS NOTIONAL AMOUNTS The notional amounts are not recorded as assets or liabilities as they represent the face amount of the contract to which a rate or price is applied to determine the amount of cash flows to be exchanged. Notional amounts do not represent the potential gain or loss associated with the market risk nor indicative of the credit risk associated with derivative financial instruments. The following table discloses the notional amount of over-the-counter and exchange-traded derivatives. Over-the-Counter and Exchange-Traded Derivatives (millions of Canadian dollars) October 31 2018 As at October 31 2017 Trading Exchange- traded Total Non- trading3 Total Total 575,825 $ $ 575,825 $ – 970,679 – 8,024,217 200,895 121,246 154,683 224,884 851,754 9,996,500 – $ 225 575,825 $ 970,904 445,848 528,945 1,418,487 9,442,704 7,377,368 108,135 126,785 1,421,656 11,418,156 8,587,081 200,948 227,775 53 2,891 Over-the-Counter1 Non clearing house Clearing house2 $ – $ 919,623 7,580,152 – – 8,499,775 – 51,056 444,065 79,649 70,201 644,971 – – – 1,796,542 6 – 688,980 – 34,090 – – 32,655 – 2,552,273 24 24 – 1,796,542 6 – 688,980 – 34,090 – 32,655 – 24 2,552,297 – 24 3 29,140 1,825,682 1,484,952 – 674,533 22,272 22,713 126,106 2,678,403 2,204,473 6 785,946 34,090 32,655 – 96,966 – – 9,665 987 10,652 202 135 337 – – – 9,867 1,122 10,989 2,745 – 2,745 12,612 1,122 13,734 12,227 1,694 13,921 – 150 150 57,736 33,161 90,897 $ 8,510,577 $ 3,288,478 142,404 57,161 47,798 39,882 97,043 190,202 $ 948,821 $ 12,747,876 $ 1,580,937 $ 14,328,813 $ 10,995,677 145,327 73,193 218,520 30,430 – 30,430 114,897 73,193 188,090 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 derivative contracts Credit default swaps – protection purchased Credit default swaps – protection sold Total credit derivative contracts Other contracts Equity contracts Commodity contracts Total other contracts Total 1 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. 2 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. 3 Includes $1,244 billion of over-the-counter derivatives that are transacted with clearing houses (October 31, 2017 – $1,173 billion) and $337 billion of over-the-counter derivatives that are transacted with non-clearing houses (October 31, 2017 – $310 billion) as at October 31, 2018. There were no exchange-traded derivatives both as at October 31, 2018 and October 31, 2017. The following table distinguishes the notional amount of 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. Notional of Non-Trading Derivatives (millions of Canadian dollars) Derivatives held or issued for hedging (non-trading) purposes Interest rate contracts Foreign exchange contracts Credit derivative contracts Other contracts Total notional non-trading Derivatives in qualifying hedging relationships Fair value $ 282,718 – – – $ 282,718 Cash flow1 $ 214,969 113,183 – 2,058 $ 330,210 Net investment1 $ 1,646 1,249 – – $ 2,895 As at October 31, 2018 Derivatives not in qualifying hedging relationships Total $ 922,323 $ 1,421,656 126,106 11,674 2,745 2,745 30,430 28,372 $ 965,114 $ 1,580,937 1 Certain cross-currency swaps are executed using multiple derivatives, including interest rate swaps. These derivatives are used to hedge foreign exchange rate risk in cash flow hedges and net investment hedges. 178 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS The following table discloses the notional principal amount of over-the-counter derivatives and exchange-traded derivatives based on their contractual terms to maturity. Derivatives by Term-to-Maturity (millions of Canadian dollars) October 31 2018 As at October 31 2017 Remaining term-to-maturity Notional Principal Interest rate contracts Futures Forward rate agreements Swaps Options written Options purchased Total interest rate contracts Foreign exchange contracts Futures Forward contracts Swaps Cross-currency interest rate swaps Options written Options purchased Total foreign exchange contracts Credit derivative contracts Credit default swaps – protection purchased Credit default swaps – protection sold Total credit derivative contracts Other contracts Equity contracts Commodity contracts Total other contracts Total Within 1 year $ 455,257 689,173 4,010,167 159,621 184,334 5,498,552 24 1,772,289 6 196,829 28,443 27,241 2,024,832 1,289 41 1,330 Over 1 year to 5 years $ 120,528 281,731 4,155,482 33,151 35,811 4,626,703 – 49,765 – 437,096 5,647 5,414 497,922 4,466 663 5,129 Over 5 years $ 40 – 1,277,055 8,176 7,630 1,292,901 – 3,628 – 152,021 – – 155,649 6,857 418 7,275 Total Total $ 575,825 970,904 9,442,704 200,948 227,775 11,418,156 24 1,825,682 6 785,946 34,090 32,655 2,678,403 $ 445,848 528,945 7,377,368 108,135 126,785 8,587,081 3 1,484,952 – 674,533 22,272 22,713 2,204,473 12,612 1,122 13,734 12,227 1,694 13,921 106,905 61,563 168,468 $ 7,693,182 37,652 11,284 48,936 $ 5,178,690 770 346 1,116 $ 1,456,941 145,327 73,193 218,520 $ 14,328,813 142,404 47,798 190,202 $ 10,995,677 179 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS The following table discloses the notional amount and average price of derivative instruments designated in qualifying hedge accounting relationships. Hedging Instruments by Term-to-Maturity (millions of Canadian dollars, except as noted) Notional Interest rate risk Interest rate swaps Notional – pay fixed Average fixed interest rate % Notional – received fixed Average fixed interest rate % Total notional – interest rate risk Foreign exchange risk1 Forward contracts Notional – USD/CAD Average FX forward rate Notional – EUR/CAD Average FX forward rate Notional – other Cross-currency swaps2,3 Notional – USD/CAD Average FX rate Notional – EUR/CAD Average FX rate Notional – GBP/CAD Average FX rate Notional – other currency pairs4 Total notional – foreign exchange risk Equity Price Risk Notional – equity forward contracts Total notional Within 1 year Over 1 year to 5 years As at October 31, 2018 Over 5 years Total $ 38,837 1.62 36,872 1.83 75,709 $ 57,774 2.09 63,997 2.15 121,771 $ 84,933 1.92 111,144 2.12 196,077 1,329 1.26 4,169 1.54 1,249 10,868 1.24 – n/a 673 2.02 12,626 30,914 281 1.27 11,211 1.59 – 36,298 1.28 13,694 1.50 3,281 1.71 10,838 75,603 – n/a 1,903 1.73 – 2,321 1.32 3,355 1.47 – n/a 335 7,914 $ 181,544 212,013 393,557 1,610 17,283 1,249 49,487 17,049 3,954 23,799 114,431 2,058 $ 108,681 – $ 197,374 – $ 203,991 2,058 $ 510,046 1 Foreign currency denominated deposit liabilities are also used to hedge foreign exchange risk. As at October 31, 2018, the carrying value of these non-derivative hedging instruments was $15.3 billion designated under net investment hedges. 3 Certain cross-currency swaps are executed using multiple derivatives, including interest rate swaps. The notional amount of these interest rate swaps, excluded from the above, is $105.8 billion as at October 31, 2018. 2 Cross-currency swaps may be used to hedge foreign exchange risk or a combination of interest rate risk and foreign exchange risk in a single hedge relationship. Both these types of hedges are disclosed under the Foreign exchange risk as the risk category. 4 Includes derivatives executed to manage non-trading foreign currency exposures, when more than one currency is involved prior to hedging to the Canadian dollar, when the functional currency of the entity is not the Canadian dollar, or when the currency pair is not a significant exposure for the Bank. 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 and non-trading businesses 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 counterparty to meet its obligation to the Bank. The Capital Markets Risk Management group is responsible for implementing and ensuring compliance with credit policies established by the Bank for the management of derivative credit exposures. Derivative-related credit risks are subject to the same credit approval, limit and monitoring standards that are used for managing other transactions that create credit exposure. This includes evaluating the creditworthiness of counterparties, and managing the size, 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. 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. 180 TD BANK GROUP ANNUAL REPORT 2018 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) October 31 2018 $ 29,608 9,737 1,995 $ 41,340 By sector Financial Government Other Current replacement cost Less: impact of master netting agreements and collateral Total current replacement cost By location of risk2 Canada United States Other international United Kingdom Europe – other Other Total Other international Total current replacement cost October 31, 2018 As at October 31, 2017 Current replacement cost Credit equivalent amount Risk- weighted amount Current replacement cost Credit equivalent amount $ 21 11,630 508 12,159 17,605 21,218 486 39,309 3 3,043 1,101 4,147 55,615 34,205 21,410 8,884 12,526 155 $ 12,681 $ 56 15,557 776 16,389 35,543 40,942 1,029 77,514 358 7,383 2,546 10,287 104,190 54,039 50,151 9,602 40,549 14,332 $ 54,881 $ 15 4,193 299 4,507 4,247 7,012 212 11,471 145 920 514 1,579 17,557 11,464 6,093 1,173 4,920 2,058 $ 6,978 $ 22 13,516 370 13,908 16,816 20,388 330 37,534 5 1,553 645 2,203 53,645 36,522 17,123 6,889 10,234 1,566 $ 11,800 $ 202 17,710 433 18,345 32,408 37,415 685 70,508 360 5,152 1,779 7,291 96,144 54,970 41,174 7,672 33,502 16,322 $ 49,824 Canada1 October 31 2017 $ 32,494 7,031 1,811 $ 41,336 October 31 2018 $ 930 102 359 $ 1,391 United States1 October 31 2017 Other international1 October 31 2017 October 31 2018 $ 2,355 16 433 $ 2,804 $ 7,104 4,704 1,076 $ 12,884 $ 5,159 3,420 926 $ 9,505 October 31 2018 $ 37,642 14,543 3,430 $ 55,615 Risk- weighted amount $ 86 6,493 167 6,746 4,156 7,041 153 11,350 148 952 371 1,471 19,567 13,606 5,961 1,141 4,820 1,864 $ 6,684 As at Total October 31 2017 $ 40,008 10,467 3,170 $ 53,645 October 31 2018 $ 3,898 4,887 October 31 2017 $ 3,749 3,312 487 2,183 1,071 3,741 $ 12,526 712 1,671 790 3,173 $ 10,234 43,089 $ 12,526 43,411 $ 10,234 October 31 2018 % mix October 31 2017 % mix 31.1% 39.0 3.9 17.4 8.6 29.9 100.0% 36.6% 32.4 7.0 16.3 7.7 31.0 100.0% 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 rating of the Bank, either as counterparty or as guarantor of one of the Bank’s subsidiaries. At October 31, 2018, the aggregate net liability position of those contracts would require: (1) the posting of collateral or other acceptable remedy totalling $300 million (October 31, 2017 – $193 million) in the event of a one-notch or two-notch downgrade in the Bank’s senior debt rating; and (2) funding totalling $10 million (October 31, 2017 – $26 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 rating. 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 181 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS by that master derivative agreement. Some of these agreements may permit the Bank’s counterparties to require, upon the downgrade of the credit rating of the Bank, to post additional collateral. As at October 31, 2018, the fair value of all derivative instruments with credit risk related contingent features in a net liability position was $8 billion (October 31, 2017 – $9 billion). The Bank has posted $10 billion (October 31, 2017 – $13 billion) of collateral for this exposure in the normal course of business. As at October 31, 2018, the impact of a one-notch downgrade in the Bank’s credit rating would require the Bank to post an additional $38 million (October 31, 2017 – $121 million) of collateral to that posted in the normal course of business. A two-notch downgrade in the Bank’s credit rating would require the Bank to post an additional $44 million (October 31, 2017 – $156 million) of collateral to that posted in the normal course of business. 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 Corporation (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, 2018, the Bank’s reported investment in TD Ameritrade was 41.61% (October 31, 2017 – 41.27%) of the outstanding shares of TD Ameritrade with a fair value of $16 billion (US$12 billion) (October 31, 2017 – $15 billion (US$12 billion)) based on the closing price of US$51.72 (October 31, 2017 – US$49.99) on the New York Stock Exchange. During the year ended October 31, 2018, TD Ameritrade repurchased 5.5 million shares (for the year ended October 31, 2017 – nil million shares). Pursuant to the Stockholders Agreement in relation to the Bank’s equity investment in TD Ameritrade, 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, and method of sales with a view to maximizing proceeds from such sales. However, in the event that stock repurchases by TD Ameritrade cause the Bank’s ownership percentage to exceed 45%, the Bank has no absolute obligation to reduce its ownership percentage to 45%. In addition, stock repurchases by TD Ameritrade cannot result in the Bank’s ownership percentage exceeding 47%. In connection with TD Ameritrade’s acquisition of Scottrade Financial Services, Inc. (Scottrade) on September 18, 2017, TD Ameritrade issued 38.8 million shares, of which the Bank purchased 11.1 million pursuant to its pre-emptive rights. The Bank purchased the shares at a price of US$36.12. As a result of the share issuance, the Bank’s common stock ownership percentage in TD Ameritrade decreased and the Bank realized a dilution gain of $204 million recorded in Other Income on the Consolidated Statement of Income. Refer to Note 13 for a discussion on the acquisition of Scottrade Bank. 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 currently include the Bank’s Group President and Chief Executive Officer and four independent directors of TD or TD’s U.S. subsidiaries. TD Ameritrade has no significant contingent liabilities to which the Bank is exposed. During the years ended October 31, 2018, and October 31, 2017, TD Ameritrade did not experience any significant restrictions to transfer funds in the form of cash dividends, or repayment of loans or advances. The condensed financial statements of TD Ameritrade, based on its consolidated financial statements, are included in the following tables. Condensed Consolidated Balance Sheets1 (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’ equity2 Total liabilities and stockholders’ equity September 30 2018 September 30 2017 As at $ 1,809 29,773 17,811 $ 49,393 $ 3,923 30,126 4,809 38,858 10,535 $ 49,393 $ 1,721 22,127 25,985 $ 49,833 $ 3,230 32,391 4,862 40,483 9,350 $ 49,833 1 Customers’ securities are reported on a settlement date basis whereas the Bank reports customers’ securities on a trade date basis. 2 The difference between the carrying value of the Bank’s investment in TD Ameritrade and the Bank’s share of TD Ameritrade’s stockholders’ equity is comprised of goodwill, other intangibles, and the cumulative translation adjustment. 182 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS Condensed Consolidated Statements of Income (millions of Canadian dollars, except as noted) Revenues Net interest revenue Fee-based and other revenue Total revenues Operating expenses Employee compensation and benefits Other Total operating expenses Other expense (income) Pre-tax income Provision for income taxes Net income1,2 Earnings per share – basic (Canadian dollars) Earnings per share – diluted (Canadian dollars) For the years ended September 30 2018 2017 2016 $ 1,635 5,365 7,000 1,992 2,434 4,426 142 2,432 535 $ 1,897 $ 3.34 3.32 $ 903 3,923 4,826 1,260 1,639 2,899 95 1,832 686 $ 1,146 $ 2.17 2.16 $ 789 3,623 4,412 1,111 1,553 2,664 70 1,678 563 $ 1,115 $ 2.10 2.09 1 The Bank’s equity share of net income of TD Ameritrade is based on the published consolidated financial statements of TD Ameritrade after converting into Canadian dollars and is subject to adjustments relating to the amortization of certain intangibles. 2 The Bank’s equity share in TD Ameritrade earnings for the year ended October 31, 2018 includes a net favourable adjustment of $41 million (US$32 million) primarily representing the Bank’s share of TD Ameritrade’s remeasurement of its deferred income tax balances as a result of the reduction in the U.S. federal corporate income tax rate. 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, 2018, or October 31, 2017. The carrying amount of the Bank’s investment in individually immaterial associates and joint ventures during the period was $3 billion (October 31, 2017 – $3 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 community-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. The Bank recorded an impairment loss during the year ended October 31, 2018 of $89 million representing the immediate impact of lower future tax deductions on Low Income Housing Tax Credit (LIHTC) investments as a result of the reduction in the U.S. federal corporate tax rate, which was recorded in Other income (loss) on the Consolidated Statement of Income. This impairment loss does not include losses taken upon tax credit-related investments including LIHTC on a normal course basis. Refer to Note 25 for further details on the reduction of the U.S. federal corporate tax rate. N O T E 1 3 SIGNIFICANT ACQUISITIONS AND DISPOSALS Acquisition of Scottrade Bank On September 18, 2017, the Bank acquired 100% of the outstanding equity of Scottrade Bank, a federal savings bank wholly-owned by Scottrade, for cash consideration of approximately $1.6 billion (US$1.4 billion). Scottrade Bank merged with TD Bank, N.A. In connection with the acquisition, TD agreed to accept sweep deposits from Scottrade clients, expanding the Bank’s existing sweep deposit activities. The acquisition is consistent with the Bank’s U.S. strategy. The acquisition was accounted for as a business combination under the purchase method. Goodwill of $34 million reflects the excess of the consideration paid over the fair value of the identifiable net assets. Goodwill is deductible for tax purposes. The results of the acquisition have been consolidated with the Bank’s results and are reported in the U.S. Retail segment. For the year ended October 31, 2017, the contribution of Scottrade Bank to the Bank’s revenue and net income was not significant nor would it have been significant if the acquisition had occurred as of November 1, 2016. The following table presents the estimated fair values of the assets and liabilities acquired as of the date of acquisition. Fair Value of Identifiable Net Assets Acquired (millions of Canadian dollars) Assets acquired Cash and due from banks Securities Loans Other assets Less: Liabilities assumed Deposits Other liabilities Fair value of identifiable net assets acquired Goodwill Total purchase consideration Amount $ 750 14,474 5,284 149 20,657 18,992 57 1,608 34 $ 1,642 183 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS N O T E 1 4 GOODWILL AND OTHER INTANGIBLES The recoverable amount of the Bank’s CGUs 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 recoverable amount of CGUs, and the use of different assumptions and estimates in the calculations could influence the determination of the existence of impairment and the valuation of goodwill. Management believes that the assumptions and estimates used are reasonable and supportable. Where possible, fair values generated internally are compared to relevant market information. The carrying amounts of the Bank’s CGUs are determined by management using risk based capital models to adjust net assets and liabilities by CGU. These models consider various factors including market risk, credit risk and operational risk, including investment capital (comprised of goodwill and other intangibles). Any 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 capital was approximately $15.4 billion and primarily related to treasury assets and excess capital 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, 2016 Additions Foreign currency translation adjustments and other Carrying amount of goodwill as at October 31, 2017 Additions Foreign currency translation adjustments and other Carrying amount of goodwill as at October 31, 20182 Pre-tax discount rates 2017 2018 1 Goodwill predominantly relates to U.S. personal and commercial banking. 2 Accumulated impairment as at October 31, 2018, was nil (October 31, 2017 – nil). Key Assumptions The recoverable amount of each CGU or group of CGUs has been determined based on its estimated value-in-use. In assessing value-in-use, 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 observable terminal multiples of comparable financial institutions and ranged from 9 times to 14 times. In considering the sensitivity of the key assumptions discussed above, management determined that 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 their carrying amount. Canadian Retail $ 2,337 – (34) 2,303 82 18 $ 2,403 U.S. Retail1 $ 14,175 34 (516) 13,693 – 280 $ 13,973 Wholesale Banking $ 150 10 – 160 – – $ 160 Total $ 16,662 44 (550) 16,156 82 298 $ 16,536 9.1–10.7% 9.1–10.7 10.1–10.5% 10.1–11.8 12.2% 12.2 184 TD BANK GROUP ANNUAL REPORT 2018 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, 2016 Additions Disposals Fully amortized intangibles Foreign currency translation adjustments and other As at October 31, 2017 Additions Disposals Fully amortized intangibles Foreign currency translation adjustments and other As at October 31, 2018 Amortization and impairment As at November 1, 2016 Disposals Impairment losses Amortization charge for the year Fully amortized intangibles Foreign currency translation adjustments and other As at October 31, 2017 Disposals Impairment losses Amortization charge for the year Fully amortized intangibles Foreign currency translation adjustments and other As at October 31, 2018 Net Book Value: As at October 31, 2017 As at October 31, 2018 Core deposit intangibles Credit card related intangibles Internally generated software Other software Other intangibles $ 2,623 – – – (100) 2,523 – – – 52 $ 2,575 $ 2,225 – – 121 – (86) 2,260 – – 96 – 48 $ 2,404 $ 762 – – – (6) 756 – – – 3 $ 759 $ 356 – – 90 – (4) 442 – – 98 – 2 $ 542 $ 2,266 576 (93) (171) (29) 2,549 567 (82) (275) 1 $ 2,760 $ 786 (91) 1 368 (171) (5) 888 (11) – 423 (275) 6 $ 1,031 $ 387 82 (16) (142) (3) 308 87 (2) (89) (4) $ 300 $ 261 (16) – 80 (142) (3) 180 (2) 5 78 (89) 12 $ 184 $ 675 74 (58) (110) (16) 565 14 – – 7 $ 586 $ 446 (58) – 44 (110) (9) 313 – – 44 – 3 $ 360 Total $ 6,713 732 (167) (423) (154) 6,701 668 (84) (364) 59 $ 6,980 $ 4,074 (165) 1 703 (423) (107) 4,083 (13) 5 739 (364) 71 $ 4,521 $ 263 171 $ 314 217 $ 1,661 1,729 $ 128 116 $ 252 226 $ 2,618 2,459 185 TD BANK GROUP ANNUAL REPORT 2018 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 Assets (millions of Canadian dollars) Land Buildings Computer equipment Furniture, fixtures, and other depreciable assets Leasehold improvements Cost As at November 1, 2016 Additions Disposals Fully depreciated assets Foreign currency translation adjustments and other As at October 31, 2017 Additions Disposals Fully depreciated assets Foreign currency translation adjustments and other As at October 31, 2018 Accumulated depreciation and impairment/losses As at November 1, 2016 Depreciation charge for the year Disposals Impairment losses Fully depreciated assets Foreign currency translation adjustments and other As at October 31, 2017 Depreciation charge for the year Disposals Impairment losses Fully depreciated assets Foreign currency translation adjustments and other As at October 31, 2018 Net Book Value: As at October 31, 2017 As at October 31, 2018 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 Total N O T E 1 7 DEPOSITS $ 1,012 – (2) – (41) 969 2 (5) – 5 $ 971 $ $ – – – – – – – – – – – – – $ 3,349 168 (19) (73) (110) 3,315 164 (37) (90) 26 $ 3,378 $ 1,147 132 (15) – (73) (40) 1,151 120 (14) – (90) 6 $ 1,173 $ 859 153 (21) (122) (16) 853 141 (13) (143) (9) $ 829 $ 406 175 (22) – (122) (4) 433 170 (13) – (143) 2 $ 449 $ 1,320 145 (30) (101) (49) 1,285 134 (44) (69) 9 $ 1,315 $ 566 142 (29) – (101) (26) 552 128 (22) – (69) 16 $ 605 $ 1,858 114 (31) (48) (9) 1,884 160 (33) (57) 39 $ 1,993 $ 797 154 (30) – (48) (16) 857 158 (32) – (57) 9 $ 935 Total $ 8,398 580 (103) (344) (225) 8,306 601 (132) (359) 70 $ 8,486 $ 2,916 603 (96) – (344) (86) 2,993 576 (81) – (359) 33 $ 3,162 $ 969 971 $ 2,164 2,205 $ 420 380 $ 733 710 $ 1,027 1,058 $ 5,313 5,324 October 31 2018 $ 8,938 2,343 1,614 113 1,638 950 $ 15,596 As at October 31 2017 $ 7,932 1,945 832 13 1,536 1,006 $ 13,264 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 aggregate amount of term deposits in denominations of $100,000 or more as at October 31, 2018, was $293 billion (October 31, 2017 – $258 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. 186 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS Deposits (millions of Canadian dollars) Personal Banks1 Business and government2 Trading1 Total Non-interest-bearing deposits included above In domestic offices In foreign offices Interest-bearing deposits included above In domestic offices In foreign offices U.S. federal funds deposited1 Total2,3 By Type By Country October 31 October 31 2017 2018 As at Demand Notice Term Canada United States International Total Total $ 13,493 $ 411,087 $ 53,064 $ 218,772 13,080 7,873 261,282 76,093 54,563 – $ 97,459 $ 541,514 $ 327,170 $ 547,697 55 130,372 – 8,784 150,618 114,704 $ 258,834 866 93,398 39,358 $ 392,456 38 $ 477,644 $ 468,155 $ 25,887 16,712 2,766 338,782 357,083 2,403 20,783 79,940 114,704 $ 25,990 $ 966,143 $ 912,764 $ 42,402 $ 39,547 52,915 54,488 505,295 362,890 1,068 443,395 371,728 5,179 $ 966,143 $ 912,764 1 Includes deposits and advances with the Federal Home Loan Bank. 2 As at October 31, 2018, includes $36 billion relating to covered bondholders (October 31, 2017 – $29 billion) and $2 billion (October 31, 2017 – $2 billion) due to TD Capital Trust IV. 3 As at October 31, 2018, includes deposits of $548 billion (October 31, 2017 – $522 billion) denominated in U.S. dollars and $55 billion (October 31, 2017 – $44 billion) denominated in other foreign currencies. Term Deposits by Remaining Term-to-Maturity (millions of Canadian dollars) As at October 31 October 31 2017 2018 Within 1 year $ 32,928 8,773 66,492 109,256 $ 217,449 Over 1 year to 2 years $ 10,222 – 21,345 1,183 $ 32,750 Over 2 years to 3 years Over 3 years to 4 years $ 9,601 – 31,416 1,122 $ 42,139 $ 197 – 9,605 981 $ 10,783 Over 4 years to 5 years $ 78 3 13,760 1,157 $ 14,998 Over 5 years Total Total $ 38 $ 53,064 $ 50,507 18,616 8,784 8 142,942 150,618 8,000 1,005 79,940 114,704 $ 9,051 $ 327,170 $ 292,005 October 31 2018 As at October 31 2017 Within 3 months $ 11,424 8,440 38,177 53,482 $ 111,523 Over 3 months to 6 months Over 6 months to 12 months Total Total $ 7,541 255 7,033 31,081 $ 45,910 $ 13,963 78 21,282 24,693 $ 60,016 $ 32,928 8,773 66,492 109,256 $ 217,449 $ 30,793 18,602 69,139 76,266 $ 194,800 Personal Banks Business and government Trading Total Term Deposits due within a Year (millions of Canadian dollars) Personal Banks Business and government Trading Total N O T E 1 8 OTHER LIABILITIES Other Liabilities1 (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 Other financial liabilities designated at fair value through profit or loss Provisions Total 1 Certain comparative amounts have been reclassified to conform with the presentation adopted in the current period. October 31 2018 $ 4,958 1,283 3,344 454 84 175 1,747 5,627 16 1,502 $ 19,190 As at October 31 2017 $ 4,492 988 3,348 2,060 82 178 2,463 5,835 8 1,016 $ 20,470 187 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS 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 debentures 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 July 9, 2023 May 26, 2025 June 24, 20253 September 30, 20253 September 14, 20283 July 25, 20293 March 4, 20313 September 15, 20313 December 18, 2106 Total Interest rate (%) 5.8281 9.150 2.6921 2.9821 3.5891 3.2241 4.8591 3.6255 5.7636 Earliest par Reset redemption spread (%) date 2.5501 July 9, 20182 n/a – 1.2101 June 24, 2020 1.8301 September 30, 2020 1.0601 September 14, 20234 1.2501 July 25, 2024 3.4901 March 4, 2026 2.2055 September 15, 2026 1.9906 December 18, 20177 As at October 31 2018 October 31 2017 $ – 198 1,474 982 1,711 1,427 1,124 1,824 – $ 8,740 $ 650 199 1,492 987 – 1,460 1,164 1,776 1,800 $ 9,528 1 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. 2 On July 9, 2018, the Bank redeemed all of its outstanding $650 million 5.828% subordinated debentures due July 9, 2023, at a redemption price of 100% of the principal amount plus accrued and unpaid interest. 3 Non-viability contingent capital (NVCC). The subordinated notes and debentures qualify as regulatory capital under OSFI’s Capital Adequacy Requirements (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, 300 million for the 2.982% subordinated debentures due September 30, 2025, 525 million for the 3.589% subordinated debentures due September 14, 2028, 450 million for the 3.224% subordinated debentures due July 25, 2029, 375 million for the 4.859% subordinated debentures due March 4, 2031 and assuming a Canadian to U.S. dollar exchange rate of 1.00, 450 million for the 3.625% subordinated debentures due September 15, 2031. 4 On September 14, 2018, the Bank issued $1.75 billion of NVCC medium term notes constituting subordinated indebtedness of the Bank (the “Notes”). The Notes will bear interest at a fixed rate of 3.589% per annum (paid semi-annually) until September 14, 2023, and at the three-month Bankers’ Acceptance rate plus 1.06% thereafter (paid quarterly) until maturity on September 14, 2028. With the prior approval of OSFI, the Bank may, at its option, redeem the Notes on or after September 14, 2023, in whole or in part, at par plus accrued and unpaid interest. Not more than 60 nor less than 30 days’ notice is required to be given to the Notes’ holders for such redemptions. 5 Interest rate is for the period to but excluding the earliest par redemption date, and thereafter, it will be reset at a rate of 5-year Mid-Swap Rate plus the reset spread noted. 6 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. 7 On December 18, 2017, the Bank redeemed all of its outstanding $1.8 billion 5.763% subordinated debentures due December 18, 2106, at a redemption price of 100% of the principal amount. The total change in subordinated notes and debentures for the year ended October 31, 2018 primarily relates to the issuance and redemption of subordinated debentures, foreign exchange translation, and the basis adjustment for fair value hedges. REPAYMENT SCHEDULE The aggregate remaining maturities of the Bank’s subordinated notes and debentures are as follows: 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 As at October 31 October 31 2017 2018 $ – – – – 8,740 $ 8,740 $ – – – – 9,528 $ 9,528 188 TD BANK GROUP ANNUAL REPORT 2018 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. On November 26, 2018, Trust III announced its intention to redeem all of the outstanding TD CaTS III on December 31, 2018. 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-cumulative Class A First Preferred Shares, Series A10 of the Bank and each TD CaTS IV − 3 may be automatically exchanged into non-cumulative Class A First Preferred Shares, Series A11 of the Bank, in each case, without the consent of the holders, on the occurrence of certain events. On each interest payment date in respect of which certain events have occurred, holders of TD CaTS IV Notes will be required to invest interest paid on such TD CaTS IV Notes in a new series of non-cumulative Class A First Preferred Shares of the Bank. 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, 2018, there was $450 million (October 31, 2017 – $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 2017 of the issuer yield 2018 Redemption date As at 1,000 June 30, Dec. 31 7.243%1 Dec. 31, 20132 $ 993 $ 983 550 450 750 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 consideration. 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 regulatory 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. 189 TD BANK GROUP ANNUAL REPORT 2018 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, 2018 October 31, 2017 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 S1 Series T2 Series Y3 Series Z4 Series 15 Series 35 Series 55 Series 75 Series 95 Series 115 Series 125 Series 145 Series 165 Series 185 Series 205 Balance as at end of year – preferred shares Treasury shares – common6 Balance as at beginning of year Purchase of shares Sale of shares Balance as at end of year – treasury shares – common Treasury shares – preferred6 Balance as at beginning of year Purchase of shares Sale of shares Balance as at end of year – treasury shares – preferred Number of shares 1,842.5 2.9 5.0 (20.0) 1,830.4 – – – – 20.0 20.0 20.0 14.0 8.0 6.0 28.0 40.0 14.0 14.0 16.0 200.0 2.9 110.6 (111.4) 2.1 0.3 5.2 (5.2) 0.3 Amount $ 20,931 152 366 (228) $ 21,221 $ – – – – 500 500 500 350 200 150 700 1,000 350 350 400 $ 5,000 $ $ $ $ (176) (8,295) 8,327 (144) (7) (129) 129 (7) Number of shares 1,857.6 3.0 4.9 (23.0) 1,842.5 5.4 4.6 5.5 4.5 20.0 20.0 20.0 14.0 8.0 6.0 28.0 40.0 14.0 – – 190.0 0.4 148.3 (145.8) 2.9 0.2 7.3 (7.2) 0.3 Amount $ 20,711 148 329 (257) $ 20,931 $ 135 115 137 113 500 500 500 350 200 150 700 1,000 350 – – $ 4,750 $ $ $ $ (31) (9,654) 9,509 (176) (5) (175) 173 (7) 1 On July 31, 2018, the Bank redeemed all of its 5.4 million outstanding Class A First Preferred Shares, Series S (“Series S Shares”), at the redemption price of $25.00 per Series S Share, for total redemption costs of approximately $135 million. 2 On July 31, 2018, the Bank redeemed all of its 4.6 million outstanding Class A First Preferred Shares, Series T (“Series T Shares”), at the redemption price of $25.00 per Series T Share, for total redemption costs of approximately $115 million. 3 On October 31, 2018, the Bank redeemed all of its 5.5 million outstanding Class A First Preferred Shares, Series Y (“Series Y Shares”), at a redemption price of $25.00 per Series Y Share, for total redemption costs of approximately $137 million. 4 On October 31, 2018, the Bank redeemed all of its 4.5 million outstanding Class A 5 NVCC Series 1, 3, 5, 7, 9, 11, 12, 14, 16, 18, and 20 Preferred Shares 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 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, 30 million, 140 million, 200 million, 70 million, 70 million, and 80 million, respectively. 6 When the Bank purchases its own shares as part of its trading business, they are First Preferred Shares, Series Z (“Series Z Shares”), at a redemption price of $25.00 per Series Z Share, for total redemption costs of approximately $113 million. classified as treasury shares and the cost of these shares is recorded as a reduction in equity. 190 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS Preferred Shares Terms and Conditions NVCC Fixed Rate Preferred Shares Series 11 NVCC Rate Reset Preferred Shares3 Series 1 Series 3 Series 5 Series 7 Series 9 Series 12 Series 14 Series 16 Series 18 Series 20 Issue date Annual yield (%)1 Reset Next redemption/ Convertible into1 conversion date1 spread (%)1 July 21, 2015 June 4, 2014 July 31, 2014 December 16, 2014 March 10, 2015 April 24, 2015 January 14, 2016 September 8, 2016 July 14, 2017 March 14, 2018 September 13, 2018 4.9 3.9 3.8 3.75 3.6 3.7 5.5 4.85 4.50 4.70 4.75 n/a October 31, 20202 n/a 2.24 October 31, 2019 July 31, 2019 2.27 January 31, 2020 2.25 July 31, 2020 2.79 October 31, 2020 2.87 April 30, 2021 4.66 October 31, 2021 4.12 October 31, 2022 3.01 April 30, 2023 2.70 October 31, 2023 2.59 Series 2 Series 4 Series 6 Series 8 Series 10 Series 13 Series 15 Series 17 Series 19 Series 21 1 Non-cumulative preferred dividends for each Series are payable quarterly, as and 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 corresponding 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 Subject to regulatory consent, redeemable on or after October 31, 2020, at a redemption price of $26.00, and thereafter, at a declining redemption price. 3 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. NORMAL COURSE ISSUER BID As approved by the Board on November 28, 2018, the Bank announced its intention to amend its normal course issuer bid (NCIB) for up to an additional 20 million of its common shares, 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. 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. On April 19, 2018, the Bank announced that the TSX and OSFI approved the Bank’s previously announced NCIB to repurchase for cancellation up to 20 million of the Bank’s common shares. During the year ended October 31, 2018, the Bank repurchased 20 million common shares under its NCIB at an average price of $75.07 per share for a total amount of $1.5 billion. The Bank had repurchased 22.98 million common shares under its previous NCIB announced in March 2017, as amended in September 2017, at an average price of $60.78 per share for a total amount of $1.4 billion. DIVIDEND REINVESTMENT PLAN The Bank offers a dividend reinvestment plan for its common shareholders. 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 dividend 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, 5.0 million common shares at a discount of 0% were issued from the Bank’s treasury (2017 – 4.9 million common shares at a discount of 0%) under the dividend reinvestment plan. 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) TD Capital Trust III Securities – Series 20081 Total As at October 31 October 31 2017 2018 $ 993 $ 993 $ 983 $ 983 1 Refer to Note 20 for a description of the TD Capital Trust III securities. 191 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS N O T E 2 2 INSURANCE INSURANCE REVENUE AND EXPENSES Insurance revenue and expenses are presented on the Consolidated Statement of Income under insurance revenue and insurance claims and related expenses, respectively, net of impact of reinsurance. This includes the results of property and casualty insurance, life and health insurance, as well as reinsurance assumed and ceded in Canada and internationally. 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 2018 were $130 million (2017 – $127 million; 2016 – $142 million). For the years ended October 31 2018 2017 2016 $ 4,398 915 3,483 562 4,045 2,676 232 $ 2,444 $ 4,132 915 3,217 543 3,760 2,381 135 $ 2,246 $ 4,226 933 3,293 503 3,796 3,086 624 $ 2,462 RECONCILIATION OF CHANGES IN LIABILITIES Insurance-related liabilities are comprised of provision for unpaid claims (section (a) below), unearned premiums (section (b) below) and other liabilities (section (c) below). (a) Movement in Provision for Unpaid Claims The following table presents movements in the property and casualty insurance 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 inassumptions: 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 reinsurance/other recoverables Balance as at end of year October 31, 2018 October 31, 2017 Reinsurance/ Other recoverable $ 192 42 (6) – (1) 35 (15) (44) (59) (8) $ 160 Gross $ 4,965 2,673 (460) (78) (19) 2,116 (1,238) (1,023) (2,261) (8) $ 4,812 Net $ 4,773 2,631 Gross $ 5,214 2,425 (454) (370) (78) (18) 2,081 (1,223) (979) (2,202) – $ 4,652 (83) (11) 1,961 (1,052) (1,153) (2,205) (5) $ 4,965 Reinsurance/ Other recoverable $ 388 – (52) 1 (6) (57) – (134) (134) (5) $ 192 Net $ 4,826 2,425 (318) (84) (5) 2,018 (1,052) (1,019) (2,071) – $ 4,773 (b) Movement in Unearned Premiums The following table presents movements in the property and casualty insurance 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, 2018 October 31, 2017 Gross Reinsurance Net Gross Reinsurance $ 1,581 3,185 (3,092) $ 1,674 $ – 114 (95) $ 19 $ 1,581 3,071 (2,997) $ 1,655 $ 1,575 2,993 (2,987) $ 1,581 $ – 92 (92) – $ Net $ 1,575 2,901 (2,895) $ 1,581 192 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS (c) Other Movements in Insurance Liabilities Other insurance liabilities were $212 million as at October 31, 2018 (October 31, 2017 – $229 million). The decrease of $17 million (2017 – decrease of $28 million) is mainly due to changes in life and health insurance actuarial assumptions. PROPERTY AND CASUALTY CLAIMS DEVELOPMENT The following table shows the estimates of cumulative claims incurred, including IBNR, with subsequent developments during the periods and together with cumulative payments to date. The original reserve estimates are evaluated monthly for redundancy or deficiency. The evaluation is based on actual payments in full or partial settlement of claims and current estimates of claims liabilities for claims still open or claims still unreported. Incurred Claims by Accident Year (millions of Canadian dollars) Net ultimate claims cost at end of accident year Revised estimates One year later Two years later Three years later Four years later Five years later Six years later Seven years later Eight years later Nine 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 2009 and prior 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total Accident year $ 3,699 $ 1,742 $ 1,724 $ 1,830 $ 2,245 $ 2,465 $ 2,409 $ 2,438 $ 2,425 $ 2,631 1,764 3,721 1,851 3,820 1,921 3,982 1,926 4,128 1,931 4,100 1,904 4,137 1,884 4,097 1,883 4,068 – 4,055 1,883 4,055 (3,907) (1,816) 67 148 1,728 1,823 1,779 1,768 1,739 1,702 1,696 – – 1,696 (1,621) 75 1,930 1,922 1,885 1,860 1,818 1,793 – – – 1,793 (1,651) 142 2,227 2,191 2,158 2,097 2,047 – – – – 2,047 (1,826) 221 2,334 2,280 2,225 2,147 – – – – – 2,147 (1,783) 364 – 2,367 2,421 2,307 – – 2,310 2,334 – – – 2,234 – – – – – – – – – – – – – – – – – – – – – – – – 2,631 2,234 2,334 2,307 (1,657) (1,568) (1,425) (1,223) 577 766 882 1,408 $ 4,650 (412) 414 $ 4,652 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 when actuarial liabilities are determined. 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 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. 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 reporting and final settlements of claims. The following table outlines the sensitivity of the Bank’s property and casualty insurance claims liabilities to reasonably possible movements 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 October 31, 2018 October 31, 2017 Impact on net income (loss) before income taxes Impact on equity Impact on net income (loss) before income taxes Impact on equity Impact of a 1% change in key assumptions Discount rate Increase in assumption Decrease in assumption Margin for adverse deviation Increase in assumption Decrease in assumption Impact of a 5% change in key assumptions Frequency of claims Increase in assumption Decrease in assumption Severity of claims Increase in assumption Decrease in assumption $ 121 (129) (45) 45 $ (41) 41 (210) 210 $ 88 (95) (33) 33 $ (30) 30 (153) 153 $ 117 (125) (46) 46 $ (31) 31 (218) 218 $ 85 (91) (34) 34 $ (23) 23 (159) 159 193 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS For life and health insurance, the processes used to determine critical assumptions are as follows: • Mortality, morbidity, and lapse assumptions are based on industry and historical company data. 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. • Expense assumptions are based on an annually updated expense As at October 31, 2018, for the property and casualty insurance 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. CONCENTRATION OF INSURANCE RISK Concentration risk is the risk resulting from large exposures 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 business, 66.2% of net written premiums were derived from automobile policies (October 31, 2017 – 65.9%) followed by residential with 33.3% (October 31, 2017 – 33.6%). The distribution by provinces show that business is mostly concentrated in Ontario with 55.0% of net written premiums (October 31, 2017 – 55.7%). The Western provinces represented 30.4% (October 31, 2017 – 30.0%), followed by the Atlantic provinces with 8.5% (October 31, 2017 – 8.3%), and Québec at 6.0% (October 31, 2017 – 6.0%). Concentration risk is not a major concern for the life and health insurance business as it does not have a material level of regional specific characteristics like those exhibited in the property and casualty insurance business. Reinsurance is used to limit the liability on a single claim. Concentration risk is further limited by diversification across uncorrelated risks. This limits the impact of a regional pandemic and other concentration risks. To improve understanding of exposure to this risk, a pandemic scenario is tested annually. N O T E 2 3 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 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, 18.0 million common shares have been reserved for future issuance (October 31, 2017 – 19.8 million). The outstanding options expire on various dates to December 12, 2027. The following table summarizes the Bank’s stock option activity and related information, adjusted to reflect the impact of the stock dividend 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 2018 Weighted- average of shares exercise price Number 14.3 1.9 (3.0) (0.1) 13.1 $ 48.17 72.64 41.21 60.46 $ 53.12 2017 Weighted- average exercise price $ 44.18 65.75 38.59 54.58 $ 48.17 Number of shares 15.4 2.0 (3.0) (0.1) 14.3 4.7 $ 40.61 5.4 $ 38.00 2016 Weighted- average exercise price $ 40.65 53.15 35.21 48.29 $ 44.18 $ 37.19 Number of shares 18.4 2.5 (4.9) (0.6) 15.4 5.5 The weighted-average share price for the options exercised in 2018 was $74.99 (2017 – $67.79; 2016 – $54.69). The following table summarizes information relating to stock options outstanding and exercisable as at October 31, 2018. Options outstanding Options exercisable Number of shares outstanding Weighted- average remaining contractual Weighted- average life (years) exercise price 2.1 2.6 4.6 1.9 1.9 2.4 4.5 6.5 8.0 9.0 36.06 44.27 52.80 65.75 72.64 Number of shares Weighted- average exercisable exercise price 2.1 2.6 – – – 36.06 44.27 – – – Range of Exercise Prices (millions of shares and Canadian dollars) $32.99 – $36.64 $40.54 – $47.59 $52.46 – $53.15 $65.75 $72.64 194 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS For the year ended October 31, 2018, the Bank recognized compensation expense for stock option awards of $11.5 million (October 31, 2017 – $14.8 million; October 31, 2016 – $6.5 million). For the year ended October 31, 2018, 1.9 million (October 31, 2017 – 2.0 million; October 31, 2016 – 2.5 million) options were granted by the Bank at a weighted-average fair value of $6.28 per option (2017 – $5.81 per option; 2016 – $4.93 per option). The following table summarizes the assumptions used for estimating the fair value of options for the twelve months ended October 31. Assumptions Used for Estimating the Fair Value of Options (in Canadian dollars, except as noted) 2018 2017 2016 Risk-free interest rate Expected option life Expected volatility1 Expected dividend yield Exercise price/share price 1.71% 1.24% 1.00% 6.3 years 13.91% 3.50% $ 72.64 6.3 years 14.92% 3.47% $ 65.75 6.3 years 15.82% 3.45% $ 53.15 1 Expected volatility is calculated based on the average daily volatility measured over a historical period corresponding to the expected option life. OTHER SHARE-BASED COMPENSATION PLANS The Bank operates restricted share unit and performance share unit plans which are offered to certain employees of the Bank. Under these plans, participants are awarded share units equivalent to the Bank’s common shares that generally vest over three years. 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 shareholder 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, 2018, was 23 million (2017 – 25 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 may be deferred, or in the case of non-employee directors, a portion of their annual compensation may be delivered as share units equivalent to the Bank’s common shares. N O T E 2 4 EMPLOYEE BENEFITS 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, 2018, 6.2 million deferred share units were outstanding (October 31, 2017 – 6.4 million). Compensation expense for these plans is recorded in the year the incentive award is earned by the plan participant. Changes in the value of these plans are recorded, net of the effects of related hedges, on the Consolidated Statement of Income. For the year ended October 31, 2018, the Bank recognized compensation expense, net of the effects of hedges, for these plans of $509 million (2017 – $490 million; 2016 – $467 million). The compensation expense recognized before the effects of hedges was $607 million (2017 – $917 million; 2016 – $720 million). The carrying amount of the liability relating to these plans, based on the closing share price, was $2.1 billion at October 31, 2018 (October 31, 2017 – $2.2 billion), and is reported in Other liabilities on the Consolidated Balance Sheet. EMPLOYEE OWNERSHIP PLAN The Bank also operates a share purchase plan available to Canadian employees. Employees can contribute any amount of their eligible earnings (net of source deductions), subject to an annual cap of 10% of salary to the Employee Ownership Plan. For participating employees below the level of Vice President, 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, 2018, the Bank’s contributions totaled $72 million (2017 – $70 million; 2016 – $66 million) and were expensed as salaries and employee benefits. As at October 31, 2018, an aggregate of 20 million common shares were held under the Employee Ownership Plan (October 31, 2017 – 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. 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. Effective December 31, 2018, the defined benefit portion of the TDPP will be closed to new employees hired after that date. All new permanent employees hired in Canada on or after January 1, 2019 will be eligible to join the defined contribution portion of the TDPP after one year of service. Funding for the Bank’s principal pension plans is provided by contributions from the Bank and members of the plans. 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 plans are adequately funded over time. The Bank’s contributions to the principal pension plans during 2018 were $355 million (2017 – $565 million). The 2018 and 2017 contributions were made in accordance with the actuarial valuation reports for funding purposes as at October 31, 2017 and October 31, 2016, respectively, for both of the principal pension plans. The next valuation date for funding purposes is as at October 31, 2018, for both of the principal pension plans. The Bank also provides certain post-retirement benefits, which are generally unfunded. 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. Effective June 1, 2017, the Bank’s principal non-pension post-retirement benefit plan was closed to new employees hired on or after that date. INVESTMENT STRATEGY AND ASSET ALLOCATION The primary objective of each of the Society and the TDPP is to achieve a rate of return that meets or exceeds the change in value of the plan’s respective liabilities over rolling five-year periods. The investments of the Society and the TDPP are managed with the primary objective of providing reasonable rates of return, consistent with available market opportunities, consideration of plan liabilities, prudent portfolio management, and levels of risk commensurate with the return expectations and asset mix policy as set out by the risk budget of 7% and 15% surplus volatility, respectively. The investment policies for the principal pension plans generally do not apply to the Pension Enhancement Account (PEA) assets, which are invested at the members’ discretion in certain mutual and pooled funds. 195 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS Public debt instruments of both the Society and the TDPP must meet or exceed a credit rating of BBB- at the time of purchase. 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 foreign government entities must not exceed 20%; • Debt instruments of either a single non-government or single foreign government entity must not exceed 10%; and • Debt instruments issued by the Government 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 13% 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 50%; • Asset-backed securities must have a minimum credit rating of AAA and not exceed 25% of the mandate; and • Limitation of 10% for any one issuer. The remainder of the Society’s public debt portfolio is not permitted to invest in debt instruments of non-government entities. 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 small 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 or income trust 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. Both the Society and the TDPP are also permitted to invest in other alternative investments, such as private equity, infrastructure equity, and real estate. The asset allocations by asset category for the principal pension plans are as follows: Plan Asset Allocation (millions of Canadian dollars, except as noted) As at October 31, 2018 Debt Equity Alternative investments2 Other3 Total As at October 31, 2017 Debt Equity Alternative investments2 Other3 Total As at October 31, 2016 Debt Equity Alternative investments2 Other3 Total Acceptable range 40-70% 24-42 6-35 n/a 40-70% 24-42 0-35 n/a 40-70% 24-42 0-35 n/a % of total 55% 34 11 n/a 100% 57% 35 8 n/a 100% 62% 33 5 n/a 100% Society1 Fair value Quoted Unquoted $ – 897 – – $ 897 $ – 1,248 42 – $ 1,290 $ – 1,165 31 – $ 1,196 $ 2,885 869 551 (107) $ 4,198 $ 2,903 511 376 46 $ 3,836 $ 2,962 407 208 43 $ 3,620 Acceptable range 25-50% 30-65 3-25 n/a 25-56% 30-65 0-20 n/a 25-56% 44-65 0-20 n/a % of total 34% 58 8 n/a 100% 36% 59 5 n/a 100% 43% 56 1 n/a 100% Quoted $ – 396 – – $ 396 $ – 324 – – $ 324 $ – 51 – – $ 51 TDPP1 Fair value Unquoted $ 497 470 122 63 $ 1,152 $ 484 478 68 56 $ 1,086 $ 413 488 11 44 $ 956 1 The principal pension plans invest in investment vehicles which may hold shares 3 Consists mainly of PEA assets, interest and dividends receivable, and amounts due or debt issued by the Bank. to and due from brokers for securities traded but not yet settled. 2 The principal pension plans’ alternative investments primarily include private equity, infrastructure, and real estate funds, none of which are invested in the Bank and its affiliates. 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, price risks, credit spread and credit 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, as well as both the principal pension plans’ Statement of Investment Policies and Procedures (SIPP) and the Management Operating Policies and Procedures (MOPP). 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; and • Monitoring the return on the plans’ assets relative to the plans’ liabilities. 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. 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 defined benefit pension plan. The defined benefit plan was closed to new members after May 31, 1987. However, plan members were permitted to continue in the plan for future service. Funding for the plan is provided by contributions from the Bank and members of the plan. 196 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS 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, 2018, were $134 million (October 31, 2017 – $124 million; October 31, 2016 – $121 million), which included core and matching contributions. Annual expense is equal to the Bank’s contributions to the plan. 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 for eligible employees are not funded by the Bank. 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) Principal pension plans 2018 2017 2016 Principal non-pension post-retirement benefit plan1 2016 2017 2018 Other pension and retirement plans2 2016 2017 2018 Change in projected benefit obligation Projected benefit obligation at beginning of year Obligations included due to The Retirement Benefit 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 The Retirement Benefit 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 Excess (deficit) of plan assets at fair value over projected benefit obligation Effect of asset limitation and minimum funding requirement 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 projected benefit obligation as at October 31 (percentage) Weighted-average discount rate for projected benefit obligation Weighted-average rate of compensation increase $ 7,082 $ 6,805 $ 5,377 $ 558 $ 568 $ 553 $ 2,750 $ 2,863 $ 2,743 6 407 217 (969) – 22 104 (330) – – 6,539 – 439 196 (148) 25 (15) 80 (291) – (9) 7,082 – 331 191 1,179 – 8 66 (347) – – 6,805 – 15 18 (42) – 2 – (16) – – 535 – 16 17 – (42) 15 – (16) – – 558 – 17 21 (9) – 2 – (16) – – 568 – 10 96 (190) (8) 14 – (137) 31 3 2,569 – 11 95 (27) 13 1 – (138) (68) – 2,750 – 10 105 259 (11) (12) – (265) 45 (11) 2,863 6,536 5,823 5,327 10 209 – 174 – 195 (231) 104 355 (330) – (10) 6,643 195 80 565 (291) – (10) 6,536 207 66 384 (347) – (9) 5,823 – – – – – 16 (16) – – – – – – – – 16 (16) – – – – 1,855 1,895 1,910 – – – – 16 (16) – – – – 66 – 64 – 74 (109) – 37 (137) 27 (6) 1,733 59 – 37 (138) (58) (4) 1,855 40 – 101 (265) 39 (4) 1,895 104 (546) (982) (535) (558) (568) (836) (895) (968) – 104 – (546) – (982) – (535) – (558) – (568) (13) (849) – (895) – (968) 407 439 331 15 16 17 8 – 10 22 (9) 10 $ 425 $ 462 (4) – 9 $ 336 18 – – $ 33 17 – – $ 33 21 – – $ 38 $ 10 30 3 4 47 $ 11 31 – 4 46 $ 10 31 (11) 7 37 4.10% 2.54 3.60% 2.54 3.52% 2.66 4.10% 3.00 3.60% 3.00 3.60% 3.25 4.37% 3.74% 3.65% 1.03 1.14 1.18 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 4.28%. The rate is assumed to decrease gradually to 2.49% by the year 2040 and remain at that level thereafter. 2 Includes Canada Trust (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. The TD Banknorth defined benefit pension plan was frozen as of December 31, 2008, and no service credits can be earned after that date. Certain TD Auto Finance defined benefit pension plans were frozen as of April 1, 2012, and no service credits can be earned after March 31, 2012. 3 During 2018, The Retirement Benefit Plan of The Toronto-Dominion Bank (the “RBP”) was deemed to be merged with the Society and previously undisclosed obligations and assets of the RBP are now included for the current year. 4 Includes a settlement gain of $12 million related to a portion of the TDAF defined benefit pension plan that was settled during 2016. 197 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS During the year ended October 31, 2019, the Bank expects to contribute $352 million to its principal pension plans, $18 million to its principal non-pension post-retirement benefit plan, and $39 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) Male aged 65 at measurement date Female aged 65 at measurement date Male aged 40 at measurement date Female aged 40 at measurement date Principal pension plans Principal non-pension post-retirement benefit plan Other pension and retirement plans As at October 31 2018 23.3 24.1 24.5 25.2 2017 23.2 24.0 24.5 25.2 2016 22.1 24.0 23.4 25.1 2018 2017 2016 23.3 24.1 24.5 25.2 23.2 24.0 24.5 25.2 22.1 24.0 23.4 25.1 2018 22.1 23.7 23.0 24.8 2017 21.8 23.4 22.9 25.1 2016 21.4 23.4 22.5 25.0 The weighted-average duration of the defined benefit obligation for the Bank’s principal pension plans, principal non-pension post-retirement benefit plan, and other pension and retirement plans at the end of the reporting period are 15 years (2017 – 15 years, 2016 – 16 years), 17 years (2017 – 18 years, 2016 – 17 years), and 12 years (2017 – 13 years, 2016 – 13 years), respectively. The following table provides the sensitivity of the projected benefit obligation 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, 2018 Principal non-pension post- retirement benefit plan Principal pension plans Obligation Other pension and retirement plans $ 1,092 (847) (233) 232 (130) 128 n/a n/a $ 93 (73) n/a1 n/a1 (16) 16 (71) 90 $ 336 (274) – – (75) 74 (4) 5 198 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS The Bank recognized the following amounts on the Consolidated Balance Sheet. Amounts Recognized in the Consolidated Balance Sheet (millions of Canadian dollars) Other assets Principal pension plans Other pension and retirement plans Other employee benefit plans1 Total other assets Other liabilities Principal pension plans Principal non-pension post-retirement benefit plan Other pension and retirement plans Other employee benefit plans1 Total other liabilities Net amount recognized 1 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) Actuarial gains (losses) recognized in Other Comprehensive Income Principal pension plans Principal non-pension post-retirement benefit plan Other pension and retirement plans Other employee benefit plans2 Total actuarial gains (losses) recognized in Other Comprehensive Income 1 Amounts are presented on pre-tax basis. 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. October 31 2018 October 31 2017 $ 104 3 6 113 – 535 852 360 1,747 $ (1,634) $ – 7 6 13 546 558 902 457 2,463 $ (2,450) As at October 31 2016 $ – 3 8 11 982 568 971 490 3,011 $ (3,000) For the years ended October 31 2018 October 31 2017 October 31 2016 $ 720 40 60 45 $ 865 $ 333 27 72 22 $ 454 $ (980) 7 (193) (56) $ (1,222) 199 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS N O T E 2 5 INCOME TAXES The provision for (recovery of) income taxes is comprised of the following: Provision for (Recovery of) Income Taxes1 (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 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 1 Certain comparative amounts have been reclassified to conform with the presentation adopted in the current period. For the years ended October 31 2018 2017 2016 $ 2,873 (76) 2,797 $ 2,073 5 2,078 $ 2,106 (66) 2,040 76 302 7 385 3,182 (48) (701) (749) (3) (2) (5) 2,428 1,491 1,055 200 2,746 (244) (160) 86 (318) $ 2,428 215 13 (53) 175 2,253 261 (755) (494) 29 – 29 1,788 1,115 797 456 2,368 (233) (156) (191) (580) $ 1,788 50 2 51 103 2,143 57 (229) (172) 26 (5) 21 1,992 1,003 693 427 2,123 (171) (116) 156 (131) $ 1,992 On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “U.S. Tax Act”), which made broad and complex changes to the U.S. tax code. The reduction of the U.S. federal corporate tax rate enacted by the U.S. Tax Act resulted in an adjustment during 2018 to the Bank’s U.S. deferred tax assets and liabilities to the lower base rate of 21%. The impact for the year ended October 31, 2018 was a reduction in the value of the Bank’s net deferred tax assets resulting in a $366 million income tax expense recorded in the Provision for (recovery of) income taxes on the Consolidated Statement of Income, a $22 million deferred income tax benefit recorded in OCI and a $12 million deferred income tax expense recorded in retained earnings. The impact of the U.S. Tax Act on the Bank’s statutory and effective tax rate is outlined in the following table as part of the Rate differentials on international operations. 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 2018 2017 $ 3,648 26.5% $ 3,262 26.5% $ 2,819 (142) (343) 19 $ 3,182 (1.0) (2.5) 0.1 23.1% (498) (515) 4 $ 2,253 (4.0) (4.2) – 18.3% (233) (439) (4) $ 2,143 2016 26.5% (2.2) (4.1) (0.1) 20.1% The Canada Revenue Agency (CRA) and Alberta are denying certain dividend deductions claimed by the Bank. In September 2018, Alberta reassessed the Bank for $15 million of income tax for the years 2011 to 2013. In June 2018, the CRA reassessed the Bank for approximately $198 million of additional income tax and interest in respect of its 2013 taxation year. To date, the Bank has been reassessed for approximately $553 million of income tax and interest for the years 2011 to 2013. The Bank expects the CRA and Alberta to reassess the subsequent years on the same basis and that Québec will also reassess all open years. The Bank is of the view that its tax filing positions were appropriate and intends to challenge all reassessments. 200 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS Deferred tax assets and liabilities comprise of the following: Deferred Tax Assets and Liabilities (millions of Canadian dollars) Deferred tax assets Allowance for credit losses Securities Trading loans Employee benefits Pensions Losses available for carry forward Tax credits Other Total deferred tax assets Deferred tax liabilities Land, buildings, equipment, and other depreciable assets Deferred (income) expense Intangibles Goodwill Total deferred tax liabilities Net deferred tax assets Reflected on the Consolidated Balance Sheet as follows: Deferred tax assets Deferred tax liabilities1 Net deferred tax assets 1 Included in Other liabilities on the Consolidated Balance Sheet. October 31 2018 As at October 31 2017 $ 845 920 54 739 59 94 326 92 3,129 223 12 163 94 492 2,637 2,812 175 $ 2,637 $ 924 215 90 814 269 131 22 144 2,609 7 (83) 244 122 290 2,319 2,497 178 $ 2,319 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 $806 million as at October 31, 2018 (October 31, 2017 – $633 million), of which $2 million (October 31, 2017 – $2 million) is scheduled to expire within five years. 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, 2018. The total amount of these temporary differences was $61 billion as at October 31, 2018 (October 31, 2017 – $55 billion). 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 2018 Total Consolidated statement of income Other comprehensive income Business combinations and other 2017 Total Deferred income tax expense (recovery) Allowance for credit losses Land, buildings, equipment, and other depreciable assets Deferred (income) expense Trading loans Pensions Employee benefits Losses available for carry forward Tax credits Other deferred tax assets Securities Intangible assets Goodwill Total deferred income tax $ 79 $ – $ – $ 79 $ (59) $ – $ – $ (59) 216 95 36 (20) 61 37 (304) 54 240 (81) (28) – – – 230 14 – – – (945) – – – – – – – – – (2) – – – 216 95 36 210 75 37 (304) 52 (705) (81) (28) 36 (52) 24 27 20 23 143 202 (118) (87) 16 – – – 128 7 – – – (890) – – – – – – – – – – – – – 36 (52) 24 155 27 23 143 202 (1,008) (87) 16 expense (recovery) $ 385 $ (701) $ (2) $ (318) $ 175 $ (755) $ – $ (580) 201 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS N O T E 2 6 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. weighted-average number of shares outstanding for the effects of all dilutive potential common shares that are assumed to be issued by the Bank. Diluted earnings per share is calculated using the same method as basic earnings per share except that certain adjustments are made to net income attributable to common shareholders and the The following table presents the Bank’s basic and diluted earnings per share for the years ended October 31. 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 (Canadian dollars) Diluted earnings per share Net income attributable to common shareholders 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 Weighted-average number of common shares outstanding – diluted (millions) Diluted earnings per share (Canadian dollars)1 1 For the years ended October 31, 2018, October 31, 2017, and October 31, 2016, no outstanding options were excluded from the computation of diluted earnings per share. For the years ended October 31 2018 2017 2016 $ 11,048 1,835.4 6.02 $ $ 10,203 1,850.6 5.51 $ $ 8,680 1,853.4 4.68 $ $ 11,048 11,048 1,835.4 4.1 1,839.5 6.01 $ $ 10,203 10,203 1,850.6 4.2 1,854.8 5.50 $ $ 8,680 8,680 1,853.4 3.4 1,856.8 4.67 $ N O T E 2 7 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, 2017 Additions Amounts used Release of unused amounts Foreign currency translation adjustments and other Balance as of October 31, 2018, 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, 2018 1 Includes provisions for onerous lease contracts. 2 Refer to Note 8 for further details. Restructuring1 Litigation and Other $ 117 84 (72) (11) 3 $ 332 158 (121) (24) 7 $ 121 $ 352 Total $ 449 242 (193) (35) 10 $ 473 1,029 $ 1,502 LITIGATION In the ordinary course of business, the Bank and its subsidiaries are involved in various legal and regulatory actions. The Bank establishes legal provisions when it becomes probable that the Bank will incur a loss and the amount can be reliably estimated. The Bank also estimates the aggregate range of reasonably possible losses (RPL) in its legal and regulatory actions (that is, those which are neither probable nor remote), in excess of provisions. As at October 31, 2018, the Bank’s RPL is from zero to approximately $763 million. This range does not include potential punitive damages and interest and also does not include matters for which an estimate cannot currently be made, including actions that are in preliminary stages and certain matters where no specific amount has been claimed. The Bank’s provisions and RPL represent the Bank’s best estimates based upon currently available information for actions for which estimates can be made, but there are a number of factors that could cause the Bank’s provisions and/ or RPL to be significantly different from its actual or reasonably possible losses. For example, the Bank’s estimates involve significant judgment due to the varying stages of the proceedings, the existence of multiple defendants in many proceedings whose share of liability has yet to be determined, the numerous yet-unresolved issues in many of the proceedings, some of which are beyond the Bank’s control and/or involve novel legal theories and interpretations, the attendant uncertainty of the various potential outcomes of such proceedings, and the fact that the underlying matters will change from time to time. In addition, some actions seek very large or indeterminate damages. 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, because of the factors listed above, as well as other uncertainties inherent in litigation and regulatory matters, there is a possibility that the ultimate resolution of legal or regulatory actions may be material to the Bank’s consolidated results of operations for any particular reporting period. 202 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS Stanford Litigation – The 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. The Official Stanford Investors Committee (OSIC), 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 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. The class 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. On April 22, 2016, the Bank filed a motion to reconsider the court’s April 2015 dismissal decision with respect to certain claims by OSIC under the Texas Uniform Fraudulent Transfer Act based on an intervening change in the law announced by the Texas Supreme Court on April 1, 2016. On July 28, 2016, the court issued a decision denying defendants’ motions to dismiss the class plaintiffs’ complaint and to reconsider with respect to OSIC’s complaint. The Bank filed its answer to the class plaintiffs’ complaint on August 26, 2016. OSIC filed an amended intervenor complaint against the Bank on November 4, 2016 and the Bank filed its answer to this amended complaint on December 19, 2016. On November 7, 2017, the Court issued a decision denying the class certification motion. The court found that the plaintiffs failed to show that common issues of fact would predominate given the varying sales presentations they allegedly received. On November 21, 2017, the class plaintiffs filed a Rule 23(f) petition seeking permission to appeal the District Court’s denial of class certification to the United States Court of Appeals for the Fifth Circuit. The Bank filed an opposition to the class plaintiffs’ petition on December 4, 2017. The Fifth Circuit denied the class plaintiffs’ petition on April 20, 2018. The 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 judgment 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 two cases filed in the Ontario Superior Court of Justice are being managed jointly, and discovery is ongoing. Overdraft Litigation – TD Bank, N.A. was 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 and the overdraft practices of Carolina First Bank prior to its merger into TD Bank, N.A. in September 2010. These actions have been consolidated for pretrial proceedings as MDL 2613 in the United States District Court for the District of South Carolina: In re TD Bank, N.A. Debit Card Overdraft Fee Litigation, No. 6:15-MN-02613 (D.S.C.). On December 10, 2015, TD Bank, N.A.’s motion to dismiss the consolidated class action was granted in part and denied in part. Discovery, briefing, and a hearing on class certification were complete as of May 24, 2017. On January 5, 2017, TD Bank, N.A. was named as a defendant in a twelfth class action complaint challenging an overdraft practice that was already the subject of the consolidated amended class action complaint. This action was consolidated into MDL 2613, and dismissed by the Court. The plaintiff in that complaint has filed a notice of appeal with the Fourth Circuit. On December 5, 2017, TD Bank, N.A. was named as a defendant in a thirteenth class action complaint challenging the Bank’s overdraft practices. The new action, which was transferred to MDL 2613, concerns the Bank’s treatment of certain transactions as “recurring” for overdraft purposes. The Bank has moved to dismiss the claims. On February 22, 2018, the Court issued an order certifying a class as to certain claims and denying certification as to others. The United States Court of Appeals for the Fourth Circuit denied the Bank’s 23(f) petition seeking permission to appeal certain portions of the District Court’s order. Credit Card Fees – Between 2011 and 2013, seven proposed class actions were commenced, five of which remain in British Columbia, Alberta, Saskatchewan, Ontario and Québec: Coburn and Watson’s Metropolitan Home v. Bank of America Corporation, et al.; Macaronies Hair Club v. BOFA Canada Bank, 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 Québec Inc. v. Visa Canada Corporation, et al. Subject to court approval of certain settlements, the remaining defendants in each action are the Bank and several other financial institutions. The plaintiff class members are Canadian merchants who accept payment for products and services by Visa Canada Corporation (Visa) and/or MasterCard International Incorporated (MasterCard) (collectively, the “Networks”). 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 excessive fees and that certain rules have the effect of increasing the merchant fees. The five actions that remain include claims of civil conspiracy, breach of the Competition Act, interference with economic relations, and unjust enrichment. Plaintiffs seek general and punitive damages. 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. While both the plaintiffs and defendants succeeded in part on their respective appeals, the class period for the plaintiffs’ key claims was shortened significantly. At a hearing in October 2016, the plaintiffs sought to amend their claims to reinstate the extended class period. The plaintiffs’ motion to amend their claims to reinstate the extended class period was denied by the motions judge and subsequently by the B.C. Court of Appeal. The plaintiffs have sought and were refused leave to appeal to the Supreme Court of Canada. The trial of the British Columbia action is currently scheduled to proceed in October 2019. In Québec, the motion for authorization proceeded on November 6–7, 2017 and the matter was authorized on similar grounds and for a similar period as in British Columbia. The plaintiffs appealed this decision with a date to be set by the court. Consumer Class Actions – The Bank, along with several other Canadian financial institutions, is a defendant in a number of matters brought by consumers alleging provincial and/or national class claims in connection with various fees, interest rate calculations, and credit decisions. The cases are in various stages of maturity. In one matter, the Bank is the sole defendant. Trial in that case has been scheduled for November 2020. 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. 203 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTSFinancial and performance standby letters of credit represent 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 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. 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 2017 2018 $ 26,431 $ 23,723 198 197 41,587 50,028 134,148 115,692 $ 210,804 $ 181,200 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, 2018, the Bank is committed to fund $205 million (October 31, 2017 – $123 million) of private equity investments. Long-term Commitments or Leases The Bank has obligations under long-term non-cancellable leases for premises and equipment. Future minimum operating lease commitments for premises and for equipment, where the annual rental is in excess of $100 thousand, is estimated at $948 million for 2019; $902 million for 2020, $815 million for 2021, $733 million for 2022, $640 million for 2023, $3,229 million for 2024, and thereafter. Future minimum finance lease commitments where the annual Details of assets pledged against liabilities and collateral assets held or repledged are shown in the following table: Sources and Uses of Pledged Assets and Collateral1 (millions of Canadian dollars) As at October 31 October 31 2017 2018 Sources of pledged assets and collateral Bank assets Cash and due from banks Interest-bearing deposits with banks Loans Securities Other assets $ 1,219 $ 3,301 83,637 83,370 442 3,329 75,682 74,511 635 172,805 154,599 1,278 Third-party assets2 Collateral received and available for sale or repledging 243,168 Less: Collateral not repledged 215,678 (57,845) (61,328) 185,323 154,350 358,128 308,949 Uses of pledged assets and collateral3 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 8,083 7,905 105,665 85,544 39,007 32,067 38,033 7,540 1,390 94,945 61,856 35,281 33,527 30,273 5,686 1,222 40,799 38,254 $ 358,128 $ 308,949 1 Certain comparative amounts have been restated to conform with the presentation adopted in the current period. 2 Includes collateral received from reverse repurchase agreements, securities borrowing, margin loans, and other client activity. 3 Includes $43.9 billion of on-balance sheet assets that the Bank has pledged and that the counterparty can subsequently repledge as at October 31, 2018 (October 31, 2017 – $39.3 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. payment is in excess of $100 thousand, is estimated at $26 million for 2019; $12 million for 2020, $8 million for 2021, $5 million for 2022, $4 million for 2023, $5 million for 2024, and thereafter. GUARANTEES The following types of transactions represent the principal guarantees that the Bank has entered into. 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, 2018 (October 31, 2017 – $1.1 billion; October 31, 2016 – $1.1 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. 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 experiences a liquidity event such that it does not have sufficient cash to honour unitholder redemptions. On April 22, 2016, the Fund was discontinued and merged with another mutual fund managed by the Bank. The mortgages held by the Fund were not merged into the other mutual fund and as a result of the Fund’s discontinuation, the mortgages were repurchased from the Fund at a fair value of $155 million. Prior to the discontinuation of the Fund, during the year ended October 31, 2016, the fair value of the mortgages repurchased from the Fund as a result of a liquidity event was $21 million. For further details on the Bank’s involvement with the Fund, refer to Note 10. 204 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS Credit Enhancements The Bank guarantees payments to counterparties in the event that third-party credit enhancements supporting asset pools are insufficient. 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 acquisitions 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. N O T E 2 8 RELATED PARTY TRANSACTIONS Parties are considered to be related if one party has the ability to directly or indirectly control the other party or exercise significant influence over the other party in making financial or operational decisions. The Bank’s related parties include key management 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 management personnel, which are subject to approved policy guidelines that govern all employees. As at October 31, 2018, $149 million (October 31, 2017 – $180 million) of related party loans were outstanding from key management personnel, their close family members, and their related entities. 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 2018 $ 34 3 37 $ 74 2017 $ 33 3 32 $ 68 2016 $ 25 3 32 $ 60 In addition, the Bank offers deferred share and other plans to non-employee directors, executives, and certain other key employees. Refer to Note 23 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. The following table summarizes as at October 31, the maximum potential amount of future payments that could be made under guarantees without consideration of possible recoveries under recourse provisions or from collateral held or pledged. Maximum Potential Amount of Future Payments (millions of Canadian dollars) As at Financial and performance standby letters of credit Assets sold with contingent repurchase obligations Total October 31 October 31 2017 2018 $ 26,431 $ 23,723 15 12 $ 26,443 $ 23,738 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, 2018, other than as described in the following sections and in Note 12. 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, FDIC-insured money market deposit accounts as either designated sweep vehicles or as non-sweep deposit accounts. TD Ameritrade provides marketing and support services with respect to the IDA. The Bank paid fees of $1.9 billion during the year ended October 31, 2018 (October 31, 2017 – $1.5 billion; October 31, 2016 – $1.2 billion) to TD Ameritrade related to deposit accounts. The amount paid by the Bank is based on the average insured deposit balance of $140 billion for the year ended October 31, 2018 (October 31, 2017 – $124 billion; October 31, 2016 – $112 billion) with a portion of the amount 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 bps on the aggregate average daily balance in the sweep accounts (subject to adjustment based on a specified formula). As at October 31, 2018, amounts receivable from TD Ameritrade were $137 million (October 31, 2017 – $68 million). As at October 31, 2018, amounts payable to TD Ameritrade were $174 million (October 31, 2017 – $167 million). The Bank and other financial institutions provided TD Ameritrade with unsecured revolving loan facilities. The total commitment provided by the Bank was $338 million, which was undrawn as at October 31, 2018, and October 31, 2017. (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, 2018, the Bank paid $86 million (October 31, 2017 – $93 million; October 31, 2016 – $97 million) for these services. As at October 31, 2018, the amount payable to Symcor was $14 million (October 31, 2017 – $15 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, 2018, and October 31, 2017. 205 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS N O T E 2 9 SEGMENTED INFORMATION For management reporting purposes, the Bank 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 business banking operations, 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. 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 business 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 the Bank’s 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 equivalent adjustments and other management reclassifications, corporate level tax items, and residual unallocated revenue and expenses. The results of each business segment reflect revenue, expenses, and assets generated by the businesses in that segment. Due to the complexity of the Bank, its management reporting model uses various estimates, assumptions, allocations, and risk-based methodologies for funds transfer pricing, inter-segment revenue, income tax rates, capital, indirect expenses and cost transfers to measure business segment results. The basis of allocation and methodologies are reviewed periodically to align with management’s evaluation of the Bank’s business segments. Transfer pricing of funds is generally applied at market rates. Inter-segment revenue is negotiated between each business segment and approximates the fair value of the services provided. Income tax provision or recovery is generally applied to each segment based on a statutory tax rate and may be adjusted for items and activities unique to each segment. Amortization of intangibles acquired as a result of business combinations is included in the Corporate segment. Accordingly, net income for business segments is presented before amortization of these intangibles. Non-interest income is earned by the Bank primarily through investment and securities services, credit fees, trading income, service charges, card services, and insurance revenues. Revenues from investment and securities services are earned predominantly in the Canadian Retail segment with the remainder earned in Wholesale Banking and U.S. Retail. Revenues from credit fees are primarily earned in the Wholesale Banking and Canadian Retail segments. Trading income is earned within Wholesale Banking. Both service charges and card services revenue are mainly earned in the U.S. Retail and Canadian Retail segments. Insurance revenue is earned in the Canadian Retail segment. 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 Banking’s corporate lending portfolio. These CDS do not qualify for hedge accounting treatment and are measured at fair value with changes in fair value recognized in current period’s earnings. The related loans are accounted for at amortized cost. Management believes that this asymmetry in the accounting treatment between CDS and loans would result in periodic profit and loss volatility which is not indicative of the economics of the corporate loan portfolio or the underlying business performance in Wholesale Banking. As a result, 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 changed its trading strategy with respect to certain trading debt securities and reclassified these securities from trading to the available-for-sale category under IAS 39 (classified as fair value through other comprehensive income under IFRS 9) effective August 1, 2008. These debt securities are economically hedged, primarily with CDS and interest rate swap contracts which are recorded on a fair value basis with changes in fair value recorded in the period’s earnings. As a result, the derivatives were accounted for on an accrual basis in Wholesale Banking and the gains and losses related to the derivatives in excess of the accrued amounts were reported in the Corporate segment. Adjusted results of the Bank in prior periods exclude the gains and losses of the derivatives in excess of the accrued amount. Effective February 1, 2017, the total gains and losses as a result of changes in fair value of these derivatives are recorded in Wholesale Banking. Upon adoption of IFRS 9, the current period provision for credit losses related to performing (Stage 1 and Stage 2) and impaired (Stage 3) financial assets, loan commitments, and financial guarantees are recorded within the respective segment. Under IAS 39, and prior to November 1, 2017, the provision for credit losses related to the collectively assessed allowance for incurred but not identified credit losses that related to Canadian Retail and Wholesale Banking segments was recorded in the Corporate segment. 206 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTSThe following table summarizes the segment results for the years ended October 31. Results by Business Segment1 (millions of Canadian dollars) Net interest income (loss) Non-interest income (loss) Total revenue4 Provision for (recovery 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 TD Ameritrade Net income (loss) Canadian Retail $ 11,576 11,137 22,713 998 2,444 9,473 9,798 2,615 – 7,183 $ For the years ended October 31 Corporate2,3 $ 1,337 $ 381 1,718 562 – 2,497 (1,341) (200) 50 $ (1,091) $ 2018 Total 22,239 16,595 38,834 2,480 2,444 20,137 13,773 3,182 743 11,334 $ Wholesale Banking2,3 1,150 2,309 3,459 3 – 2,067 1,389 335 – 1,054 $ U.S. Retail $ 8,176 2,768 10,944 917 – 6,100 3,927 432 693 4,188 $ Total assets as at October 31 $ 433,960 $ 417,292 $ 425,909 $ 57,742 $ 1,334,903 Net interest income (loss) Non-interest income (loss) Total revenue4 Provision for (recovery 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 TD Ameritrade Net income (loss) $ 10,611 10,451 21,062 986 2,246 8,934 8,896 2,371 – 6,525 $ $ 7,486 2,735 10,221 792 – 5,878 3,551 671 442 3,322 $ $ $ 1,804 1,467 3,271 (28) – 1,929 1,370 331 – 1,039 $ 946 $ 649 1,595 466 – 2,625 (1,496) (1,120) 7 (369) $ $ 2017 20,847 15,302 36,149 2,216 2,246 19,366 12,321 2,253 449 10,517 Total assets as at October 31 $ 404,444 $ 403,937 $ 406,138 $ 64,476 $ 1,278,995 Net interest income (loss) Non-interest income (loss) Total revenue Provision for (recovery 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 TD Ameritrade Net income (loss) $ 9,979 10,230 20,209 1,011 2,462 8,557 8,179 2,191 – 5,988 $ $ $ 7,093 2,366 9,459 744 – 5,693 3,022 498 435 2,959 $ $ 1,685 1,345 3,030 74 – 1,739 1,217 297 – 920 $ 1,166 $ 451 1,617 501 – 2,888 (1,772) (843) (2) (931) $ $ 2016 19,923 14,392 34,315 2,330 2,462 18,877 10,646 2,143 433 8,936 Total assets as at October 31 $ 383,011 $ 388,749 $ 342,478 $ 62,729 $ 1,176,967 1 The retailer program partners’ share of revenues and credit losses is presented in the Corporate segment, with an offsetting amount (representing the partners’ net share) recorded in Non-interest expenses, resulting in no impact to Corporate reported Net income (loss). The Net income (loss) included in the U.S. Retail segment includes only the portion of revenue and credit losses attributable to the Bank under the agreements. 3 Effective February 1, 2017, the total gains and losses as a result of changes in fair value of the CDS and interest rate swap contracts hedging the reclassified financial assets at FVOCI (AFS securities under IAS 39) portfolio are recorded in Wholesale Banking. Previously, these derivatives were accounted for on an accrual basis in Wholesale Banking and the gains and losses related to the derivatives, in excess of the accrued costs were reported in Corporate segment. 2 Net interest income within Wholesale Banking is calculated on a TEB. The TEB 4 Effective fiscal 2017, the impact from certain treasury and balance sheet adjustment reflected in Wholesale Banking is reversed in the Corporate segment. management activities relating to the U.S. Retail segment is recorded in the Corporate segment. 207 TD BANK GROUP ANNUAL REPORT 2018 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) Canada United States Other international Total Canada United States Other international Total Canada United States Other international Total For the years ended October 31 As at October 31 2018 2018 Total revenue Income before income taxes $ 23,279 13,751 1,804 $ 38,834 $ 8,886 3,768 1,119 $ 13,773 $ 20,862 13,371 1,916 $ 36,149 $ 7,250 3,677 1,394 $ 12,321 $ 20,374 12,217 1,724 $ 34,315 $ 6,760 2,873 1,013 $ 10,646 Net income Total assets $ 6,523 2,993 1,818 $ 11,334 2017 $ 5,660 3,075 1,782 $ 10,517 2016 $ 5,133 2,436 1,367 $ 8,936 $ 713,677 514,263 106,963 $ 1,334,903 2017 $ 648,924 515,478 114,593 $ 1,278,995 2016 $ 632,215 462,330 82,422 $ 1,176,967 N O T E 3 0 INTEREST INCOME AND EXPENSE The following table presents interest income and interest expense by basis of accounting measurement. Please refer to Note 2 for the type of instruments measured at amortized cost and FVOCI under IFRS 9 and IAS 39. (millions of Canadian dollars) Measured at amortized cost Measured at FVOCI Not measured at amortized cost or FVOCI2 Total Interest income $ 26,051 4,588 30,639 5,783 October 31, 20181 Interest expense $ 9,286 – 9,286 4,897 For the year ended October 31, 2017 Interest income Interest expense $ 22,596 3,426 26,022 3,810 $ 6,204 – 6,204 2,781 $ 36,422 $ 14,183 $ 29,832 $ 8,985 1 Amounts for the year ended October 31, 2018 are prepared in accordance with 2 Includes interest income, interest expense, and dividend income for financial IFRS 9. Prior period comparatives are based on IAS 39. Refer to Note 2 for further details. instruments that are measured or designated at fair value through profit or loss and equities designated at fair value through other comprehensive income. 208 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS N O T E 3 1 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 (millions of Canadian dollars, except as noted) Canada7 United States8 United Kingdom Europe – other Other international Total Loans and customers’ liability under acceptances1,2 Credit instruments3,4 October 31 2018 October 31 2017 October 31 2018 October 31 2017 As at Derivative financial instruments5,6 October 31 2017 October 31 2018 67% 32 – – 1 100% 66% 33 – – 1 100% 40% 57 1 1 1 100% 42% 55 1 1 1 100% 24% 31 15 24 6 100% 29% 26 17 21 7 100% $ 666,405 $ 629,888 $ 210,804 $ 181,200 $ 55,615 $ 53,645 1 Of the total loans and customers’ liability under acceptances, the only industry segment which equalled or exceeded 5% of the total concentration as at October 31, 2018, was: real estate 9% (October 31, 2017 – 10%). 2 Includes loans that are measured at fair value through other comprehensive income. 3 As at October 31, 2018, the Bank had commitments and contingent liability contracts in the amount of $211 billion (October 31, 2017 – $181 billion). Included are commitments to extend credit totalling $184 billion (October 31, 2017 – $157 billion), of which the credit risk is dispersed as detailed in the table above. 4 Of the commitments to extend credit, industry segments which equalled or exceeded 5% of the total concentration were as follows as at October 31, 2018: financial institutions 19% (October 31, 2017 – 19%); pipelines, oil and gas 10% (October 31, 2017 – 10%); power and utilities 9% (October 31, 2017 – 10%); automotive 9% (October 31, 2017 – 7%); telecommunications, cable, and media 7% (October 31, 2017 – 6%); sundry manufacturing and wholesale 7% (October 31, 2017 – 7%); professional and other services 6% (October 31, 2017 – 6%); non-residential real estate development 5% (October 31, 2017 – 5%); government, public sector entities, and education 5% (October 31, 2017 – 5%). 5 As at October 31, 2018, the current replacement cost of derivative financial instruments amounted to $56 billion (October 31, 2017 – $54 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. 6 The largest concentration by counterparty type was with financial institutions (including non-banking financial institutions), which accounted for 68% of the total as at October 31, 2018 (October 31, 2017 – 75%). The second largest concentration was with governments, which accounted for 26% of the total as at October 31, 2018 (October 31, 2017 – 20%). No other industry segment exceeded 5% of the total. 7 Debt securities classified as loans were 0.4% as at October 31, 2017, of the total loans and customers’ liability under acceptances. Debt securities classified as loans are reclassified as Debt securities at amortized cost under IFRS 9. 8 Debt securities classified as loans were 0.1% as at October 31, 2017, of the total loans and customers’ liability under acceptances. Debt securities classified as loans are reclassified as Debt securities at amortized cost under IFRS 9. 209 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS The following table presents the maximum exposure to credit risk of financial instruments, before taking account of any collateral held or other credit enhancements. Gross Maximum Credit Risk Exposure (millions of Canadian dollars) Cash and due from banks Interest-bearing deposits with banks Securities1 Financial assets designated at fair value through profit or loss Government and government-insured securities Other debt securities Trading Government and government-insured securities Other debt securities Retained interest Non-trading securities at fair value through profit or loss Government and government-insured securities Other debt securities Securities at fair value through other comprehensive income Government and government-insured securities Other debt securities Available-for-sale Government and government-insured securities Other debt securities Debt securities at amortized cost Government and government-insured securities Other debt securities Held-to-maturity Government and government-insured securities Other debt securities Securities purchased under reverse purchase agreements Derivatives2 Loans Residential mortgages Consumer instalment and other personal Credit card Business and government Debt securities classified as loans Trading loans Non-trading loans at fair value through profit or loss Loans at fair value through other comprehensive income Customers’ liability under acceptances Amounts receivable from brokers, dealers, and clients Other assets Total assets Credit instruments3 Unconditionally cancellable commitments to extend credit relating to personal lines of credit and credit card lines Total credit exposure October 31 2018 As at October 31 2017 $ 4,735 30,720 $ 3,971 51,185 1,397 2,221 47,085 20,106 25 – 2,340 94,733 30,948 2,119 1,913 40,012 13,358 32 n/a n/a n/a n/a n/a n/a 102,361 41,763 60,535 46,636 n/a n/a 127,379 101,525 225,081 170,976 34,015 216,321 n/a 10,990 1,336 2,745 17,267 26,940 5,886 1,281,942 210,804 n/a n/a 45,623 25,740 134,429 70,120 221,990 156,293 31,743 199,503 3,062 11,235 n/a n/a 17,297 29,971 4,556 1,208,276 181,200 301,752 $ 1,794,498 290,123 $ 1,679,599 1 Excludes equity securities. 2 The gross maximum credit exposure for derivatives is based on the credit equivalent amount less the impact of certain master netting arrangements. The amounts exclude exchange traded derivatives and non-trading credit derivatives. Refer to Note 11 for further details. 3 The balance represents the maximum amount of additional funds that the Bank could be obligated to extend should the contracts be fully utilized. The actual maximum exposure may differ from the amount reported above. Refer to Note 27 for further details. 210 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS N O T E 3 2 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 shareholders’ equity. Basel III Capital Framework Capital requirements of the Basel Committee on Banking Supervision (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. Risk sensitive regulatory capital ratios are calculated by dividing CET1, Tier 1, and Total Capital by their respective risk-weighted assets (RWA), inclusive of any minimum requirements outlined under the regulatory floor. In 2015, Basel III also implemented a non-risk sensitive leverage ratio to act as a supplementary measure to the risk-sensitive capital requirements. The objective of the leverage ratio is to constrain the build-up of excess leverage in the banking sector. The leverage ratio is calculated by dividing Tier 1 Capital by leverage ratio exposure which is primarily comprised of on-balance sheet assets with adjustments made to derivative and securities financing transaction exposures, and credit equivalent amounts of off-balance sheet exposures. 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. Effective the third quarter of 2016, OSFI approved the Bank to calculate the majority of the retail portfolio credit RWA in the U.S. Retail segment using the AIRB approach. The remaining assets in the U.S. Retail segment continue to use the standardized approach for credit risk. For accounting purposes, IFRS is followed for consolidation of subsidiaries and joint ventures. For regulatory capital purposes, insurance subsidiaries are deconsolidated and reported as a deduction from capital. Insurance subsidiaries are subject to their own capital adequacy reporting, such as OSFI’s Minimum Continuing Capital Surplus Requirements and Minimum Capital Test. Currently, for regulatory capital purposes, all the entities of the Bank are either consolidated or deducted from capital and there are no entities from which surplus capital is recognized. Some of the Bank’s subsidiaries are individually regulated by either OSFI or other regulators. Many of these entities have minimum capital requirements which they must maintain and which may limit the Bank’s ability to extract capital or funds for other uses. During the year ended October 31, 2018, the Bank complied with the OSFI Basel III guideline related to capital ratios and the leverage ratio. Effective January 1, 2016, OSFI’s target CET1, Tier 1, and Total Capital ratios for Canadian banks designated as D-SIBs includes a 1% common equity capital surcharge bringing the targets to 8%, 9.5%, and 11.5%, respectively. In addition, on June 25, 2018, OSFI provided greater transparency related to previously undisclosed Pillar 2 CET1 capital buffers through the introduction of the public Domestic Stability Buffer (DSB) which is held by D-SIBs against Pillar 2 risks. The current buffer is set at 1.5% of total risk-weighted assets (RWA) and must be met with CET1 Capital, effectively raising the CET1 target to 9.5%. Effective the second quarter of 2018, the Bank is no longer constrained by the regulatory floor as a result of implementing OSFI’s revised capital floor requirements. 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. The following table summarizes the Bank’s regulatory capital position as at October 31. Regulatory Capital Position (millions of Canadian dollars, except as noted) Capital Common Equity Tier 1 Capital Tier 1 Capital Total Capital Risk-weighted assets used in the calculation of capital ratios1,2 Common Equity Tier 1 Capital Tier 1 Capital Total Capital Capital and leverage ratios Common Equity Tier 1 Capital ratio1,2 Tier 1 Capital ratio1,2 Total Capital ratio1,2 Leverage ratio As at October 31 October 31 2017 2018 $ 52,389 $ 46,628 59,735 53,751 70,434 65,038 $ 435,632 $ 435,750 435,780 435,750 435,927 435,750 12.0% 13.7 16.2 4.2 10.7% 12.3 14.9 3.9 1 In accordance with the final CAR guideline, the Credit Valuation Adjustment (CVA) capital charge is being phased in until the first quarter of 2019. Each capital ratio has its own RWA measure due to the OSFI-prescribed scalar for inclusion of the CVA. For fiscal 2018, the scalars for inclusion of CVA for CET1, Tier 1, and Total Capital RWA are 80%, 83%, and 86%, respectively. For fiscal 2017, the scalars were 72%, 77%, and 81%, respectively. 2 As at October 31, 2017, RWA for all ratios were the same due to the regulatory floor which was based on Basel I risk weights. As at October 31, 2018, the regulatory floor is based on Basel II standardized risk weights and is no longer triggered resulting in a separate RWA for each ratio due to the CVA scalar. 211 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS N O T E 3 3 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, liquidity, and insurance risks are an integral part of the 2018 Consolidated Financial Statements. N O T E 3 4 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 Group US Holdings LLC Toronto Dominion Holdings (U.S.A.), Inc. TD Prime Services LLC TD Securities (USA) LLC Toronto Dominion (Texas) LLC Toronto Dominion (New York) LLC Toronto Dominion Capital (U.S.A.), Inc. Toronto Dominion Investments, Inc. TD Bank US Holding Company Epoch Investment Partners, Inc. TDAM USA 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 Luxembourg International Holdings TD Ameritrade Holding Corporation4 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 Limited TD Financial International Ltd. TD Reinsurance (Barbados) Inc. Toronto Dominion International Inc. TD Waterhouse Canada 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 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 New York, New York Cherry Hill, New Jersey New York, New York New York, New York Cherry Hill, New Jersey Cherry Hill, New Jersey Farmington Hills, Michigan Cherry Hill, New Jersey New York, New York Cherry Hill, New Jersey Luxembourg, Luxembourg Omaha, Nebraska Toronto, Ontario Toronto, Ontario Toronto, Ontario Vancouver, British Columbia Toronto, Ontario Toronto, Ontario Toronto, Ontario Hamilton, Bermuda St. James, Barbados St. James, Barbados Toronto, Ontario As at October 31, 2018 Carrying value of shares owned by the Bank3 $ 1,379 Description Holding Company 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 Holding Company Holding Company Securities Dealer Securities Dealer Financial Services Entity Financial Services Entity Small Business Investment Company Merchant Banking and Investments Holding Company Investment Counselling and Portfolio Management Investment Counselling and Portfolio Management U.S. National Bank U.S. National Bank Automotive Finance Entity Financial Services Entity Broker-dealer and Registered Investment Advisor Insurance Agency Holding Company Securities Dealer Mutual Fund Dealer Insurance Company Deposit-Taking Entity Deposit-Taking Entity Trust, Loans, and Deposit-Taking Entity Investment Dealer and Broker Holding Company Holding Company Reinsurance Company Intragroup Lending Company Investment Dealer 328 2,344 1,350 68,903 26 70 9,201 2,191 21,520 2,799 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. included herein which are eliminated for consolidated financial reporting purposes. Certain amounts have been adjusted to conform with the presentation adopted in the current period. 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 Carrying amounts are prepared for purposes of meeting the disclosure requirements of Section 308 (3)(a)(ii) of the Bank Act. Intercompany transactions may be 4 As at October 31, 2018, the Bank’s reported investment in TD Ameritrade Holding Corporation was 41.61% (October 31, 2017 – 41.27%) 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. 212 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS Significant Subsidiaries (continued)1 (millions of Canadian dollars) International TD Bank N.V. TD Ireland Unlimited Company TD Global Finance Unlimited Company TD Securities (Japan) Co. Ltd. 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 Amsterdam, The Netherlands Dublin, Ireland Dublin, Ireland Tokyo, Japan Sydney, Australia London, England London, England London, England London, England Singapore, Singapore Description Dutch Bank Holding Company Securities Dealer Securities Dealer Securities Dealer Holding Company UK Bank Holding Company Securities Dealer Financial Institution As at October 31, 2018 Carrying value of shares owned by the Bank3 $ 434 319 9 99 1,078 817 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 Carrying amounts are prepared for purposes of meeting the disclosure requirements of Section 308 (3)(a)(ii) of the Bank Act. Intercompany transactions may be included herein which are eliminated for consolidated financial reporting purposes. Certain amounts have been adjusted to conform with the presentation adopted in the current period. SUBSIDIARIES WITH RESTRICTIONS TO TRANSFER FUNDS Certain of the Bank’s subsidiaries have regulatory requirements to fulfill, in accordance with applicable law, in order to transfer funds, including paying dividends to, repaying loans to, or redeeming subordinated debentures issued to, the Bank. These customary requirements include, but are not limited to: • Local regulatory capital and/or surplus adequacy requirements; • Basel requirements under Pillar 1 and Pillar 2; • Local regulatory approval requirements; and • Local corporate and/or securities laws. As at October 31, 2018, the net assets of subsidiaries subject to regulatory or capital adequacy requirements was $79.8 billion (October 31, 2017 – $77.2 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 restrictions 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 Notes 9 and 27. 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. 213 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTS N O T E 3 5 SIGNIFICANT AND SUBSEQUENT EVENTS, AND PENDING ACQUISITIONS Acquisition of Greystone Managed Investments Inc. On November 1, 2018, the Bank acquired 100% of the outstanding equity of Greystone Capital Management Inc., the parent company of Greystone Managed Investments Inc. (Greystone) for consideration of $817 million, of which $475 million was paid in cash and $342 million was paid in the Bank’s common shares. The value of 4.7 million common shares issued as consideration was based on the volume weighted-average market price of the Bank’s common shares over the 10 trading day period immediately preceding the fifth business day prior to the acquisition date and was recorded based on market price at close. Common shares of $167 million issued to employee shareholders in respect of the purchase price will be held in escrow for two years post-acquisition, subject to their continued employment, and will be recorded as a compensation expense over the two-year escrow period. The acquisition is accounted for as a business combination under the purchase method. As at November 1, 2018, the acquisition contributed $169 million of assets and $55 million of liabilities. The excess of accounting consideration over the fair value of the identifiable net assets is allocated to customer relationship intangibles of $140 million, deferred tax liability of $37 million and goodwill of $433 million. Goodwill is not deductible for tax purposes. The results of the acquisition will be consolidated from the acquisition date and reported in the Canadian Retail segment. The purchase price allocation is subject to refinement and may be adjusted to reflect new information about facts and circumstances that existed at the acquisition date during the measurement period. Agreement for Air Canada Credit Card Loyalty Program On November 26, 2018, the Bank finalized a long-term loyalty program agreement (the “Loyalty Agreement”) with Air Canada. Under the terms of the Loyalty Agreement, the Bank will become the primary credit card issuer for Air Canada’s new loyalty program when it launches in 2020 through to 2030. The Loyalty Agreement was finalized in conjunction with Air Canada entering into a definitive share purchase agreement with Aimia Inc. (“Aimia”) for the acquisition of Aimia Canada Inc., which operates the Aeroplan loyalty business (the “Transaction”), for an aggregate purchase price of $450 million in cash and the assumption of approximately $1.9 billion of Aeroplan Miles liability. The closing of the Transaction is subject to the satisfaction of certain conditions, including receipt of Aimia shareholder approval and customary regulatory approvals. The Loyalty Agreement will become effective upon the closing of the Transaction and TD Aeroplan cardholders will become members of Air Canada’s new loyalty program and their miles will be transitioned when Air Canada’s new loyalty program launches in 2020. If the proposed Transaction is completed, the Bank will pay $622 million plus applicable sales tax to Air Canada, of which $547 million ($446 million after sales and income taxes) will be recognized as an expense during the first quarter of 2019 to be reported in the Canadian Retail segment, and $75 million will be recognized as an intangible asset amortized over the Loyalty Agreement term. In addition, the Bank will prepay $308 million plus applicable sales tax for the future purchase of loyalty points over a ten year period. The Bank also expects to incur additional pre-tax costs of approximately $100 million over two years to build the functionality required to facilitate the new program. Normal Course Issuer Bid As approved by the Board on November 28, 2018, the Bank announced its intention to amend its normal course issuer bid (NCIB) for up to an additional 20 million of its common shares, 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. Redemption of TD CaTS III Securities On November 26, 2018, TD Capital Trust III announced its intention to redeem all of the outstanding TD Capital Trust III Securities – Series 2008 (TD CaTS III) on December 31, 2018, at a redemption price per TD CaTS III of $1,000, plus the unpaid distribution payable on the redemption date of December 31, 2018. 214 TD BANK GROUP ANNUAL REPORT 2018 FINANCIAL RESULTSTen-year Statistical Review – IFRS Condensed Consolidated Balance Sheet (millions of Canadian dollars) 2018 2017 2016 2015 2014 2013 2012 2011 ASSETS Cash resources and other Trading loans, securities, and other1 Non-trading financial assets at fair value through profit or loss Derivatives Debt securities at amortized cost, net of allowance for credit losses Held-to-maturity securities Securities purchased under reverse repurchase agreements Loans, net of allowance for loan losses Other Total assets LIABILITIES $ 35,455 $ 262,115 55,156 254,361 $ 57,621 211,111 $ 45,637 188,317 $ 46,554 168,926 $ 32,164 188,016 $ 25,128 199,280 $ 24,112 171,109 4,015 56,996 n/a 56,195 107,171 n/a n/a 71,363 127,379 646,393 95,379 134,429 612,591 94,900 n/a 72,242 n/a 84,395 86,052 585,656 79,890 n/a 69,438 n/a 74,450 n/a 55,796 n/a 56,977 n/a 49,461 n/a 29,961 n/a 60,919 n/a 59,845 n/a – n/a – 97,364 544,341 84,826 82,556 478,909 70,793 64,283 444,922 53,214 69,198 408,848 47,680 56,981 377,187 46,259 $ 1,334,903 $ 1,278,995 $ 1,176,967 $ 1,104,373 $ 960,511 $ 862,021 $ 811,053 $ 735,493 Trading deposits Derivatives Deposits Other Subordinated notes and debentures $ 114,704 $ 48,270 851,439 231,710 8,740 79,940 51,214 832,824 230,299 9,528 $ 79,786 65,425 773,660 172,991 10,891 $ 74,759 57,218 695,576 201,155 8,637 $ 59,334 51,209 600,716 185,236 7,785 $ 50,967 49,471 541,605 160,613 7,982 $ 38,774 64,997 487,754 160,105 11,318 $ 29,613 61,715 449,428 139,190 11,543 1,254,863 1,203,805 1,102,753 1,037,345 904,280 810,638 762,948 691,489 Total liabilities and equity $ 1,334,903 $ 1,278,995 $ 1,176,967 $ 1,104,373 $ 960,511 $ 862,021 $ 811,053 $ 735,493 Total liabilities EQUITY Shareholders’ Equity Common shares Preferred shares Treasury shares Contributed surplus Retained earnings Accumulated other comprehensive income (loss) Non-controlling interests in subsidiaries 993 983 Total equity 80,040 75,190 Condensed Consolidated Statement of Income – Reported (millions of Canadian dollars) 2017 2018 Net interest income Non-interest income $ 22,239 $ 16,595 20,847 15,302 $ 21,221 5,000 (151) 193 46,145 20,931 4,750 (183) 214 40,489 6,639 8,006 79,047 74,207 20,711 4,400 (36) 203 35,452 11,834 72,564 1,650 74,214 20,294 2,700 (52) 214 32,053 10,209 65,418 1,610 67,028 19,811 2,200 (55) 205 27,585 4,936 54,682 1,549 56,231 19,316 3,395 (147) 170 23,982 3,159 49,875 1,508 51,383 18,691 3,395 (167) 196 20,868 17,491 3,395 (116) 212 18,213 3,645 3,326 46,628 42,521 1,477 1,483 48,105 44,004 $ 2016 19,923 14,392 34,315 2,330 2,462 18,877 10,646 2,143 433 8,936 141 2015 18,724 12,702 31,426 1,683 2,500 18,073 9,170 1,523 377 8,024 99 2014 2013 2012 2011 $ 17,584 12,377 $ 16,074 11,185 $ 15,026 10,520 29,961 1,557 2,833 16,496 9,075 1,512 320 7,883 143 27,259 1,631 3,056 15,069 7,503 1,135 272 6,640 185 25,546 1,795 2,424 14,016 7,311 1,085 234 6,460 196 $ 13,661 10,179 23,840 1,490 2,178 13,047 7,125 1,326 246 6,045 180 38,834 2,480 2,444 20,137 36,149 2,216 2,246 19,366 13,773 3,182 12,321 2,253 743 449 11,334 214 10,517 193 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 TD Ameritrade Provision for (recovery of) income taxes Equity in net income of an investment in TD Ameritrade Net income Preferred dividends Net income available to common shareholders and non-controlling interests in subsidiaries Attributable to: Common shareholders Non-controlling interests in subsidiaries $ 11,120 $ 10,324 $ 8,795 $ 7,925 $ 7,740 $ 6,455 $ 6,264 $ 5,865 $ 11,048 $ 72 10,203 121 $ 8,680 115 $ 7,813 112 $ 7,633 107 $ 6,350 105 $ 6,160 104 $ 5,761 104 Condensed Consolidated Statement of Changes in Equity (millions of Canadian dollars) 2017 2018 2016 2015 2014 2013 2012 2011 Shareholders’ Equity Common shares Preferred shares Treasury shares Contributed surplus Retained earnings Accumulated other comprehensive income (loss) Total $ $ 21,221 $ 5,000 (151) 193 46,145 20,931 4,750 (183) 214 40,489 6,639 8,006 79,047 74,207 Non-controlling interests in subsidiaries 993 983 $ 20,711 4,400 (36) 203 35,452 11,834 72,564 1,650 20,294 2,700 (52) 214 32,053 10,209 65,418 1,610 $ 19,811 2,200 (55) 205 27,585 $ 19,316 3,395 (147) 170 23,982 $ 18,691 3,395 (167) 196 20,868 $ 17,491 3,395 (116) 212 18,213 4,936 54,682 1,549 3,159 49,875 1,508 3,645 3,326 46,628 42,521 1,477 1,483 Total equity $ 80,040 $ 75,190 $ 74,214 $ 67,028 $ 56,231 $ 51,383 $ 48,105 $ 44,004 1 Includes financial assets designated at fair value through profit or loss and financial assets at fair value through other comprehensive income (available-for-sale securities under IAS 39). TD BANK GROUP ANNUAL RE POR T 2 0 18 TEN-YEAR STATISTICAL R EVIEW 215 2011 2010 2009 $ 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 $ 686,360 $ 619,545 $ 557,219 $ 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 1,559 639,508 577,243 518,499 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 46,852 42,302 38,720 $ 686,360 $ 619,545 $ 557,219 2011 2010 2009 $ 12,831 8,763 21,594 1,465 13,083 $ 11,543 8,022 19,565 1,625 12,163 $ 11,326 6,534 17,860 2,480 12,211 7,046 1,299 104 246 5,889 180 5,777 1,262 106 235 4,644 194 3,169 241 111 303 3,120 167 $ 5,709 $ 4,450 $ 2,953 2011 2010 2009 $ 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 $ 46,852 $ 42,302 $ 38,720 Ten-year Statistical Review – Canadian GAAP 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 shares Contributed surplus Retained earnings Accumulated other comprehensive income (loss) Total liabilities and shareholders’ equity Condensed Consolidated Statement of Income – Reported (millions of Canadian dollars) Net interest income Non-interest income Total revenue 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 Net income available to common shareholders 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 equity 216 TD BANK GROU P AN NUAL REPO RT 20 18 TEN- YEAR S TATIS TICAL RE VIEW Ten-year Statistical Review Other Statistics – IFRS Reported Per common share 1 Basic earnings $ Performance ratios 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 9 Return on common equity 10 Return on Common Equity Tier 1 Capital risk-weighted assets2,3 11 Efficiency ratio 12 Net interest margin 13 Common dividend payout ratio 14 Dividend yield4 15 Price-earnings ratio5 $ 2018 6.02 6.01 2.61 40.50 73.03 1.80 (0.4)% 3.1 15.7% 2.56 51.9 1.95 43.3 3.5 12.2 2017 2016 2015 2014 2013 2012 2011 $ 5.51 5.50 2.35 37.76 73.34 1.94 20.5% 24.8 14.9% 2.46 53.6 1.96 42.6 3.6 13.3 4.68 4.67 2.16 36.71 60.86 1.66 13.4% 17.9 13.3% 2.21 55.0 2.01 46.1 3.9 13.0 $ 4.22 $ 4.21 2.00 33.81 53.68 1.59 (3.2)% 4.15 4.14 1.84 28.45 55.47 1.95 16.0% $ 3.46 3.44 1.62 25.33 47.82 1.89 17.7% $ 3.40 3.38 1.45 23.60 40.62 1.72 8.0% $ 3.25 3.21 1.31 21.72 37.62 1.73 2.4% 0.4 20.1 22.3 11.9 5.7 13.4% 15.4% 14.2% 15.0% 16.2% 2.20 57.5 2.05 47.4 3.7 12.8 2.45 55.1 2.18 44.3 3.5 13.4 2.32 55.3 2.20 46.9 3.8 13.9 2.58 54.9 2.23 42.5 3.7 12.0 2.78 60.2 2.30 40.2 3.4 11.7 Asset quality 16 Net impaired loans as a % of net loans6,7 0.37% 0.38% 0.46% 0.48% 0.46% 0.50% 0.52% 0.56% 17 Net impaired loans as a % of common equity6,7 3.33 3.45 4.09 4.24 4.28 4.83 Capital ratios Other 18 Provision for loan losses as a % of net average loans6,7 19 Common Equity Tier 1 Capital ratio3,8 20 Tier 1 Capital ratio2,3 21 Total Capital ratio2,3 22 Common equity to total assets 23 Number of common shares outstanding (millions) 24 Market capitalization 0.39 12.0% 13.7 16.2 5.5 0.37 10.7% 12.3 14.9 5.4 0.41 10.4% 12.2 15.2 5.8 0.34 0.34 0.38 9.9% 11.3 14.0 5.7 9.4% 9.0% n/a% n/a% 10.9 13.4 5.5 11.0 14.2 5.4 12.6 15.7 5.3 13.0 16.0 5.3 4.86 0.43 5.27 0.39 1,828.3 1,839.6 1,857.2 1,855.1 1,844.6 1,835.0 1,832.3 1,802.0 (millions of Canadian dollars) $ 133,519 $ 134,915 $ 113,028 $ 99,584 $ 102,322 $ 87,748 $ 74,417 $ 67,782 25 Average number of full-time equivalent staff9 26 Number of retail outlets10 27 Number of retail brokerage offices 28 Number of automated 84,383 2,411 109 83,160 2,446 109 81,233 2,476 111 81,483 81,137 2,534 2,514 111 108 78,748 2,547 110 78,397 2,535 112 75,631 2,483 108 banking machines 5,587 5,322 5,263 5,171 4,833 4,734 4,739 4,650 1 Return is calculated based on share price movement and dividends reinvested over 5 The price-earnings ratio is computed using diluted net income per common share the trailing twelve-month period. over the trailing 4 quarters. 2 Effective fiscal 2013, amounts are calculated in accordance with the Basel III regulatory 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. 3 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 were 57%, 65% and 77% respectively. For fiscal 2015 and 2016, the scalars for inclusion of CVA for CET1, Tier 1, and Total Capital RWA were 64%, 71%, and 77%, respectively. For fiscal 2017, the corresponding scalars were 72%, 77%, and 81%, respectively, and for fiscal 2018, are 80%, 83%, and 86%, respectively. Prior to the second quarter of 2018, the RWA as it relates to the regulatory floor was calculated based on the Basel I risk weights which are the same for all capital ratios. 6 Includes customers’ liability under acceptances. 7 Excludes acquired credit-impaired loans, and prior to November 1, 2017, certain debt securities classified as loans (DSCL). DSCL are now classified as debt securities at amortized cost under IFRS 9. 8 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 years prior to fiscal 2013 are not applicable (n/a). 9 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. Comparatives for years prior to fiscal 2014 have not been restated. 10 Includes retail bank outlets, private client centre branches, and estate and 4 Dividend yield is calculated as the dividend per common share paid during the year trust branches. divided by the daily average closing stock price during the year. TD BANK GROUP ANNUAL RE POR T 2 0 18 TEN-YEAR STATISTICAL R EVIEW 217 Ten-year Statistical Review (continued) Other Statistics – Canadian GAAP 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 on 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 $ $ 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 0.59% 4.07 0.48 13.0% 16.0 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 0.65% 4.41 0.63 12.2% 15.5 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 4.7 17.8 0.62% 4.41 0.92 11.3% 14.9 6.3 1,802.0 $ 67,782 75,631 2,483 108 4,650 6.3 1,757.0 $ 64,526 68,725 2,449 105 4,550 6.3 1,717.6 $ 52,972 65,930 2,205 190 4,197 1 Return is calculated based on share price movement and dividends reinvested over 6 Effective fiscal 2013, the Bank implemented the Basel III regulatory framework. the trailing twelve-month period. 2 The efficiency ratios under Canadian GAAP are based on the presentation of insurance revenues being reported net of claims and expenses. As a result, the Bank began reporting the measures, CET1 and CET1 Capital ratio, in accordance with the “all-in” methodology. Accordingly, amounts for years prior to fiscal 2013 are not applicable (n/a). 3 Dividend yield is calculated as the dividend per common share paid during the year 7 In fiscal 2014, the Bank conformed to a standardized definition of full-time divided by the daily average closing stock price during the year. 4 The price-earnings ratio is computed using diluted net income per common share over the trailing 4 quarters. equivalent staff across all segments. The definition includes, among other things, hours for overtime and contractors as part of its calculations. Comparatives for years prior to fiscal 2014 have not been restated. 5 Excludes acquired credit-impaired loans, and prior to November 1, 2017, certain 8 Includes retail bank outlets, private client centre branches, and estate and debt securities classified as loans (DSCL). DSCL are now classified as debt securities at amortized cost under IFRS 9. trust branches. 218218 TD BANK GROU P AN NUAL REPO RT 20 18 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 and disposals. The Bank maintains the allowance at levels that management believes are adequate to absorb incurred 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 amount at which a financial asset or financial liability is measured at initial recognition minus principal repayments, plus or minus the cumulative amortization, using EIRM, of any differences between the initial amount and the maturity amount, and minus any reduction for impairment. Assets under Administration (AUA): Assets that are beneficially owned by customers where the Bank provides services of an administrative nature, such as the collection of investment income and the placing of trades on behalf of the clients (where the client has made his or her own investment selection). These assets are not reported on the Bank’s Consolidated Balance Sheet. Assets under Management (AUM): Assets that are beneficially owned by customers, managed by the Bank, where the Bank has discretion to make investment selections on behalf of the client (in accordance with an investment policy). In addition to the TD family of mutual funds, the Bank manages assets on behalf of individuals, pension funds, corporations, institutions, endowments and foundations. These assets are not reported on the Bank’s Consolidated Balance Sheet. Some assets under management that are also administered by the Bank are included in assets under administration. Asset-backed Commercial Paper (ABCP): A form of commercial paper that is collateralized by other financial assets. Institutional investors 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 specified pool of underlying assets. Average Common Equity: Average common equity is the equity cost of capital calculated using the capital asset pricing model. Average Earning 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. Common Equity Tier 1 (CET1) Capital: This is a primary Basel III capital measure comprised mainly of common equity, retained earnings and qualifying non-controlling interest in subsidiaries. Regulatory deductions made to arrive at the CET1 Capital include goodwill and intangibles, unconsolidated investments in banking, financial, and insurance entities, deferred tax assets, defined benefit pension fund assets, and shortfalls in allowances. 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 portfolios. As per OSFI’s 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 disclosures of the banks and other financial institutions. Expected Credit Loss (ECL): Is a calculation of the present value of the amount expected to be lost on a financial asset, for financial reporting purposes. It is calculated as: ECL = PD (probability of default) x EAD (exposure at default) x LGD (loss given default) x Discount Factor. Discount Factor is based on the expected date 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). 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. Fair value reported in profit and loss (FVPL): Under IFRS 9, the classification is dependent on two tests, a contractual cash flow test (named SPPI) and a business model assessment. Unless the asset meets the requirements of both tests, it is measured at fair value with all changes in fair value reported in profit and loss. TD BANK GROUP ANNUAL RE POR T 2 018 GLO SSARY 219219 GLOSSARY (continued) Fair value through other comprehensive income (FVOCI): Under IFRS 9, if the asset passes the contractual cash flows test (named SPPI), the business model assessment determines how the instrument is classified. If the instrument is being held to collect contractual cash flows, that is, if it is not expected to be sold, it is classified as amortized cost. If the business model for the instrument is to both collect contractual cash flows and potentially sell the asset, it is reported at FVOCI. 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. 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. 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 financial instruments are based. Office of the Superintendent of Financial Institutions Canada (OSFI): The regulator of Canadian federally chartered financial institutions 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 incurred credit-related losses in its portfolio. 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. 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. Return on Tangible Common Equity (ROTCE): A non-GAAP financial measure calculated as reported net income available to common shareholders after adjusting for the after-tax amortization of acquired intangibles, which are treated as an item of note, as a percentage of average Tangible common equity. 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. Solely Payments of Principal and Interest (SPPI): IFRS 9 requires that the following criteria be met in order for a financial instrument to be classified at amortized cost: • The entity’s business model relates to managing financial assets (such as bank trading activity), and, as such, an asset is held with the intention of collecting its contractual cash flows; and • An asset’s contractual cash flows represent SPPI. Special Purpose Entities (SPEs): Entities that are created to accomplish a narrow and well-defined objective. SPEs may take the form of a corporation, trust, 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. Tangible common equity (TCE): A non-GAAP financial measure calculated as common shareholders’ equity less goodwill, imputed goodwill, and intangibles on an investment in TD Ameritrade and other acquired intangible assets, net of related deferred tax liabilities. 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 portfolio over a specified period of time. 220 TD BANK GROU P AN NUAL REPO RT 20 18 GLOSSA RY OUR STRATEGY Proven business model Purpose-driven Forward-focused 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 6 8 9 13 118 127 215 219 221 For more information, see the interactive TD Annual Report online by visiting td.com/investor-relations/ir-homepage/ annual-reports/2018/index.jsp For information on TD’s commitment to the community and our environment, see the Corporate Responsibility Report online by visiting www.td.com/responsibility (2018 interactive report available February 2019) (2018 report available April 2019) 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 2018 Ernst & Young LLP DIVIDENDS Direct dividend depositing: Registered 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. Beneficial shareholders should contact their intermediary. U.S. dollar dividends: For registered shareholders, 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. Registered shareholders whose dividends are sent to non-U.S. addresses can also 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 daily average exchange rate published at 16:30 (Eastern) on the fifth business day after the record date, or as otherwise advised by the Bank. Beneficial shareholders should contact their intermediary. 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: AST Trust Company (Canada) P.O. Box 700, Station B Montréal, Québec H3B 3K3 1-800-387-0825 (Canada and U.S. only) or 416-682-3860 Facsimile: 1-888-249-6189 inquiries@astfinancial.com or www.astfinancial.com/ca-en Co-Transfer Agent and Registrar: Computershare P.O. Box 505000 Louisville, KY 40233 or 462 South 4th Street, Suite 1600 Louisville, KY 40202 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/investor 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 1-866-222-3456 In the U.S. contact TD Bank, America’s Most Convenient Bank® 1-888-751-9000 French: 1-800-895-4463 Cantonese/Mandarin: 1-800-387-2828 Telephone device for the hearing impaired: 1-800-361-1180 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 Thursday, April 4, 2019 9:30 a.m. (Eastern) Design Exchange Toronto, Ontario 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 GR OUP ANNUAL REPORT 20 18 SHAREHO LDER AND INVESTOR INFO RMATI ON 221 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 8 A N N U A L R E P O R T Own the future 2018 Annual Report ® 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. 1 9 5 0 4 

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