TD Bank Group Newsroom
TD Bank Financial Group Delivers Solid Results for the First Quarter of 2008; Raises Dividend
FIRST QUARTER FINANCIAL HIGHLIGHTS, compared with the first quarter a
year ago:
- Reported(1) diluted earnings per share were $1.33, compared with
$1.26.
- Adjusted(2) diluted earnings per share were $1.45, compared with
$1.38.
- Reported net income was $970 million, compared with $921 million.
- Adjusted net income was $1,060 million, compared with $1,009 million.
FIRST QUARTER ADJUSTMENTS (ITEMS OF NOTE)
The first quarter reported diluted earnings per share figures above
include the following items of note:
- Amortization of intangibles of $75 million after tax (9 cents per
share), compared with $83 million after tax (11 cents per share) in
the first quarter last year. The $75 million is net of a related tax
benefit in the future tax liability of $20 million due to scheduled
reductions in the income tax rate.
- A gain of $25 million after tax (3 cents per share) due to the change
in fair value of credit default swaps hedging the corporate loan
book, net of provision for credit losses, compared with a loss of
$5 million after tax (1 cent per share) in the same quarter last
year.
- The negative impact on the provision for income taxes of the
scheduled reductions in the income tax rate, resulting in an
offsetting decrease of $20 million (3 cents per share) in the net
future tax assets.
- Provision for insurance claims of $20 million after tax (3 cents per
share) relating to a recent court decision in Alberta(3).
All dollar amounts are expressed in Canadian currency unless otherwise
noted.
(1) Reported results are prepared in accordance with Canadian generally
accepted accounting principles (GAAP).
(2) Reported and adjusted results referenced in this press release and
Report to Shareholders are explained on page 5 under the "How the
Bank Reports" section.
(3) See page 6 for more detail on the Alberta court decision.
TORONTO, Feb. 28 /CNW/ - TD Bank Financial Group (TDBFG) today announced
its financial results for the first quarter ended January 31, 2008. Overall
results for the quarter reflect solid contributions from each of TDBFG's four
business lines. TDBFG also announced its quarterly dividend will increase two
cents to 59 cents, representing an increase of 3.5% per fully paid common
share for the quarter ended April 30, 2008.
"TD's first quarter demonstrated the strength of our retail businesses in
both Canada and the U.S. while our Wholesale bank performed well relative to
the more challenging financial market conditions we're facing," said Ed Clark,
TD Bank Financial Group President and Chief Executive Officer. "As we've said
all along, TD is following a strategy that positions us to consistently
deliver for our shareholders over the long term, and these results clearly
demonstrate that focus is working," Clark added.
FIRST QUARTER BUSINESS SEGMENT PERFORMANCE
Canadian Personal and Commercial Banking
TD Canada Trust posted strong earnings of $598 million in the first
quarter, up 10% over the same period last year. Increased contributions from
real estate secured lending, core banking, and business banking all drove
earnings strength in the quarter. The quarter was also defined by robust
volume growth across all Canadian Personal and Commercial Banking operating
businesses.
"Our Canadian Personal and Commercial Bank led the way for us again this
quarter, delivering results above our expectations given today's operating
environment," said Clark. "While we did see revenue growth soften as
anticipated, TD Canada Trust maintained a disciplined approach to expense
control while reinvesting for the future," said Clark. "We added more new
branches this quarter, and we're very pleased with the early customer response
to our industry-leading branch hours offering," Clark added.
Wealth Management
Wealth Management, including TDBFG's equity share of TD Ameritrade,
earned $216 million in the quarter, an overall increase of 16% over the same
period last year.
Canadian Wealth Management grew its earnings 5% during the quarter. The
business saw growth across the mutual fund and advice-based businesses, while
discount brokerage earnings remained stable. TD Waterhouse Canada continues to
be on track to achieve its goal of adding 130 net new client-facing advisors
by the end of fiscal 2008.
TD Ameritrade generated record results, which translated into a net
income contribution of $88 million to the Wealth Management segment in the
quarter. TD Ameritrade produced records in net revenue, net income and average
client trades per day, while continuing to make progress on its long-term
asset gathering strategy.
"Wealth Management's results this quarter show the consistency of this
growing business," said Clark. "What's particularly pleasing to us is the way
Canadian Wealth Management increased its client and asset base despite
managing through tough equity market conditions and negative investor
sentiment," Clark added.
U.S. Personal and Commercial Banking
TD Banknorth earned $127 million in the first quarter. The business saw
continued strength in commercial banking and solid overall asset quality. TD
Banknorth also made further progress on initiatives to enhance the organic
growth potential of the franchise, including the launch of a credit card and
increasing the number of locations that offer extended hours, now available at
260 of its almost 600 branches.
Subsequent to the quarter, Commerce Bancorp shareholders approved the
proposed acquisition by TDBFG. The transaction is expected to close by the end
of the first calendar quarter of 2008, subject to regulatory approvals.
"We're pleased with TD Banknorth's performance. The business continued to
earn through a stronger Canadian dollar in a difficult market environment,"
said Clark. "The ongoing progress we're seeing on key initiatives to enhance
organic growth will make us more competitive over time," Clark said.
"The successful outcome of the Commerce shareholder vote was a major
milestone for us, and subject to regulatory approvals, we look forward to
having Commerce employees join the TDBFG family," Clark added.
Wholesale Banking
Wholesale Banking produced a solid quarter, with earnings of
$163 million. Trading results were mixed as foreign exchange and interest rate
trading delivered strong results while equity and credit trading revenues
declined. The investment portfolio continued to provide a steady contribution.
"Our Wholesale bank generated good results considering the weakness in
capital markets, showing the benefit of having a diverse portfolio of
businesses," said Clark. "While the current market volatility makes it
challenging to predict our Wholesale results, we continue to be well
positioned to deliver high quality earnings from this business," added Clark.
Conclusion
"Following an incredibly strong 2007, our first quarter results mark a
good start to 2008," said Clark. "We remain optimistic that all of TD's
businesses have the right strategies in place to deliver shareholder value
this year and over the long term. This confidence is reflected in the Board's
decision to increase the quarterly dividend by 3.5% from the current level,"
said Clark.
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
From time to time, the Bank makes written and oral forward-looking
statements, including in this report, in other filings with Canadian
regulators or the U.S. Securities and Exchange Commission (SEC), and in other
communications. In addition, the Bank's senior management may make forward-
looking statements orally to analysts, investors, representatives of the media
and others. All such statements are made pursuant to the "safe harbour"
provisions of the U.S. Private Securities Litigation Reform Act of 1995 and
applicable Canadian securities legislation. Forward-looking statements
include, among others, statements regarding the Bank's objectives and targets
for 2008 and beyond, and strategies to achieve them, the outlook for the
Bank's business lines, and the Bank's anticipated financial performance. The
purpose of these statements is to provide management's view of these matters.
The economic assumptions for 2008 for each of our business segments are set
out in the 2007 Annual Report under the headings "Economic Outlook" and
"Business Outlook and Focus for 2008", as updated in the subsequently filed
quarterly Reports to Shareholders. Forward-looking statements are typically
identified by words such as "will", "should", "believe", "expect",
"anticipate", "intend", "estimate", "plan", "may" and "could". By their very
nature, these statements require us to make assumptions and are subject to
inherent risks and uncertainties, general and specific, which may cause actual
results to differ materially from the expectations expressed in the forward-
looking statements. Some of the factors - many of which are beyond our control
- that could cause such differences include: credit, market (including equity
and commodity), liquidity, interest rate, operational, reputational,
insurance, strategic, foreign exchange, regulatory, legal and other risks
discussed in the Bank's 2007 Annual Report and in other regulatory filings
made in Canada and with the SEC; general business and economic conditions in
Canada, the U.S. and other countries in which the Bank conducts business, as
well as the effect of changes in monetary policy in those jurisdictions and
changes in the foreign exchange rates for the currencies of those
jurisdictions; the degree of competition in the markets in which the Bank
operates, both from established competitors and new entrants; the accuracy and
completeness of information the Bank receives on customers and counterparties;
the development and introduction of new products and services in markets;
developing new distribution channels and realizing increased revenue from
these channels; the Bank's ability to execute its strategies, including its
integration, growth and acquisition strategies and those of its subsidiaries,
particularly in the U.S.; changes in accounting policies and methods the Bank
uses to report its financial condition, including uncertainties associated
with critical accounting assumptions and estimates; the effect of applying
future accounting changes; global capital market activity; the Bank's ability
to attract and retain key executives; reliance on third parties to provide
components of the Bank's business infrastructure; the failure of third parties
to comply with their obligations to the Bank or its affiliates as such
obligations relate to the handling of personal information; technological
changes; the use of new technologies in unprecedented ways to defraud the Bank
or its customers; legislative and regulatory developments; change in tax laws;
unexpected judicial or regulatory proceedings; continued negative impact of
the U.S. securities litigation environment; unexpected changes in consumer
spending and saving habits; the adequacy of the Bank's risk management
framework, including the risk that the Bank's risk management models do not
take into account all relevant factors; the possible impact on the Bank's
businesses of international conflicts and terrorism; acts of God, such as
earthquakes; the effects of disease or illness on local, national or
international economies; and the effects of disruptions to public
infrastructure, such as transportation, communication, power or water supply.
A substantial amount of the Bank's business involves making loans or otherwise
committing resources to specific companies, industries or countries.
Unforeseen events affecting such borrowers, industries or countries could have
a material adverse effect on the Bank's financial results, businesses,
financial condition or liquidity. The preceding list is not exhaustive of all
possible factors. Other factors could also adversely affect the Bank's
results. For more information, see the discussion starting on page 59 of the
Bank's 2007 Annual Report. All such factors should be considered carefully
when making decisions with respect to the Bank, and undue reliance should not
be placed on the Bank's forward-looking statements as they may not be suitable
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.
This document was reviewed by the Bank's Audit Committee and was approved
by the Bank's Board of Directors, on the Audit Committee's recommendation,
prior to its release.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATING PERFORMANCE
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This Management's Discussion and Analysis (MD&A) is presented to enable
readers to assess material changes in the financial condition and operational
results of TD Bank Financial Group (the Bank) for the three months ended
January 31, 2008, compared with the three months ended January 31, 2007 and
October 31, 2007. This MD&A should be read in conjunction with the Bank's
unaudited Interim Consolidated Financial Statements and related Notes included
in this Report to Shareholders and with our 2007 Annual Report. This MD&A is
dated February 27, 2008. Unless otherwise indicated, all amounts are expressed
in Canadian dollars and have been primarily derived from the Bank's Annual or
Interim Consolidated Financial Statements prepared in accordance with Canadian
generally accepted accounting principles (GAAP). Certain comparative amounts
have been reclassified to conform to the presentation adopted in the current
period. Additional information relating to the Bank is available on the Bank's
website www.td.com, as well as on SEDAR at www.sedar.com and on the U.S.
Securities and Exchange Commission's (SEC's) website at www.sec.org (EDGAR
filers section).
FINANCIAL HIGHLIGHTS
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For the three months ended
---------------------------------
(millions of Canadian dollars, except Jan. 31 Oct. 31 Jan. 31
as noted) 2008 2007 2007
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Results of operations
Total revenues $3,604 $3,550 $3,505
Provision for credit losses 255 139 163
Non-interest expenses 2,228 2,241 2,221
Net income - reported 970 1,094 921
Net income - adjusted(1) 1,060 1,021 1,009
Economic profit(2) 462 430 442
Return on common equity - reported 18.0% 20.8% 18.2%
Return on invested capital(2) 16.6% 16.3% 16.8%
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Financial position
Total assets $435,153 $422,124 $408,216
Total risk-weighted assets(3) 145,900 152,519 149,090
Total shareholders' equity 22,940 21,404 21,017
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Financial ratios - reported (percent)
Efficiency ratio 61.8% 63.1% 63.4%
Tier 1 capital to risk-weighted
assets(3) 10.9 10.3 11.9
Provision for credit losses as a %
of net average loans 0.57 0.30 0.38
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Common share information - reported
(Canadian dollars)
Per share
Basic earnings $1.34 $1.52 $1.27
Diluted earnings 1.33 1.50 1.26
Dividends 0.57 0.57 0.48
Book value 30.69 29.23 28.64
Closing share price 68.01 71.35 69.88
Shares outstanding (millions)
Average basic 718.3 717.3 718.3
Average diluted 724.6 724.4 724.9
End of period 719.0 717.8 719.0
Market capitalization (billions of
Canadian dollars) $48.9 $51.2 $50.2
Dividend yield 3.2% 3.0% 2.7%
Dividend payout ratio 42.6 37.6 37.7
Price to earnings multiple 12.3 13.0 15.9
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Common share information - adjusted
(Canadian dollars)
Per share
Basic earnings $1.46 $1.42 $1.40
Diluted earnings 1.45 1.40 1.38
Dividend payout ratio 39.0% 40.3% 34.4%
Price to earnings multiple 11.7 12.4 14.3
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(1) Adjusted and reported results are explained under the "How the Bank
Reports" section, which includes reconciliation between reported and
adjusted results.
(2) Economic profit and return on invested capital are non-GAAP financial
measures and are explained under the "Economic Profit and Return on
Invested Capital" section.
(3) The Bank adopted the "International Convergence of Capital
Measurement and Capital Standards - A Revised Framework" (Basel II)
for calculating risk-weighted assets (RWA) starting November 1, 2007.
Prior periods numbers are based on the Basel I Capital Accord (Basel
I). For details, see the "Capital Position" section.
HOW WE PERFORMED
Corporate Overview
The Toronto-Dominion Bank and its subsidiaries are collectively known as
TD Bank Financial Group. The Bank serves more than 14 million customers in
four key businesses operating in a number of locations in key financial
centres around the globe: Canadian Personal and Commercial Banking, including
TD Canada Trust; Wealth Management, including TD Waterhouse Canada, TD
Waterhouse U.K. and the Bank's investment in TD Ameritrade; U.S. Personal and
Commercial Banking through TD Banknorth; and Wholesale Banking, including TD
Securities. The Bank also ranks among the world's leading on-line financial
services firms, with more than 4.5 million on-line customers. The Bank had
$435 billion in assets as at January 31, 2008. The Bank is headquartered in
Toronto, Canada. The Bank's common stock is listed on the Toronto Stock
Exchange and the New York Stock Exchange under the symbol "TD", as well as on
the Tokyo Stock Exchange.
How the Bank Reports
The Bank's financial results, as presented on pages 26 to 38 of this
Report to Shareholders, have been prepared in accordance with GAAP. The Bank
refers to results prepared in accordance with GAAP 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 overall Bank
performance. To arrive at adjusted results, the Bank removes "items of note",
net of income taxes, from reported results. The items of note are listed in
the table on the following page. 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. As explained,
adjusted results are different from reported results determined in accordance
with GAAP. Adjusted results, items of note and related terms used in this
report are not defined terms under GAAP and, therefore, may not be comparable
to similar terms used by other issuers.
The tables below provide reconciliation between the Bank's reported and
adjusted results.
Operating results - reported
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For the three months ended
---------------------------------
Jan. 31 Oct. 31 Jan. 31
(millions of Canadian dollars) 2008 2007 2007
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Net interest income $1,788 $1,808 $1,671
Other income 1,816 1,742 1,834
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Total revenues 3,604 3,550 3,505
Provision for credit losses (255) (139) (163)
Non-interest expenses (2,228) (2,241) (2,221)
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Income before provision for income
taxes, non-controlling interests
in subsidiaries and equity in net
income of an associated company 1,121 1,170 1,121
Provision for income taxes (235) (153) (218)
Non-controlling interests in
subsidiaries, net of income taxes (8) (8) (47)
Equity in net income of an associated
company, net of income taxes 92 85 65
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Net income - reported 970 1,094 921
Preferred dividends (8) (5) (6)
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Net income available to common
shareholders - reported $962 $1,089 $915
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Reconciliation of non-GAAP measures(1)
Adjusted results to reported results
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For the three months ended
---------------------------------
Jan. 31 Oct. 31 Jan. 31
(millions of Canadian dollars) 2008 2007 2007
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Operating results - adjusted
Net interest income $1,788 $1,808 $1,671
Other income(2) 1,791 1,582 1,842
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Total revenues 3,579 3,390 3,513
Provision for credit losses(3) (238) (199) (163)
Non-interest expenses(4) (2,106) (2,103) (2,103)
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Income before provision for income
taxes, non-controlling interests
in subsidiaries and equity in net
income of an associated company 1,235 1,088 1,247
Provision for income taxes(5) (275) (156) (264)
Non-controlling interests in
subsidiaries, net of income taxes(6) (8) (8) (51)
Equity in net income of an
associated company, net of income
taxes(7) 108 97 77
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Net income - adjusted 1,060 1,021 1,009
Preferred dividends (8) (5) (6)
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Net income available to common
shareholders - adjusted 1,052 1,016 1,003
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Items of note affecting net income,
net of income taxes
Amortization of intangibles(8) (75) (99) (83)
Gain relating to restructuring of Visa(9) - 135 -
Change in fair value of credit
default swaps hedging the corporate
loan book, net of provision for
credit losses(10) 25 (2) (5)
Other tax items(11) (20) - -
Provision for insurance claims(12) (20) - -
General allowance release - 39 -
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Total items of note (90) 73 (88)
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Net income available to common
shareholders - reported $962 $1,089 $915
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(1) Certain comparative amounts have been restated to conform to the
presentation adopted in the current period.
(2) Adjusted other income excludes the following items of note: first
quarter 2008 - $55 million change for the period in unrealized gain
in credit default swaps (CDS) hedging the corporate loan book;
$30 million pre-tax provision for insurance claims, as explained in
footnote 12; fourth quarter 2007 - $163 million pre-tax gains
relating to restructuring of Visa, as explained in footnote 9;
$3 million change for the period in unrealized loss in CDS hedging
the corporate loan book; first quarter 2007 - $8 million change for
the period in unrealized loss in CDS hedging the corporate loan
book.
(3) Adjusted provisions for credit losses (PCL) excludes the following
items of note: first quarter 2008 - $17 million related to the
portion that was hedged via the CDS; fourth quarter 2007 -
$60 million general allowance release based on revised loss factors,
utilizing internal experience in alignment with Basel II
methodology.
(4) Adjusted non-interest expenses excludes the following items of note:
first quarter 2008 - $122 million amortization of intangibles;
fourth quarter 2007 - $138 million amortization of intangibles;
first quarter 2007 - $118 million amortization of intangibles.
(5) For reconciliation between reported and adjusted provision for
income taxes, refer to the reconciliation table on page 10.
(6) Adjusted non-controlling interests excludes the following item of
note: first quarter 2007 - $4 million balance sheet restructuring
charge at TD Banknorth.
(7) Adjusted equity in net income of an associated company excludes the
following items of note: first quarter 2008 - $16 million
amortization of intangibles; fourth quarter 2007 - $12 million
amortization of intangibles; first quarter 2007 - $12 million
amortization of intangibles.
(8) Amortization of intangibles primarily relates to the Canada Trust
acquisition in 2000, the TD Banknorth Inc. (TD Banknorth)
acquisition in 2005 and its privatization in 2007, and the
acquisitions by TD Banknorth of Hudson United Bancorp (Hudson) in
2006 and Interchange Financial Services Corporation (Interchange) in
2007, and the amortization of intangibles included in equity in net
income of TD Ameritrade.
(9) As part of the global restructuring of Visa USA Inc., Visa Canada
Association and Visa International Service Association, which closed
on October 3, 2007 (restructuring date), the Bank received shares of
the new global entity (Visa Inc.) in exchange for the Bank's
membership interest in Visa Canada Association. As required by the
applicable accounting standards, the shares received were measured
at fair value and an estimated gain of $135 million after tax was
recognized in the Corporate segment, based on results of an
independent valuation of the shares the Bank received in Visa Inc.
The gain may be subject to further adjustment based on the
finalization of the Bank's ownership percentage in Visa Inc.
(10) 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, therefore, they are measured at fair
value with changes in fair value recognized in current period's
earnings. The related loans are accounted for at amortized cost.
Management believes that this asymmetry in the accounting treatment
between CDS and loans would result in periodic profit and loss
volatility which is not indicative of the economics of the corporate
loan portfolio or the underlying business performance in Wholesale
Banking. As a result, the CDS are accounted for on an accrual basis
in the Wholesale Banking segment and the gains and losses on the
CDS, in excess of the accrued cost, are reported in the Corporate
segment. Adjusted earnings excludes the gains and losses on the CDS
in excess of the accrued cost. When a credit event occurs in the
corporate loan book that has an associated CDS hedge, the PCL
related to the portion that was hedged via the CDS is netted against
this item of note. During the quarter, the change in the fair value
of CDS, net of PCL, resulted in a net gain of $38 million before tax
($25 million after tax). The item of note included a change in fair
value of CDS of $55 million before tax ($36 million after tax), net
of PCL of approximately $17 million before tax ($11 million after
tax).
(11) This represents the negative impact of the scheduled reductions in
the income tax rate on reduction of net future income tax assets.
(12) The provision for insurance claims relates to a recent court
decision in Alberta. The Alberta government's legislation
effectively capping minor injury insurance claims was challenged and
held to be unconstitutional. While the government of Alberta has
appealed the decision, the ultimate outcome remains uncertain. As a
result, the Bank accrued an additional actuarial liability for
potential claims in the first quarter of 2008.
Reconciliation of reported earnings per share (EPS) to adjusted EPS
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For the three months ended
---------------------------------
Jan. 31 Oct. 31 Jan. 31
(Canadian dollars) 2008 2007 2007
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Diluted - reported $1.33 $1.50 $1.26
Items of note affecting income (as above) 0.12 (0.10) 0.12
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Diluted - adjusted $1.45 $1.40 $1.38
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Basic - reported $1.34 $1.52 $1.27
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Amortization of Intangibles, net of income taxes
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For the three months ended
---------------------------------
Jan. 31 Oct. 31 Jan. 31
(millions of Canadian dollars) 2008 2007 2007
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TD Canada Trust $21 $40 $49
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TD Banknorth Reported amortization
of intangibles 33 40 20
Less: non-controlling
interest - - 4
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Net amortization of
intangibles 33 40 16
TD Ameritrade (included in equity in
net income of an associated company) 16 12 12
Other 5 7 6
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Amortization of intangibles, net of
income taxes(1) $75 $99 $83
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(1) Amortization of intangibles is included in the Corporate segment.
Economic Profit and Return on Invested Capital
The Bank utilizes economic profit as a tool to measure shareholder value
creation. Economic profit is adjusted net income available to common
shareholders less a charge for average invested capital. Average invested
capital is equal to average common equity for the period plus the average
cumulative after-tax goodwill and intangible assets amortized as of the
reporting date. The rate used in the charge for capital is the equity cost of
capital calculated using the capital asset pricing model. The charge
represents an assumed minimum return required by common shareholders on the
Bank's invested capital. The Bank's goal is to achieve positive and growing
economic profit.
Return on invested capital (ROIC) is adjusted net income available to
common shareholders divided by average invested capital. ROIC is a variation
of the economic profit measure that is useful in comparison to the equity cost
of capital. Both ROIC and the cost of capital are percentage rates, while
economic profit is a dollar measure. When ROIC exceeds the equity cost of
capital, economic profit is positive. The Bank's goal is to maximize economic
profit by achieving ROIC that exceeds the equity cost of capital.
Economic profit and ROIC are not defined terms under GAAP. Securities
regulators require that companies caution readers that earnings and other
measures adjusted to a basis other than GAAP do not have standardized meanings
under GAAP and therefore, may not be comparable to similar terms used by other
issuers.
The following table reconciles between the Bank's economic profit, return
on invested capital and adjusted net income. Adjusted earnings and related
terms are discussed in the "How the Bank Reports" section.
Reconciliation of Economic Profit, Return on Invested Capital and
Adjusted Net Income
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For the three months ended
---------------------------------
Jan. 31 Oct. 31 Jan. 31
(millions of Canadian dollars) 2008 2007 2007
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Average common equity $21,221 $20,808 $19,969
Average cumulative goodwill/intangible
assets amortized, net of income taxes 4,015 3,941 3,715
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Average invested capital $25,236 $24,749 $23,684
Rate charged for invested capital 9.3% 9.4% 9.4%
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Charge for invested capital $(590) $(586) $(561)
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Net income available to common
shareholders - reported $962 $1,089 $915
Items of note impacting income, net of
income taxes 90 (73) 88
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Net income available to common
shareholders - adjusted $1,052 $1,016 $1,003
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Economic profit $462 $430 $442
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Return on invested capital 16.6% 16.3% 16.8%
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Significant Events in 2008
Acquisition of Commerce Bancorp, Inc.
On February 6, 2008, the shareholders of Commerce Bancorp, Inc.
(Commerce) approved the proposed acquisition by the Bank. The transaction is
expected to close by the end of the first calendar quarter of 2008, subject to
regulatory approvals.
FINANCIAL RESULTS OVERVIEW
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Performance Summary
An overview of the Bank's performance on an adjusted basis for the first
quarter of 2008 against the financial shareholder indicators included in the
2007 Annual Report is outlined below. Shareholder performance indicators help
guide and benchmark the Bank's accomplishments. For the purpose of this
analysis, the Bank utilizes adjusted earnings, which exclude items of note
from the reported results that are prepared in accordance with Canadian GAAP.
Adjusted earnings and reported results are explained under the "How the Bank
Reports" section.
- Adjusted diluted earnings per share increased 5% from the first
quarter last year. The Bank's goal is 7 - 10% adjusted earnings per
share growth over the longer term.
- Adjusted return on risk-weighted assets (RWA) was 2.9% under
Basel II. RWA under Basel I was 2.7% in the first quarter last year.
- For the twelve months ended January 31, 2008, the total shareholder
return was 0.5%, above the peer average.
Net Income
Year-over-year comparison
-------------------------
Reported net income for the quarter was $970 million, up $49 million, or
5%, from the first quarter last year. Adjusted net income was $1,060 million,
up $51 million, or 5%, from the prior year. The increase in adjusted net
income was due to higher earnings in Canadian Personal and Commercial Banking,
Wealth Management and U.S. Personal and Commercial Banking, partially offset
by lower earnings from the Wholesale Banking and Corporate segments. Canadian
Personal and Commercial Banking delivered 10% year-over-year earnings growth,
led primarily by volume-driven net interest income growth and higher fee-
related income. Wealth Management net income increased primarily due to TD
Ameritrade's contribution to Bank earnings due to strong underlying
performance driven by revenue growth. U.S. Personal and Commercial Banking net
income was up, largely due to increased TD Banknorth ownership related to the
privatization. Wholesale Banking net income declined, primarily due to lower
trading revenue and higher provisions for credit losses. The Corporate segment
also reported lower earnings due to higher unallocated expenses and an
unfavourable tax item.
Prior quarter comparison
------------------------
Reported net income for the quarter declined $124 million, or 11%, from
the prior quarter. Adjusted net income for the quarter increased $39 million,
or 4%. Reported net income declined due to the impact of items of note. The
prior quarter items of note included an after-tax gain of $135 million related
to the global restructuring of Visa and a $39 million after-tax general
allowance release, whereas the current quarter included the provision for
insurance claims relating to a recent court decision in Alberta. The increase
in adjusted net income was due to higher net income from all business
segments, partially offset by a higher net loss in the Corporate segment.
Net Interest Income
Year-over-year comparison
-------------------------
Net interest income was $1,788 million for the quarter, an increase of
$117 million, or 7%, compared with the same quarter last year. Canadian
Personal and Commercial Banking accounted for the majority of net interest
income growth, reporting an increase of $107 million, or 8%, driven by strong
volume growth across most products which was partially offset by a 5 bps
decline in net interest margin to 2.98%. The remainder of the increase was due
to higher net interest income from Wholesale Banking and the Corporate
segment.
Prior quarter comparison
------------------------
Net interest income declined by $20 million, or 1%, from the prior
quarter. U.S. Personal and Commercial Banking net interest income declined by
$23 million, due largely to a decline in the net interest margin and the
impact of the stronger Canadian dollar.
Other Income
Year-over-year comparison
-------------------------
Reported other income of $1,816 million was down $18 million, or 1%, from
last year. Adjusted other income decreased $51 million, or 3%, from the prior
year. Reported other income included the favourable impact of a gain due to
change in the fair value of credit default swaps (CDS) used to hedge the
corporate loan book, compared to a loss last year. This was partially offset
by the insurance claims provision relating to the recent court decision in
Alberta. On an adjusted basis, the decline was attibutable to decreases in the
Wholesale Banking and Corporate segments with a partial offsetting increase
from Canadian Personal and Commercial Banking. Wholesale Banking other income
declined due to lower equity and credit trading revenue, partially offset by
higher net securities gains. The Corporate segment decline was largely a
result of lower securitization revenue. Canadian Personal and Commercial
Banking reported higher other income supported by higher fee income on various
products.
Prior quarter comparison
------------------------
Reported other income increased $74 million, or 4%, from the prior
quarter. Adjusted other income rose $209 million or 13%. Prior quarter other
income included the gain of $163 million related to the global restructuring
of Visa which was excluded from adjusted earnings. On an adjusted basis, the
increase was attributable to Wholesale Banking which generated an increase in
other income of $201 million, primarily due to higher net security gains and
higher trading revenues on strong foreign exchange and interest rate trading.
Provision for Credit Losses
Year-over-year comparison
-------------------------
During the quarter, the Bank recorded a provision for credit losses of
$255 million, an increase of $92 million from the same quarter last year,
primarily due to higher specific provisions in the Canadian and U.S. Personal
and Commercial Banking, and Wholesale Banking segments.
Prior quarter comparison
------------------------
Provision for credit losses for the quarter was up $116 million from
$139 million in the prior quarter. The increase was primarily due to a
$60 million general allowance release in the prior quarter as well as a
$52 million increase in this quarter's provision for credit loss in Wholesale
Banking.
Provision for Credit Losses
-------------------------------------------------------------------------
For the three months ended
-------------------------------
Jan. 31 Oct. 31 Jan. 31
(millions of Canadian dollars) 2008 2007 2007
-------------------------------------------------------------------------
Net new specifics (net of reversals) $267 $192 $184
Recoveries (32) (27) (31)
-------------------------------------------------------------------------
Provision for credit losses - specifics 235 165 153
Change in general allowance
VFC 15 13 11
TD Banknorth 4 21 (1)
Other 1 (60) -
-------------------------------------------------------------------------
Total $255 $139 $163
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Non-interest Expenses and Efficiency Ratio
Year-over-year comparison
-------------------------
Reported non-interest expenses for the quarter were $2,228 million, an
increase of $7 million, or less than 1%, from the same quarter last year.
Adjusted expenses of $2,106 million were flat compared with last year. Higher
Canadian Personal and Commercial Banking, Corporate segment and Wealth
Management expenses were offset by lower expenses in the U.S. Personal and
Commercial Banking and Wholesale Banking segments. Canadian Personal and
Commercial Banking reported higher expenses related to branch expansion and
extended operating hours. Wealth Management expenses rose due to growth in the
sales force and higher volume-related expenses. The Corporate segment reported
higher unallocated corporate expenses in the current quarter. The U.S.
Personal and Commercial Banking and Wholesale Banking segments provided a
partial offset as U.S. Personal and Commercial Banking expenses declined,
primarily due to the impact of the stronger Canadian dollar and merger-related
charges incurred last year. Wholesale Banking expenses decreased, largely on
lower severance-related costs.
The reported efficiency ratio improved to 61.8% from 63.4%, in the same
quarter last year. The Bank's adjusted efficiency ratio improved to 58.8% from
59.9% a year ago.
Prior quarter comparison
------------------------
Reported non-interest expenses of $2,228 were down $13 million, or less
than 1%, from the fourth quarter last year. Adjusted expenses of
$2,106 million were flat, compared with the prior quarter. On an adjusted
basis, Wholesale Banking and the Corporate segment reported higher expenses,
largely offset by reductions in the U.S. Personal and Commercial Banking,
Wealth Management and Canadian Personal and Commercial Banking segments.
Wholesale Banking expenses were up primarily due to higher variable
compensation. Corporate expenses increased due to higher unallocated expenses.
Canadian Personal and Commercial Banking expenses declined on lower business
volume-related expenses. Lower Wealth Management expenses were due to reduced
marketing and professional fees. U.S. Personal and Commercial Banking costs
were lower driven by the impact of the stronger Canadian dollar.
The reported efficiency ratio improved to 61.8% from 63.1% in the prior
quarter. The Bank's adjusted efficiency ratio improved to 58.8% from 62% in
the prior quarter.
Taxes
As discussed in the "How the Bank Reports" section, the Bank adjusts its
reported results to assess each of its businesses and to measure overall Bank
performance. As such, the provision for income taxes is stated on a reported
and an adjusted basis.
The Bank's effective tax rate was 21.0% for the quarter, compared with
13.1% in the prior quarter and 19.4% in the same quarter last year. The change
was largely due to lower non-taxable income in the current quarter and an
unfavourable tax item of $22 million related to prior year tax audits.
Taxes
-------------------------------------------------------------------------
For the three months ended
------------------------------------------
Jan. 31 Oct. 31 Jan. 31
(millions of Canadian dollars) 2008 2007 2007
-------------------------------------------------------------------------
Income taxes at Canadian
statutory income tax rate $367 32.8% $409 34.9% $392 34.9%
Increase (decrease)
resulting from:
Dividends received (87) (7.7) (161) (13.7) (103) (9.2)
Rate differentials on
international operations (84) (7.5) (86) (7.3) (82) (7.4)
Other - net 39 3.4 (9) (0.8) 11 1.1
-------------------------------------------------------------------------
Provision for income taxes
and effective income
tax rate - reported $235 21.0% $153 13.1% $218 19.4%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Reconciliation of non-GAAP provision for income taxes
-------------------------------------------------------------------------
For the three months ended
-------------------------------
Jan. 31 Oct. 31 Jan. 31
2008 2007 2007
-------------------------------------------------------------------------
Provision for income taxes - reported $235 $153 $218
Increase (decrease) resulting from
items of note:
Amortization of intangibles 63 51 43
Gain relating to restructuring of Visa - (28) -
Change in fair value of credit default
swaps hedging the corporate loan book,
net of provision for credit losses (13) 1 3
Other tax items (20) - -
Provision for insurance claims 10 - -
General allowance release - (21) -
-------------------------------------------------------------------------
Tax effect - items of note 40 3 46
-------------------------------------------------------------------------
Provision for income taxes - adjusted $275 $156 $264
-------------------------------------------------------------------------
-------------------------------------------------------------------------
HOW OUR BUSINESSES PERFORMED
For management reporting purposes, the Bank's operations and activities
are organized around the following operating business segments: Canadian
Personal and Commercial Banking, Wealth Management, including TD Ameritrade,
U.S. Personal and Commercial Banking, and Wholesale Banking. The Bank's other
activities are grouped into the Corporate segment. Results of each business
segment reflect revenue, expenses, assets and liabilities generated by the
business in that segment. The Bank measures and evaluates the performance of
each segment based on adjusted results where applicable, and for those
segments the Bank notes that the measure is adjusted. Amortization of
intangible expense is included in the Corporate segment. Accordingly, net
income for the operating business segments is presented before amortization of
intangibles, as well as any other items of note not attributed to the
operating segments. For further details, see the "How the Bank Reports"
section, the "Business Focus" section in the 2007 Management's Discussion and
Analysis and Note 27 to the 2007 audited Consolidated Financial Statements.
For information concerning the Bank's measures of economic profit and return
on invested capital, which are non-GAAP measures, see page 7. Segmented
information also appears in Note 14 on page 37.
Net interest income within Wholesale Banking is disclosed 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 the
Wholesale Banking segment is eliminated in the Corporate segment. The TEB
adjustment for the quarter was $135 million, compared with $157 million in the
same period last year and $247 million in the prior quarter.
The Bank securitizes retail loans and receivables and records a gain or
loss on sale, including the setup of an asset related to the retained
interests. Credit losses incurred on retained interests subsequent to
securitization are recorded as a charge to other income in the Bank's
consolidated financial statements. For segment reporting, the provision for
credit loss related to securitized volumes is included in the Canadian
Personal and Commercial Banking segment but is reversed in the Corporate
segment and reclassified as a charge to other income to comply with GAAP.
Canadian Personal and Commercial Banking
Canadian Personal and Commercial Banking net income for the first quarter
was $598 million, an increase of $54 million, or 10%, from the first quarter
last year and an increase of $26 million, or 5%, from the previous quarter.
The annualized return on invested capital increased to 29%, compared with 26%
in the first quarter last year and 27% in the previous quarter.
Revenue grew by $137 million, or 7%, compared with the first quarter last
year. Volume growth across most banking products was the primary contributing
factor, particularly in real estate secured lending, personal loans, credit
cards and personal deposits. Margin on average earning assets declined by
5 bps from 3.03% to 2.98% when compared with the first quarter last year and
the previous quarter as lending margins compressed due to higher funding costs
and heightened price competition in high-yield savings and term deposits.
Higher fee income, primarily from personal deposit and credit card growth and
service fee re-pricing initiatives also contributed to the year-over-year
revenue growth. Revenue decreased by $5 million from the prior quarter, mainly
from lower fee income, a seasonal decrease in insurance premiums and higher
insurance claims and related expenses.
Compared with the first quarter last year, real estate secured lending
volume (including securitizations) grew by $13.8 billion, or 10%, personal
deposit volume grew by $3.6 billion, or 4%, and consumer loans grew by
$2.4 billion, or 12%. Business deposits grew by $2.7 billion, or 7%, and
business loans and acceptances increased by $2.2 billion, or 12%. Gross
originated insurance premiums grew by $17 million, or 3% year over year. As of
November 2007, personal deposit market share was 20.7% and personal lending
market share was 19.8%. Small business lending (credit limits of less than
$250,000) market share as at September 2007 was 18.2%.
Provision for credit losses for the quarter increased by $34 million, or
25%, compared with the first quarter last year. Personal provision for credit
losses of $166 million was $38 million higher than the first quarter last
year, largely due to higher personal lending and credit card volumes and
higher loss rates on credit cards. Business banking provision for credit
losses decreased $4 million from the first quarter last year on higher net
reversals and recoveries this quarter. Annualized provision for credit losses
as a percentage of credit volume was 0.36%, an increase of 4 bps from the
first quarter last year. Provision for credit losses was $4 million, or 2%,
lower than the previous quarter.
Non-interest expenses increased by $37 million, or 3%, compared with the
first quarter last year. Investments in new branches and higher staffing costs
associated with longer branch hours and higher employee compensation were the
primary drivers of expense growth. A positive spread between revenue and
expense growth resulted in a 170 bps improvement to 51.0% in the efficiency
ratio from the first quarter last year. The full time equivalent (FTE)
staffing levels increased by 1,483, or 5%, as compared with the first quarter
last year, predominantly due to the longer branch hours initiatives. Expenses
decreased $18 million, or 2%, from the previous quarter on lower business
volume-related expenses.
A reduction to corporate tax rates, which was enacted in December 2007,
lowered the effective tax rate and contributed to an improvement in net income
compared with both the first quarter of last year and the prior quarter.
The outlook for net interest income and fee growth is expected to remain
stable for the remaining quarters. Margins continue to be vulnerable to higher
funding costs and price competition in high-yield savings and term deposits,
and volume growth is susceptible to a U.S.-led downturn. Over time, revenue
growth should benefit from increasing our leading position in branch hours and
new branch openings, marketing investments, improved cross-sell and
productivity. Personal lending provisions for credit losses are expected to
rise with volume growth and increase if economic conditions worsen. The
business lending provision is likely to increase in future quarters as net
recoveries are not expected to continue in subsequent quarters. Expenses will
increase from current levels due to new branch openings, extension of branch
hours, and systems and infrastructure investments that support long-term
earnings growth.
Wealth Management
Wealth Management's net income for the quarter was $216 million, an
increase of $30 million, or 16%, from the first quarter last year, and an
increase of $22 million, or 11%, from the previous quarter. The annualized
return on invested capital for the quarter was 23%, an increase of 290 bps
from the first quarter last year and 320 bps higher from the previous quarter.
The Canadian Wealth segment's net income was $128 million, an increase of
$6 million, or 5%, from the first quarter last year and $9 million, or 8% from
the previous quarter. Strong transaction volumes in discount brokerage and
modest growth in the advice-based and mutual fund businesses were partially
offset by lower pricing in discount brokerage. The Bank's investment in TD
Ameritrade generated $88 million of net income, up 38% from the same quarter
last year and 17% above the previous quarter. TD Ameritrade core earnings
growth was the primary driver, more than offsetting the impact of the higher
Canadian dollar this quarter. For its first quarter ended Dec 31, 2007, TD
Ameritrade delivered record net income of US$241 million, up 65% from the same
period last year and 21% above the previous quarter.
Total revenue for the quarter was $570 million, an increase of
$19 million, or 4%, from the first quarter last year. The increase in revenues
was due to higher trade volumes in discount brokerage, higher mutual fund
management and administration fees as a result of higher assets under
management and increased net interest income primarily due to growth in client
cash deposits and margin loans. Offsetting the growth was lower commissions in
discount brokerage as a result of pricing changes introduced last year and
market volatility which impacted new issue revenues. Total revenue declined
from the prior quarter by $11 million, or 2%, due to market volatility.
Compared with the previous year, at TD Ameritrade, average trades per day
increased 35%, with total client assets increasing by 8% to $300 billion. On a
quarter-over-quarter basis, TD Ameritrade trades per day rose 16%, with total
client assets increasing 2%.
Expenses were $379 million in the quarter, an increase of $15 million, or
4%, compared with the first quarter last year. The increase in total expenses
was primarily because of higher volume-related payments to sellers of the
Bank's mutual funds, the new mutual fund administration fee, and continued
investment in sales force in our advice-based businesses and related support
staff. Expenses were down by $20 million, or 5%, compared with the prior
quarter, primarily due to lower marketing costs and professional fees.
Assets under management of $170 billion at January 31, 2008 increased
$10 billion, or 6%, from October 31, 2007 due to addition of net new client
assets and the additional mutual fund assets from TD Ameritrade, partially
offset by the market decline. Assets under administration totalled
$178 billion at the end of the quarter, declining by 7 billion, or 4%, from
October 31, 2007, primarily due to declines driven by capital markets
volatility, partially offset by the addition of net new client assets.
The current outlook for Wealth Management's earnings remains positive
though challenges presented by market volatility may impact our discount
brokerage, advice-based and mutual fund businesses in the next quarter.
Despite the short-term market volatility, investment in client-facing
advisors, product and technology continues in order to ensure that the
business grows for the future.
Wealth Management
-------------------------------------------------------------------------
For the three months ended
-------------------------------
Jan. 31 Oct. 31 Jan. 31
(millions of Canadian dollars) 2008 2007 2007
-------------------------------------------------------------------------
Canadian Wealth $128 $119 $122
TD Ameritrade 88 75 64
-------------------------------------------------------------------------
Net income $216 $194 $186
-------------------------------------------------------------------------
-------------------------------------------------------------------------
U.S. Personal and Commercial Banking
U.S. Personal and Commercial Banking's net income for the first quarter
was $127 million, compared with $64 million in the first quarter last year and
$124 million in the previous quarter. Much of the increase in net income from
the first quarter of last year relates to the increased ownership percentage
in TD Banknorth from the privatization transaction that was completed in April
2007. The average ownership interest was 57% in the first quarter of last
year, compared with 100% in the current and prior quarters. The annualized
return on invested capital was 5.7%, compared with 4.3%, in first quarter last
year, and 5.1% in the prior quarter.
Total revenue was $452 million, compared with $486 million in the first
quarter last year. Total revenue decreased from the first quarter last year,
primarily due to a stronger Canadian dollar relative to the U.S. dollar.
Revenues in U.S. dollars increased 6% due to the acquisition of Interchange
Financial Services Corporation in January 2007 and growth in transaction and
service fee income. Total revenue was $475 million in the prior quarter; again
the decline was due to the continued strengthening of the Canadian dollar
relative to the U.S. dollar as revenues in U.S. dollars increased by 1%. The
margin on average earning assets was 3.88%, compared with 3.95% in the first
quarter last year and 4.00% in the prior quarter. Margins remained under
pressure from stiff competition for deposits as competitors sought to improve
liquidity, as well as loan mix.
Provision for credit losses was $26 million, compared with $17 million in
the first quarter last year and $35 million in the prior quarter. Net write-
offs were $22 million, compared with $16 million in both the first quarter
last year and the prior quarter. The increase in write-offs in the current
quarter was primarily due to one credit which was provided for in the prior
quarter. Net impaired loans increased by $42 million, or 28%, compared with
the first quarter last year, and declined by $8 million, or 4%, from the prior
quarter. Net impaired loans as a percentage of total loans and leases were
0.72%, compared with 0.52% as at the end of the first quarter last year and
0.76% as at the end of the prior quarter.
Non-interest expenses declined $61 million, or 20%, from the first
quarter last year, and by $25 million, or 10%, from the prior quarter,
primarily due to the strengthening of the Canadian dollar and cost control
initiatives. Compared with the prior quarter, non-interest expenses in U.S.
dollars declined by 4%, primarily due to reduced compensation costs and lower
advertising expenses. The average FTE staffing level was 8,019, compared with
8,672 in the first quarter last year and 8,032 in the prior quarter; the
declines were due to improved efficiency and the closing of certain branches.
The efficiency ratio improved to 52.7%, compared with 61.5% in the first
quarter last year and 55.4% in the prior quarter.
Management continues to focus on stabilizing net interest income, organic
growth of loans and deposits, and closely managing and reducing non-interest
expenses in light of revenue pressures, while planning for the pending merger
with Commerce. The banking market in the U.S. is expected to remain
challenging, and there is uncertainty related to the continuing effects of the
ongoing market issues related to subprime real estate lending and related
issues.
Wholesale Banking
Wholesale Banking reported net income for the quarter of $163 million, a
decrease of $34 million, or 17%, compared with the first quarter of last year,
and an increase of $6 million, or 4%, compared with the prior quarter. The
annualized return on invested capital was 21% in the current quarter, compared
with 30% in the first quarter last year and 21% in the prior quarter.
Wholesale Banking revenue was derived primarily from capital markets,
investing and corporate lending activities. Revenue for the quarter was
$608 million, compared with $635 million in the first quarter of last year and
$525 million in the prior quarter. The capital markets businesses generate
revenue from advisory, underwriting, trading, facilitation and execution
services. Capital markets revenues decreased from the first quarter last year
primarily due to weaker equity and credit trading revenues, partially offset
by very strong revenues in foreign exchange and interest rate trading. Credit
trading revenues declined as current market volatility and lower liquidity
contributed to a breakdown in traditional pricing relationships between
corporate bonds and credit default swaps (CDS) as well as wider CDS bid/ask
spreads. Interest rate and foreign exchange trading generated very strong
revenues mainly driven by declines in interest rates and volatility in
currency markets. Capital markets revenues decreased from the prior quarter,
primarily due to lower non-taxable transaction revenue in equity trading,
partially offset by stronger foreign exchange and interest rate trading
revenues. The equity investment portfolio posted higher security gains this
quarter compared with the first quarter last year and the prior quarter driven
by security gains in merchant banking. Corporate lending revenue was in line
with the first quarter last year and the prior quarter.
Provision for credit losses is comprised of allowances for credit losses
and accrual costs for credit protection. Provision for credit losses was
$56 million in the quarter, compared with $24 million in the first quarter
last year and $4 million in the prior quarter. The provision for this quarter
includes specific allowances of $43 million related to two credit exposures in
the merchant banking portfolio. The first quarter last year included a
specific allowance of $12 million related to a single credit exposure in the
corporate lending portfolio and the prior quarter included $9 million in
recoveries. Wholesale banking continues to proactively manage its credit risk
and currently holds $2.7 billion in notional CDS protection.
Expenses for the quarter were $321 million, a decrease of $11 million, or
3%, compared with the first quarter last year, primarily due to lower
severance costs. Expenses increased $47 million, or 17%, from the prior
quarter mainly due to higher variable compensation related to higher merchant
banking securities gains. The efficiency ratio for the quarter was 53%
compared with 52% in the first quarter last year and in the prior quarter.
Overall the Wholesale Bank generated solid results in a weaker and more
volatile operating environment. Capital markets results declined as lower
trading revenues were partially offset by solid results in the domestic
franchise businesses. The net income contribution from the equity investment
portfolio was consistent with the prior year as higher securities gains were
offset by an increase in provisions for credit loss and higher variable
compensation. We expect the operating environment to remain challenging which
may lead to lower capital market activity and lower trading revenues relative
to the prior year. Key priorities remain: solidifying our position as a top
three dealer in Canada, seeking opportunities to grow proprietary trading in
scalable and liquid markets, maintaining a superior rate of return on invested
capital and enhancing the efficiency ratio through improved cost control.
Corporate
Corporate segment reported a net loss of $134 million for the quarter,
compared with a net loss of $70 million in the first quarter last year and a
net gain of $47 million in the previous quarter. The adjusted net loss for the
quarter was $44 million, compared with a net gain of $18 million in the same
quarter last year and a net loss of $26 million in the previous quarter.
Compared with last year, on an adjusted basis, the net loss increased as
a result of higher unallocated corporate expenses and a $22 million
unfavourable tax item related to prior year tax audits. The quarter-over-
quarter increase was driven by an increase in unallocated corporate expenses.
The adjusted net loss in the current quarter excluded the negative impact
of scheduled reductions in the federal income tax rate which resulted in a
decrease of $20 million in future tax assets, a $20 million after tax
($30 million before tax) provision for insurance claims, amortization of
intangibles of $75 million after tax ($122 million before tax), and a
$25 million after tax ($38 million before tax) gain in excess of accrued costs
for the period on CDS hedging the corporate loan book, net of provision for
credit losses.
Amortization of intangibles was $8 million lower after tax ($4 million
higher before tax) than the first quarter in prior year, while gains in excess
of accrued cost for the period on CDS hedging the corporate loan book, net of
provision for credit losses, increased $30 million after tax ($46 million
before tax).
Compared with the prior quarter, amortization of intangibles was
$24 million after tax ($16 million before tax) lower, while gains in excess of
accrued costs in CDS hedging the corporate loan book, net of provision for
credit losses, increased $27 million after tax ($41 million before tax). The
prior quarter adjusted net loss excluded a gain of $135 million after tax
($163 million before tax), related to the estimated value of the shares the
Bank received in Visa Inc. in exchange for its membership interest in Visa
Canada Association as part of the global restructuring of Visa, and a general
allowance release of $39 million after tax ($60 million before tax) based on
revised loss rate factors, utilizing internal experience in alignment with
Basel II methodology.
TD AMERITRADE HOLDING CORPORATION
The condensed financial statements of TD AMERITRADE Holding Corporation,
based on its consolidated financial statements filed with the SEC, are
provided as follows:
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------
Dec. 31, Sept. 30,
(millions of U.S. dollars) 2007 2007
-------------------------------------------------------------------------
Assets
Receivables from brokers, dealers and
clearing organizations $6,142 $6,749
Receivables from clients, net of
allowance for doubtful accounts 8,818 7,728
Other assets 3,899 3,615
-------------------------------------------------------------------------
Total assets 18,859 18,092
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities
Payable to brokers, dealers and
clearing organizations 9,237 8,387
Payable to clients 5,052 5,313
Other liabilities 2,183 2,237
-------------------------------------------------------------------------
Total liabilities 16,472 15,937
-------------------------------------------------------------------------
Stockholders' equity $2,387 $2,155
-------------------------------------------------------------------------
Total liabilities and stockholders' equity $18,859 $18,092
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------------------------------------
For the three months ended
-----------------------------
(millions of U.S. dollars, Dec. 31 Dec. 31
except per share amounts) 2007 2006
-------------------------------------------------------------------------
Revenues
Net interest revenue $149 $138
Fee-based and other revenue 493 397
-------------------------------------------------------------------------
Net revenue 642 535
-------------------------------------------------------------------------
Expenses
Employee compensation and benefits 106 98
Other 179 197
-------------------------------------------------------------------------
Total expenses 285 295
-------------------------------------------------------------------------
Pre-tax income 357 240
Provision for income taxes 116 94
-------------------------------------------------------------------------
Net income(1) $241 $146
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per share - basic and diluted $0.40 $0.24
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) The Bank's equity share of net income of TD Ameritrade is subject to
adjustments relating to amortization of intangibles.
BALANCE SHEET REVIEW
Total assets were $435.2 billion as at January 31, 2008, $13 billion
higher than at October 31, 2007. The main components of the increase were
$6.0 billion in loans, $4.1 billion in other assets and $6.6 billion in
securities purchased under resale agreements which were partially offset by a
$3.3 billion decrease in securities. Total loans increased, primarily due to a
$3.2 billion increase in mortgage loans and a $0.9 billion increase in
consumer loans driven by strong loan volume growth, primarily in Canadian
Personal and Commercial Banking. Business and government loans also increased
$1.5 billion on higher volumes from the Wholesale Banking segment. The
increase in other assets was driven primarily by higher broker receivables in
Wholesale Banking related to higher business volumes. Securities purchased
under reverse repurchase agreements increased by $1.8 billion in U.S. Personal
and Commercial Banking and $4.8 billion in Wholesale Banking as the business
experienced higher client demand. Securities declined from October 31, 2007
driven by market volatility in Wholesale Banking trading securities.
Customers' liabilities under acceptances increased $1.4 billion on higher
business volumes in Canadian Personal and Commercial Banking and Wholesale
Banking. Total deposits were $285.7 billion at the end of the quarter, an
increase of $9.3 billion from October 31, 2007. Personal deposits increased
$4.2 billion, primarily due to higher retail deposit growth in Canadian
Personal and Commercial Banking ($2.8 billion) and higher deposit balances
related to TD Ameritrade money-market accounts held by TD Bank U.S.A.,
partially offset by lower volumes in U.S. Personal and Commercial Banking.
Business and government deposits increased $4.9 billion, largely due to senior
debt issuance. Bank deposits in Wholesale banking declined by $1.2 billion,
partially offsetting other deposit growth. Obligations related to securities
sold short under repurchase agreements increased by $1.6 billion due to
increased activity in Wholesale Banking. Trading derivatives declined
$2.7 billion in Wholesale Banking impacted by market volatility. Acceptances
increased $1.4 billion, primarily in Canadian Personal and Commercial Banking
and Wholesale banking due to higher business volumes. Subordinated notes and
debentures also increased $2.5 billion as a result of a new issuance of medium
term notes in the quarter.
CREDIT PORTFOLIO QUALITY
Gross impaired loans were $785 million at January 31, 2008, $216 million
higher than at October 31, 2007, largely due to a $124 million increase in the
Canadian Personal Banking segment (the majority of which was due to a change
in the definition of gross impaired loans for insured residential mortgages
from 360 days to 90 days past the contractual due date; as the majority are
insured residential mortgages, there was no material impact to specific
allowances) and an $87 million increase in the Wholesale Banking segment. Net
impaired loans totalled $521 million, compared with $314 million in the same
quarter last year and $366 million in the previous quarter.
The total allowance for credit losses of $1,362 million at the end of the
quarter was comprised of total specific allowances of $264 million and a
general allowance of $1,098 million. Specific allowances increased by
$61 million from October 31, 2007. The Bank establishes general allowances to
recognize losses that management estimates to have occurred in the portfolio
at the balance sheet date for loans or credits not yet specifically identified
as impaired.
Changes in Gross Impaired Loans and Acceptances
-------------------------------------------------------------------------
For the three months ended
-------------------------------
Jan. 31 Oct. 31 Jan. 31
(millions of Canadian dollars) 2008 2007 2007
-------------------------------------------------------------------------
Balance at beginning of period $569 $590 $446
Additions 626 387 369
Return to performing status,
repaid or sold (197) (188) (126)
Write-offs (212) (202) (184)
Foreign exchange and other adjustments (1) (18) 6
-------------------------------------------------------------------------
Balance at end of period $785 $569 $511
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Allowance for Credit Losses(1)
-------------------------------------------------------------------------
As at
-------------------------------
Jan. 31 Oct. 31 Jan. 31
(millions of Canadian dollars) 2008 2007 2007
-------------------------------------------------------------------------
Specific allowance $264 $203 $197
General allowance 1,098 1,092 1,169
-------------------------------------------------------------------------
Total allowance for credit losses $1,362 $1,295 $1,366
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total net impaired loans $521 $366 $314
Net impaired loans as a percentage
of net loans 0.3% 0.2% 0.2%
Provision for credit losses as a
percentage of net average loans 0.57% 0.30% 0.38%
-------------------------------------------------------------------------
(1) Certain comparative amounts have been restated to conform to the
presentation adopted in the current period.
CAPITAL POSITION
The Bank's capital ratios are calculated using the guidelines of the
Office of the Superintendent of Financial Institutions (OSFI). Effective the
current quarter, the Bank began calculating its regulatory capital under the
new capital adequacy rules included in Basel II. The top corporate entity to
which Basel II applies at the consolidated level is The Toronto-Dominion Bank.
Under Basel II, risk-weighted assets (RWA) are calculated for each of
credit risk, market risk and operational risk. Operational risk is a new
component of total RWA and represents the risk of loss resulting from
inadequate or failed internal processes, people and systems or from external
events. The Bank's RWA were as follows:
Risk-weighted Assets
-------------------------------------------------------------------------
(millions of Canadian dollars) As at Jan. 31, 2008
-------------------------------------------------------------------------
Risk-weighted assets (RWA) for:
Credit risk $121,460
Market risk 4,088
Operational risk 20,352
-------------------------------------------------------------------------
Total RWA $145,900
-------------------------------------------------------------------------
-------------------------------------------------------------------------
OSFI's target Total capital ratio for Canadian banks is 10%. As at
January 31, 2008, the Bank's Tier 1 capital ratio was 10.9% and the Total
capital ratio was 15.1%, computed under Basel II. Under Basel I, the Bank's
Tier 1 capital ratio and Total capital ratio were 10.3% and 13.0%,
respectively, at October 31, 2007 and 11.9% and 14.1%, respectively, at
January 31, 2007.
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.
For accounting purposes, GAAP 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
under OSFI's Minimum Continuing Capital Surplus Requirements. 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.
During the quarter, the Bank issued $250 million of its Class A First
Preferred Shares, Series P and $200 million of its Class A First Preferred
Shares, Series Q. Also during the quarter, the Bank issued $2.5 billion of
medium term notes constituting subordinated indebtedness which qualify as Tier
2B regulatory capital. For further details of debt and equity
issues/repurchases, see Notes 6, 7 and 8 to the Interim Consolidated Financial
Statements. For further details of regulatory capital, see Note 9 to the
Interim Consolidated Financial Statements.
MANAGING RISK
EXECUTIVE SUMMARY
Financial services involve prudently taking risks in order to generate
profitable growth. At the Bank, our goal is to earn a stable and sustainable
rate of return for every dollar of risk we take, while putting significant
emphasis on investing in our businesses to ensure we can meet our future
growth objectives. Our businesses thoroughly examine the various risks to
which they are exposed and assess the impact and likelihood of those risks. We
respond by developing business and risk management strategies for our various
business units taking into consideration the risks and business environment in
which we operate. Through our businesses and operations, we are exposed to a
broad number of risks that have been identified and defined in our Enterprise
Risk Framework. This framework outlines appropriate risk oversight processes
and the consistent communication and reporting of key risks that could hinder
the achievement of our business objectives and strategies. Our risk governance
structure and risk management approach have not changed from that described in
our 2007 Annual Report. Certain risks have been outlined below. For a complete
discussion of our risk governance structure and our risk management approach,
see our 2007 Annual Report.
WHO MANAGES RISK
We have a risk governance structure in place that emphasizes and balances
strong central oversight and control of risk with clear accountability for,
and ownership of, risk within each business unit. Our structure ensures that
important information about risks flows up from the business units and
oversight functions to the Senior Executive Team and the Board of Directors.
HOW WE MANAGE RISK
We have a comprehensive and proactive risk management approach that
combines the experience and specialized knowledge of individual business
units, risk professionals and the corporate oversight functions. Our approach
is designed to promote a strong risk management culture and ensure alignment
to our strategic objectives. It includes:
- Maintaining appropriate enterprise-wide risk management policies and
practices including guidelines, requirements and limits to ensure
risks are managed to acceptable levels;
- Subjecting risk management policies to regular review and evaluation
by the Executive Committees and review and approval by the Risk
Committee of the Board;
- An integrated enterprise-wide risk monitoring and reporting process
that communicates key elements of our risk profile, both
quantitatively and qualitatively, to senior management and the Board
of Directors;
- Maintaining risk measurement methodologies that support risk
quantification, including Value-at-Risk (VaR) analysis, scenario
analysis and stress-testing;
- Annual self-assessments by significant business units and corporate
oversight functions of their key risks and internal controls. Overall
significant risk issues are identified, escalated and monitored as
needed;
- Supporting appropriate performance measurement that allocates risk-
based economic capital to businesses and charges a cost against that
capital;
- Actively monitoring internal and external risk events to assess
whether our internal controls are effective;
- Independent and comprehensive reviews conducted by the Audit
Department of the quality of the internal control environment and
compliance with established risk management policies and procedure
Basel II
Basel II is a framework developed by the Basel Committee on Banking
Supervision, with the objectives of improving the consistency of capital
requirements internationally and making required regulatory capital more risk
sensitive. Basel II sets out several options which represent increasingly more
risk-sensitive approaches to calculating credit-, market- and operational-
risk-based regulatory capital. Under the more sophisticated approaches, banks
develop their own internal estimates of risk parameters, which are used in the
determination of risk-weighted assets and calculation of regulatory capital.
The Bank has implemented the Advanced Internal Ratings Based (AIRB)
approach to credit risk for all material portfolios, with some exemptions and
waivers in place to use the Standardized approach as outlined below. We do not
use the Foundation Internal Ratings Based approach.
- Exemptions are available for non-material portfolios to remain under
the Standardized approach indefinitely. We have exemptions in place
covering some small exposures in North America. The continued
appropriateness of the Standardized approach will be reconfirmed
annually by Risk Management.
- Waivers are available to use the Standardized approach for a defined
period of time where there are clear plans in place to implement the
AIRB approach. We have received waivers for our Margin Trading Book,
some small Retail portfolios, and the majority of our TD Banknorth
portfolio. Detailed plans are in place to implement the AIRB approach
for these portfolios within timelines agreed with OSFI.
We are compliant with the market risk requirements as at October 31, 2007
and are implementing the additional market risk requirements within the OSFI-
established timelines. For operational risk, the Basic Indicator Approach is
used primarily for TD Banknorth. For the rest of the Bank, we use The
Standardized Approach (TSA).
Certain sections of this MD&A represent a discussion on risk management
policies and procedures relating to credit, market and liquidity risks as
required under the CICA Handbook Section 3862, Financial Instruments -
Disclosures, which permits these specific disclosures to be included in the
MD&A. Therefore, certain parts of the following sections, presented on pages
17 to 22, form an integral part of the unaudited interim consolidated
financial statements for the quarter ended January 31, 2008.
CREDIT RISK
Credit risk is the potential for financial loss if a borrower or
counterparty in a transaction fails to meet its obligations in accordance with
agreed terms.
Credit risk is one of the most significant and pervasive risks in
banking. Every loan, extension of credit or transaction that involves
settlements between the Bank and other parties or financial institutions -
such as derivative transactions and securities inventories - exposes the Bank
to some degree of credit risk. For this reason, we lend on a relationship
basis, and we manage all of our businesses with a focus on economic returns
from client relationships.
Our primary objective is to create a methodological approach to our
credit risk assessment in order to better understand, select and dynamically
manage our exposures to deliver reduced earnings volatility.
Our strategy is to ensure central oversight of credit risk in each
business, reinforcing a culture of accountability, independence and balance.
Who Manages Credit Risk
The responsibility for credit risk management is enterprise-wide in
scope.
Credit risk control functions are integrated into each business to
reinforce ownership of credit risk, reporting to the Risk Management
Department to ensure objectivity and accountability.
The business unit credit risk control unit is primarily responsible for
adjudication, and is subject to compliance with established policies, exposure
guidelines and discretionary limits, as well as adherence to established
standards of credit assessment, with escalation to the Risk Management
Department for material credit decisions.
Independent oversight of credit risk is provided by the Risk Management
Department, through the development of centralized policies to govern and
control portfolio risks and product specific policies as required.
The Risk Committee of the Board ultimately oversees the management of
credit risk and annually approves all major credit risk policies.
How we Manage Credit Risk
Credit Risk is managed through a centralized infrastructure based on:
- Centralized approval by the Risk Management Department of all credit
risk policies and the discretionary limits of officers throughout the
Bank for extending lines of credit;
- The establishment of guidelines to monitor and limit concentrations
in the portfolios in accordance with the Board approved, enterprise-
wide policies governing country risk, industry risk and group
exposures;
- The development and implementation of credit risk models and policies
for establishing borrower and facility risk ratings to quantify and
monitor the level of risk and facilitate its management in our
Commercial Banking and Wholesale Banking businesses. These models are
reviewed on a regular basis to ensure ongoing appropriateness,
accuracy and validity;
- Approval of the scoring techniques and standards used in extending,
monitoring and reporting of personal credit;
- Implementation of management processes to monitor country, industry
and counterparty risk ratings which include daily, monthly and
quarterly review requirements for credit exposures;
- We have implemented an ongoing monitoring process for the key risk
parameters that are used in our credit risk models.
Unanticipated economic or political changes in a foreign country could
affect cross-border payments for goods and services, loans, dividends, trade-
related finance, as well as repatriation of the Bank's capital in that
country. The Bank currently has counterparty exposure in a number of
countries, with the majority of the exposure in North America. Country risk
ratings are based on approved risk rating models and qualitative factors, and
are used to establish country exposure guidelines covering all aspects of
credit exposure, across all businesses. Country risk ratings are dynamically
managed and subject to a detailed review on at least an annual basis.
As part of our credit risk strategy, we establish credit exposure limits
for specific industry sectors. We monitor industry concentration limits to
ensure the diversification of our loan portfolio. Industry exposure guidelines
are a key element of this process as they limit exposure based on an internal
risk rating score determined through the use of our industry risk rating model
and detailed industry analysis.
If several industry segments are affected by common risk factors, we
assign a single exposure guideline to those segments. In addition, for each
material industry, the Risk Management Department assigns a concentration
limit, which is a percentage of our total wholesale and commercial exposure.
We regularly review industry risk ratings to ensure that they properly reflect
the risk of the industry.
Through the use of segment-specific models and qualitative factors, we
assign each borrower a borrower risk rating that reflects the probability of
default of the borrower. The borrower risk rating determines the amount of
credit exposure we are willing to extend to that borrower. In addition, using
a model based approach, each credit facility extended to a borrower is
assigned a facility risk rating to reflect the expected loan recovery rates,
in the event a default occurs, based on our assessment of the collateral
and/or asset values supporting the facility.
Credit derivatives may be used from time to time to mitigate industry
concentration and borrower specific exposure as part of our portfolio
diversification techniques.
We use a risk-adjusted return on capital model to assess the return on
credit relationships according to the structure and maturity of the loans and
the internal risk ratings of the borrowers involved. We review the established
risk ratings and return on capital for each borrower at least once every year.
Personal and Small Business Credit
Our personal credit segment is composed of a large number of customers,
and includes residential mortgages, unsecured loans, credit card receivables
and small business credits. Credit risk is evaluated through statistically
derived analytical models and decision strategies. Requests for personal
credit are processed using automated credit and behavioural scoring systems
or, for larger and more complex transactions, directed to underwriters in
regional credit centres who operate within clear limits. Once retail credits
are funded they are continually monitored with quantitative customer
management programs utilizing current internal and external risk indicators to
identify changes in risk.
Stress Testing
Sensitivity and stress tests are used to ascertain the size of probable
losses under a range of scenarios for our credit portfolios. Sensitivity tests
are performed using different market/economic assumptions to examine the
impact on portfolio metrics. Stress tests are also employed to assess client-
specific and portfolio vulnerability to the effects of severe but plausible
conditions, such as material market or industry disruption or economic
downturn.
Risk Parameters
Under the AIRB approach, we have developed internal risk rating systems
based on key risk estimates; first, probability of default (PD) - the degree
of likelihood that the borrower will not be able to meet their scheduled
repayments; second, loss given default (LGD) - the amount of the loss when a
borrower defaults on a loan; and third, exposure at default (EAD) - the total
amount we are exposed to at the time of default. Application of these risk
parameters allows us to measure and monitor our credit risk to ensure it
remains within pre-determined thresholds.
Estimates for each of these risk parameters are derived from our
historical loss experience and are updated regularly.
Credit Risk Exposures under Basel II
Banks adopting the AIRB approach to credit risk are required to
categorize banking-book exposures by counterparty type, each having different
underlying risk characteristics. These counterparty types may differ from the
presentation on the financial statements. We have categorized banking book
exposures according to the following Basel II counterparty types: corporate
(wholesale and commercial customers, and certain small businesses), sovereign
(governments, central banks, certain public sector entities), bank (banks,
securities firms) and retail (individuals, certain small businesses). Within
the retail category, banks are required to identify separately three sub-types
of exposures: residential secured (e.g. individual mortgages, home equity
lines of credit), qualifying revolving retail (e.g. individual credit cards,
unsecured lines of credit and overdraft protection products), and other retail
(e.g. personal loans, student lines of credit, small business banking credit
products).
Under Basel II, gross credit risk exposures include both on- and off-
balance sheet exposures. On-balance sheet exposures consist primarily of
outstanding loans, acceptances, non-trading securities, derivatives and
certain repo-style transactions. Off-balance sheet exposures consist primarily
of the Bank's estimate of EAD on undrawn commitments and certain repo-style
transactions.
Gross credit risk exposures are measured gross of specific provisions or
partial write-offs and before credit risk mitigants. Total gross credit risk
exposures under each of the Standardized approach and AIRB approach to credit
risk are given below:
Total Gross Credit Risk Exposures by Counterparty Type
- Standardized and AIRB Approaches
-------------------------------------------------------------------------
As at January 31,
2008
---------------------------------
(millions of Canadian dollars) Standardized AIRB Total
-------------------------------------------------------------------------
Residential secured $4,071 $117,856 $121,927
Qualifying revolving retail - 40,352 40,352
Other retail 11,903 19,589 31,492
Corporate 24,305 98,040 122,345
Sovereign 1,276 34,440 35,716
Bank 1,299 92,347 93,646
-------------------------------------------------------------------------
Total gross credit risk exposures $42,854 $402,624 $445,478
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Credit Risk Mitigation
There are documented policies and procedures in place for the valuation
and management of financial and non-financial collateral, for vetting and
negotiation of netting agreements, and other credit risk mitigation techniques
used in connection with on- and off-balance sheet banking activities which
result in credit exposure. The amount and type of collateral and other credit
enhancements required depend on the Bank's internal assessment of counterparty
credit quality and repayment capacity.
Non-financial collateral is primarily used in the Retail and Business
Banking segments. Enterprise-wide standards for collateral valuation,
frequency of recalculation of the collateral requirement, documentation,
registration and perfection procedures and monitoring have been established.
Non-financial collateral taken by the Bank includes residential real estate,
real estate under development, commercial real estate, and business assets
such as accounts receivable, inventory, and fixed assets. Non-financial
collateral is concentrated in residential real estate and business assets.
Financial collateral is primarily used in the Wholesale Banking segment.
Financial collateral processes are centralized in the Treasury Credit group
within Wholesale Banking and include pre-defined haircuts and procedures for
safekeeping and release of the pledged securities. The main types of financial
collateral taken by the Bank include cash and negotiable securities issued by
governments and investment grade issuer corporate entities.
Guarantees may be taken in order to support credit facilities granted to
a borrower or its subsidiaries. Retail portfolios requiring a guarantee must
be insured with a government agency or investment grade issuer.
The Bank makes use of credit derivatives and on-balance sheet netting for
the purposes of credit risk mitigation. Derivative counterparties are
primarily highly rated financial institutions with the additional benefit of
netting agreements and collateral support agreements. Credit policies are in
place that limit the amount of credit exposure to an entity based on the
credit quality and repayment capacity of the entity.
Off-balance sheet transactions with qualifying financial institutions are
subject to netting agreements and collateral agreements. Residual credit
exposure, after the effects of collateral, are calculated and reported daily.
This represents a substantial portion of credit risk mitigation used in
connection with off-balance sheet items and related credit exposures.
MARKET RISK
Market risk is the potential for loss from changes in the value of
financial instruments. The value of a financial instrument can be affected by
changes in interest rates, foreign exchange rates, equity and commodity prices
and credit spreads.
We are exposed to market risk in our trading and investment portfolios,
as well as through our non-trading activities.
Market Risk in Trading Activities
The four main trading activities that expose us to market risk are:
- Market making: We provide markets for a large number of securities
and other traded products. We keep an inventory of these securities
to buy from and sell to investors, profiting from the spread between
bid and ask prices;
- Sales: We provide a wide variety of financial products to meet the
needs of our clients, earning money on these products from mark-ups
and commissions;
- Arbitrage: We take positions in certain markets or products and
offset the risk in other markets or products. Our knowledge of
various markets and products and how they relate to one another
allows us to identify and benefit from pricing anomalies;
- Positioning: We aim to make profits by taking positions in certain
financial markets in anticipation of changes in those markets.
Who Manages Market Risk in Trading Activities
Primary responsibility for managing market risk in trading activities
lies with Wholesale Banking with oversight from Trading Risk Management within
the Risk Management Department.
How we Manage Market Risk in Trading Activities
Trading Limits
We set trading limits that are consistent with the approved business plan
for each business and our tolerance for the market risk of that business.
The core market risk limits are based on the key risk drivers in the
business and can include notional limits, credit spread limits, yield curve
shift limits, price and volatility shift limits.
Another primary measure of trading limits is Value-at-Risk (VaR) which we
use to monitor and control overall risk levels and to calculate the regulatory
capital required for market risk in trading activities.
At the end of each day, risk positions are compared with risk limits,
with excesses reported in accordance with established market risk policies and
procedures.
Calculating VaR
We estimate VaR by creating a distribution of potential changes in the
market value of the current portfolio. We value the current portfolio using
the most recent 259 trading days of market price and rate changes as well as
the market value changes associated with probability of Debt Issuer rating
migrations and defaults. VaR is then computed as the threshold level that
portfolio losses are not expected to exceed more than one out of every 100
trading days.
A graph that discloses daily VaR usage and trading-related income(1)
within the Wholesale Banking segment is included on page 19 of the fully
formatted version of this first quarter 2008 Report to Shareholders, which can
be found on TD's website at www.td.com/investor/earnings.jsp.
(1) Trading-related income is the total of trading income reported in
other income and the net interest income on trading positions
reported in net interest income.
Value-at-Risk Usage
-------------------------------------------------------------------------
For the quarter ended Quarterly Quarterly
Jan. 31, 2008 average average
Oct. 31, Jan. 31,
2007 2007
--------------------------------------
(millions of As at Average High Low
Canadian quarter for
dollars) end quarter
-------------------------------------------------------------------------
Interest rate
risk $(18.8) $(15.8) $(23.2) $(12.1) $(10.8) $(7.5)
Equity risk (5.1) (5.3) (7.2) (3.3) (4.3) (7.2)
Foreign exchange
risk (2.0) (2.5) (5.6) (1.4) (2.1) (2.0)
Commodity risk (0.6) (1.0) (2.6) (0.4) (1.0) (1.6)
Debt specific
risk (20.3) (19.1) (28.5) (13.8) (14.5) (14.1)
Diversification
effect(1) 17.8 19.9 n/m(2) n/m(2) 15.2 14.9
-------------------------------------------------------------------------
Total Value-
at-Risk $(29.0) $(23.8) $(32.7) $(17.9) $(17.5) $(17.5)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) The aggregate VaR is less then the sum of the VaR of the different
risk types due to risk offsets resulting from portfolio
diversification.
(2) Not meaningful. It is not meaningful to compute a diversification
effect because the high and low may occur on different days for
different risk types.
Stress Testing
Our trading business is subject to an overall global stress test limit.
As well, each global business has a stress test limit, and each broad risk
class has an overall stress test limit.
Stress tests are produced and reviewed regularly with the Market Risk and
Capital Committee.
Market Risk in Investment Activities
We are also exposed to market risk in the Bank's own investment portfolio
and in the merchant banking business. Risks are managed through a variety of
processes, including identification of our specific risks and determining
their potential impact. Policies and procedures are established to monitor,
measure and mitigate those risks.
Who Manages Market Risk in Investment Activities
The TDBFG Investment Committee regularly reviews the performance of the
Bank's own investments and assesses the success of the portfolio managers.
Similarly, the Merchant Banking Investment Committee reviews and approves
merchant banking investments. The Risk Committee of the Board reviews and
approves the investment policies and limits for the Bank's own portfolio and
for the merchant banking business.
How we Manage Risk in Investment Activities
We use advanced systems and measurement tools to manage portfolio risk.
Risk intelligence is embedded in the investment decision-making process by
integrating performance targets, risk/return tradeoffs and quantified risk
tolerances. Analysis of returns identifies performance drivers, such as sector
and security exposures, as well as the influence of market factors.
Market Risk in Non-trading Banking Transactions
We are exposed to market risk when we enter into non-trading banking
transactions with our customers. These transactions primarily include deposit
taking and lending, which are also referred to as "asset and liability"
positions.
Asset/Liability Management
Asset/liability management deals with managing the market risks of our
traditional banking activities. Market risks primarily include interest rate
risk and foreign exchange risk.
Who is Responsible for Asset/Liability Management
The Treasury and Balance Sheet Management Department measures and manages
the market risks of our non-trading banking activities, with oversight from
the Asset/Liability Committee, which is chaired by the Chief Financial
Officer, and includes other senior executives. The Risk Committee of the Board
periodically reviews and approves all asset/liability management market risk
policies and receives reports on compliance with approved risk limits.
How we Manage our Asset and Liability Positions
When Bank products are issued, risks are measured using a fully hedged
option-adjusted transfer-pricing framework that allows us to measure and
manage product risk within a target risk profile. The framework also ensures
that business units engage in risk-taking activities only if they are
productive.
Managing Interest Rate Risk
Interest rate risk is the impact that changes in interest rates could
have on our margins, earnings and economic value. The objective of interest
rate risk management is to ensure that earnings are stable and predictable
over time. To this end, we have adopted a disciplined hedging approach to
managing the net income contribution from our asset and liability positions
including a modeled maturity profile for non-rate sensitive assets,
liabilities and equity. Key aspects of this approach are:
- Evaluating and managing the impact of rising or falling interest
rates on net interest income and economic value;
- Measuring the contribution of each Bank product on a risk-adjusted,
fully-hedged basis, including the impact of financial options, such
as mortgage commitments, that are granted to customers;
- Developing and implementing strategies to stabilize net income from
all personal and commercial banking products.
We are exposed to interest rate risk when asset and liability principal
and interest cash flows have different payment or maturity dates. These are
called "mismatched positions." An interest-sensitive asset or liability is
repriced when interest rates change, when there is cash flow from final
maturity, normal amortization, or when customers exercise prepayment,
conversion or redemption options offered for the specific product.
Our exposure to interest rate risk depends on the size and direction of
interest rate changes, and on the size and maturity of the mismatched
positions. It is also affected by new business volumes, renewals of loans or
deposits, and how actively customers exercise options, such as prepaying a
loan before its maturity date.
Interest rate risk is measured using various interest rate "shock"
scenarios to estimate the impact of changes in interest rates on both the
Bank's annual Earnings at Risk (EaR) and Economic Value at Risk (EVaR). EaR is
defined as the change in our annual net interest income from a 100-basis-point
unfavourable interest rate shock due to mismatched cash flows. EVaR is defined
as the difference in the change in the present value of our asset portfolio
and the change in the present value of our liability portfolio, including off-
balance-sheet instruments, resulting from a 100-basis-point unfavourable
interest rate shock.
Valuations of all asset and liability positions, as well as off balance-
sheet exposures, are performed regularly. Our objectives are to protect the
present value of the margin booked at the time of inception for fixed-rate
assets and liabilities, and to reduce the volatility of net interest income
over time.
The interest rate risk exposures from instruments with closed (non-
optioned) fixed-rate cash flows are measured and managed separately from
embedded product options. Projected future cash flows include the impact of
modeled exposures for:
- An assumed maturity profile for our core deposit portfolio;
- Our targeted investment profile on our net equity position;
- Liquidation assumptions on mortgages other than from embedded pre-
payment options.
The objective of portfolio management within the closed book is to
eliminate cash flow mismatches, thereby reducing the volatility of net
interest income.
Product options, whether they are freestanding options such as mortgage
rate commitments or embedded in loans and deposits, expose us to a significant
financial risk. Our exposure from freestanding mortgage rate commitment
options is modeled based on an expected funding ratio derived from historical
experience. We model our exposure to written options embedded in other
products, such as the rights to prepay or redeem, based on analysis of
rational customer behaviour. We also model an exposure to declining interest
rates resulting in margin compression on certain demand deposit accounts that
are interest rate sensitive. Product option exposures are managed by
purchasing options or through a dynamic hedging process designed to replicate
the payoff on a purchased option.
The Bank's policy sets overall limits on EVaR and EaR based on 100 basis
point interest rate shock for its management of Canadian and U.S. non-trading
interest rate risk.
A graph that shows our interest rate risk exposure (as measured by EVaR)
on all non-trading assets, liabilities and derivative instruments used for
interest rate risk management instruments is included on page 21 of the fully
formatted version of this first quarter 2008 Report to Shareholders, which can
be found on TD's website at www.td.com/investor/earnings.jsp.
The Bank uses derivative financial instruments, wholesale instruments and
other capital market alternatives and, less frequently, product pricing
strategies to manage interest rate risk. As at January 31, 2008, an immediate
and sustained 100 bps increase in interest rates would have reduced the
economic value of shareholders' equity by $0.2 million after tax. An immediate
and sustained 100 bps decrease in interest rates would have reduced the
economic value of shareholders' equity by $57.7 million after tax.
The following table shows the sensitivity by currency for those
currencies where the bank has material exposure.
Sensitivity of After-tax Economic Value at Risk by Currency
-------------------------------------------------------------------------
(millions of Canadian dollars) As at January 31, 2008
-------------------------------------------------------------------------
Currency 100 bps increase 100 bps decrease
-------------------------------------------------------------------------
Canadian dollar $(3.9) $(30.1)
U.S. dollar 3.7 (27.4)
-------------------------------------------------------------------------
Managing Non-trading Foreign Exchange Risk
Foreign exchange risk refers to losses that could result from changes in
foreign-currency exchange rates. Assets and liabilities that are denominated
in foreign currencies have foreign exchange risk.
We are exposed to non-trading foreign exchange risk from our investments
in foreign operations, and when our foreign currency assets are greater or
less than our liabilities in that currency, they create a foreign currency
open position. An adverse change in foreign exchange rates can impact our
reported net income and equity, and also our capital ratios. Our objective is
to minimize these impacts.
Minimizing the impact of an adverse foreign exchange rate change on
reported equity will cause some variability in capital ratios, due to the
amount of risk-weighted assets (RWA) that are denominated in a foreign
currency. If the Canadian dollar weakens, the Canadian-dollar equivalent of
our RWA in a foreign currency increases, thereby increasing our capital
requirement. For this reason, the foreign exchange risk arising from the
Bank's net investments in foreign operations is hedged to the point where
capital ratios change by no more than a tolerable amount for a given change in
foreign exchange rates.
LIQUIDITY RISK
Liquidity risk is the risk that we cannot meet a demand for cash or fund
our obligations as they come due. Demand for cash can arise from withdrawals
of deposits, debt maturities and commitments to provide credit. Liquidity risk
also includes the risk of not being able to liquidate assets in a timely
manner at a reasonable price.
As a financial organization, we must always ensure that we have access to
enough readily-available funds to cover our financial obligations as they come
due and to sustain and grow our assets and operations both under normal and
stress conditions. In the unlikely event of a funding disruption, we need to
be able to continue to function without being forced to sell too many of our
assets. The process that ensures adequate access to funds is known as the
management of liquidity risk.
Who Manages Liquidity Risk
The Asset/Liability Committee oversees our liquidity risk management
program. It ensures that a management structure is in place to properly
measure and manage liquidity risk. In addition, a Global Liquidity Forum,
comprising senior management from Finance, Treasury and Balance Sheet
Management and Wholesale Banking, identifies and monitors our liquidity risks.
When necessary, the Forum recommends actions to the Asset/Liability Committee
to maintain our liquidity position within limits in both normal and stress
conditions. We have one global liquidity risk policy, but the major operating
areas measure and manage liquidity risks as follows:
- The Treasury and Balance Sheet Management Department is responsible
for consolidating and reporting the Bank's global liquidity risk
position and for managing the Canadian Personal and Commercial
Banking liquidity position.
- Wholesale Banking is responsible for managing the liquidity risks
inherent in the wholesale banking portfolios.
- TD Banknorth is responsible for managing its liquidity position.
- Each area must comply with the Global Liquidity Risk Management
policy that is periodically reviewed and approved by the Risk
Committee of the Board.
How we Manage Liquidity Risk
Our overall liquidity requirement is defined as the amount of liquidity
required to fund expected cash outflows, as well as a liquidity reserve to
fund potential cash outflows in the event of a disruption in the capital
markets or other event that could affect our access to liquidity. We do not
rely on short-term wholesale funding for purposes other than funding
marketable securities or short-term assets.
We measure liquidity requirements using a conservative base case scenario
to define the amount of liquidity that must be held at all times for a
specified minimum period. This scenario provides coverage for 100% of our
unsecured wholesale debt coming due, potential retail and commercial deposit
run-off and forecast operational requirements. In addition, we provide for
coverage of Bank-sponsored funding programs, such as Bankers' Acceptance notes
we issue on behalf of clients, and Bank-sponsored Asset-backed Commercial
Paper. We also use an extended liquidity coverage test to ensure that we can
fund our operations on a fully collateralized basis for a period up to one
year.
We meet liquidity requirements by holding assets that can be readily
converted into cash, and by managing our cash flows. To be considered readily
convertible into cash, assets must be currently marketable, of sufficient
credit quality and available for sale. Liquid assets are represented in a
cumulative liquidity gap framework based on settlement timing and market
depth. Assets needed for collateral purposes or those that are similarly
unavailable are not considered readily convertible into cash.
While each of our major operations has responsibility for the measurement
and management of its own liquidity risks, we also manage liquidity on a
global basis to ensure consistent and efficient management of liquidity risk
across all of our operations. On January 31, 2008, our consolidated surplus
liquid asset position up to 90 days was $7.8 billion, compared with a surplus
liquid-asset position of $7.8 billion on October 31, 2007. Our surplus liquid-
asset position is our total liquid assets less our unsecured wholesale funding
requirements, potential non-wholesale deposit run-off and contingent
liabilities coming due in 90 days.
Contingency Planning
If a liquidity crisis were to occur, we have contingency plans in place
to ensure that we can meet all our obligations as they come due. At the time
of preparing this report, global debt markets were experiencing a significant
liquidity event. During that time, we continued to operate within our
liquidity risk management framework and limit structure.
OFF-BALANCE SHEET ARRANGEMENTS
Securitization of Bank-Originated Assets
The Bank securitizes residential mortgages, personal loans, credit card
loans and commercial mortgages to enhance our liquidity position, to diversify
sources of funding and to optimize the management of the balance sheet.
Details of these securitization exposures are as follows:
-------------------------------------------------------------------------
Total Outstanding Exposures Securitized by the Bank as an
originator(1),(2)
(millions of Canadian dollars)
-------------------------------------------------------------------------
Third-
Own party
resid- resid-
ential ential Credit Commercial
As at Jan. mortgage mortgage Personal card mortgage
31, 2008 loans loans loans loans loans Total
-------------------------------------------------------------------------
Securitized
assets $17,945 $2,293 $9,000 $800 $159 $30,197
Carrying value
of retained
interests 231 70 71 4 5 381
-------------------------------------------------------------------------
As at Oct. 31,
2007
-------------------------------------------------------------------------
Securitized
assets $18,353 $1,999 $9,000 $800 $163 $30,315
Carrying value
of retained
interests 237 52 71 6 5 371
-------------------------------------------------------------------------
(1) Certain comparative amounts have been restated and reclassified to
conform to the presentation adopted in the current period.
(2) In all the securitization transactions that the Bank has undertaken
for its own assets and for third-party assets, it has acted as an
originating bank and retained securitization exposure.
The bank does not have any synthetic securitization exposure.
RELATED-PARTY TRANSACTIONS
During the three months ended January 31, 2008, the Bank purchased
certain securities with a notional value of approximately $300 million at par
from a fund that is managed by the Bank. The Bank immediately recognized a
securities loss of $45 million that was recorded in the Wholesale Banking
segment.
QUARTERLY RESULTS
The following table provides summary information related to the Bank's
eight most recently completed quarters.
Quarterly Results(1)
-------------------------------------------------------------------------
For the three months ended
--------------------------------------
2008
(millions of Canadian dollars) Jan. 31 Oct. 31 July 31 Apr. 30
-------------------------------------------------------------------------
Net interest income $1,788 $1,808 $1,783 $1,662
Other income 1,816 1,742 1,899 1,882
-------------------------------------------------------------------------
Total revenue 3,604 3,550 3,682 3,544
Provision for (reversal of) credit
losses (255) (139) (171) (172)
Non-interest expenses (2,228) (2,241) (2,216) (2,297)
Dilution gain (loss), net - - - -
Provision for income taxes (235) (153) (248) (234)
Non-controlling interests (8) (8) (13) (27)
Equity in net income of an
associated company, net of
income taxes 92 85 69 65
-------------------------------------------------------------------------
Net income - reported 970 1,094 1,103 879
Items of note affecting net income,
net of income taxes:
Amortization of intangibles 75 99 91 80
Gain relating to restructuring
of Visa - (135) - -
Dilution (gain) loss on Ameritrade
transaction, net of costs - - - -
TD Banknorth restructuring,
privatization and merger-related
charges - - - 43
Change in fair value of credit
default swaps hedging the corporate
loan book, net of provision for
credit losses (25) 2 (30) (7)
Other tax items 20 - - -
Provision for insurance claims 20 - - -
Initial set up of specific allowance
for credit card and overdraft loans - - - -
General allowance release - (39) - -
-------------------------------------------------------------------------
Total adjustments for items of
note, net of income taxes 90 (73) 61 116
-------------------------------------------------------------------------
Net income - adjusted 1,060 1,021 1,164 995
Preferred dividends (8) (5) (2) (7)
-------------------------------------------------------------------------
Net income available to common
shareholders - adjusted $1,052 $1,016 $1,162 $988
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(Canadian dollars)
-------------------------------------------------------------------------
Basic earnings per share
- reported $1.34 $1.52 $1.53 $1.21
- adjusted 1.46 1.42 1.61 1.37
Diluted earnings per share
- reported 1.33 1.50 1.51 1.20
- adjusted 1.45 1.40 1.60 1.36
Return on common shareholders'
equity 18.0% 20.8% 21.0% 17.1%
-------------------------------------------------------------------------
Quarterly Results(1)
-------------------------------------------------------------------------
For the three months ended
--------------------------------------
2007 2006
(millions of Canadian dollars) Jan. 31 Oct. 31 July 31 Apr. 30
-------------------------------------------------------------------------
Net interest income $1,671 $1,714 $1,623 $1,427
Other income 1,834 1,604 1,688 1,712
-------------------------------------------------------------------------
Total revenue 3,505 3,318 3,311 3,139
Provision for (reversal of) credit
losses (163) (170) (109) (16)
Non-interest expenses (2,221) (2,211) (2,170) (2,124)
Dilution gain (loss), net - - - (5)
Provision for income taxes (218) (175) (235) (244)
Non-controlling interests (47) (48) (52) (47)
Equity in net income of an
associated company, net of
income taxes 65 48 51 35
-------------------------------------------------------------------------
Net income - reported 921 762 796 738
Items of note affecting net income,
net of income taxes:
Amortization of intangibles 83 87 61 86
Gain relating to restructuring
of Visa - - - -
Dilution (gain) loss on Ameritrade
transaction, net of costs - - - 5
TD Banknorth restructuring,
privatization and merger-related
charges - - - -
Change in fair value of credit
default swaps hedging the corporate
loan book, net of provision for
credit losses 5 8 5 (10)
Other tax items - - 24 -
Provision for insurance claims - - - -
Initial set up of specific allowance
for credit card and overdraft loans - 18 - -
General allowance release - - - (39)
-------------------------------------------------------------------------
Total adjustments for items of
note, net of income taxes 88 113 90 42
-------------------------------------------------------------------------
Net income - adjusted 1,009 875 886 780
Preferred dividends (6) (5) (6) (6)
-------------------------------------------------------------------------
Net income available to common
shareholders - adjusted $1,003 $870 $880 $774
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(Canadian dollars)
-------------------------------------------------------------------------
Basic earnings per share
- reported $1.27 $1.05 $1.10 $1.02
- adjusted 1.40 1.21 1.22 1.10
Diluted earnings per share
- reported 1.26 1.04 1.09 1.01
- adjusted 1.38 1.20 1.21 1.09
Return on common shareholders'
equity 18.2% 15.7% 16.8% 16.5%
-------------------------------------------------------------------------
(1) Certain comparative amounts have been restated to conform to the
presentation adopted in the current period.
ACCOUNTING POLICIES AND ESTIMATES
The Bank's unaudited Interim Consolidated Financial Statements, as
presented on pages 26 to 38 of this Report to Shareholders, have been prepared
in accordance with GAAP. These Interim Consolidated Financial Statements
should be read in conjunction with the Bank's audited Consolidated Financial
Statements for the year ended October 31, 2007. The accounting policies used
in the preparation of these Consolidated Financial Statements are consistent
with those used in the Bank's October 31, 2007 audited Consolidated Financial
Statements, except as described below.
Changes in Significant Accounting Policies
Capital Disclosures
Effective November 1, 2007, the CICA's new accounting standard, Section
1535, Capital Disclosures, was implemented, which requires the disclosure of
both qualitative and quantitative information that enables users of financial
statements to evaluate the entity's objectives, policies and processes for
managing capital. The new guidance did not have an effect on the financial
position or earnings of the Bank.
Financial Instruments Disclosures and Presentation
Effective November 1, 2007, the accounting and disclosure requirements of
the CICA's two new accounting standards, Section 3862, Financial Instruments -
Disclosures, and Section 3863, Financial Instruments - Presentation, were
implemented. The new guidance did not have a material effect on the financial
position or earnings of the Bank.
Accounting for Transaction Costs of Financial Instruments Classified
Other Than as Held For Trading
Effective November 1, 2007, the Bank adopted EIC-166, Accounting Policy
Choice for Transaction Costs. This abstract provided clarity around the
application of accounting guidance related to transaction costs that is
codified in Section 3855, Financial Instruments - Recognition and Measurement.
More specifically the abstract contemplated whether an entity must make one
accounting policy choice that applies to all financial assets and financial
liabilities classified other than as held for trading or whether these
transaction costs may be recognized in net income for certain of these
financial assets and liabilities and added to the carrying amount for other
financial assets and liabilities. The new guidance did not have a material
effect on the financial position or earnings of the Bank.
Critical Accounting Estimates
The critical accounting estimates remain unchanged from those disclosed
in the Bank's 2007 Annual Report.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the most recent interim period, 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.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
INTERIM CONSOLIDATED BALANCE SHEET (unaudited)
-------------------------------------------------------------------------
As at
----------------------------
Jan. 31 Oct. 31
(millions of Canadian dollars) 2008 2007
-------------------------------------------------------------------------
ASSETS
Cash and due from banks $2,036 $1,790
Interest-bearing deposits with banks 13,099 14,746
-------------------------------------------------------------------------
15,135 16,536
-------------------------------------------------------------------------
Securities
Trading 73,651 77,637
Designated as trading under the fair value option 1,984 2,012
Available-for-sale 35,674 35,650
Held-to-maturity 8,405 7,737
-------------------------------------------------------------------------
119,714 123,036
-------------------------------------------------------------------------
Securities purchased under reverse repurchase
agreements 34,234 27,648
-------------------------------------------------------------------------
Loans
Residential mortgages 61,662 58,485
Consumer installment and other personal 68,405 67,532
Credit card 5,898 5,700
Business and government 45,803 44,258
Business and government designated as trading
under the fair value option 1,425 1,235
-------------------------------------------------------------------------
183,193 177,210
Allowance for credit losses (Note 4) (1,362) (1,295)
-------------------------------------------------------------------------
Loans, net of allowance for credit losses 181,831 175,915
-------------------------------------------------------------------------
Other
Customers' liability under acceptances 10,633 9,279
Investment in TD Ameritrade 4,593 4,515
Trading derivatives 35,920 36,052
Goodwill 7,875 7,918
Other intangibles 1,974 2,104
Land, buildings and equipment 1,817 1,822
Other assets 21,427 17,299
-------------------------------------------------------------------------
84,239 78,989
-------------------------------------------------------------------------
Total assets $435,153 $422,124
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
-------------------------------------------------------------------------
Deposits
Personal $151,809 $147,561
Banks 8,966 10,162
Business and government 78,267 73,322
Trading 46,641 45,348
-------------------------------------------------------------------------
285,683 276,393
-------------------------------------------------------------------------
Other
Acceptances 10,633 9,279
Obligations related to securities sold short 25,797 24,195
Obligations related to securities sold under
repurchase agreements 17,517 16,574
Trading derivatives 36,309 39,028
Other liabilities 22,365 23,829
-------------------------------------------------------------------------
112,621 112,905
-------------------------------------------------------------------------
Subordinated notes and debentures (Note 6) 11,939 9,449
-------------------------------------------------------------------------
Liabilities for preferred shares and capital
trust securities (Note 7) 1,449 1,449
-------------------------------------------------------------------------
Non-controlling interests in subsidiaries 521 524
-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common shares (millions of shares issued and
outstanding: Jan. 31, 2008 - 719.0 and
Oct. 31, 2007 - 717.8) (Note 8) 6,632 6,577
Preferred shares (millions of shares issued and
outstanding: Jan. 31, 2008 - 35.0 and Oct. 31, 2007
- 17.0) (Note 8) 875 425
Contributed surplus 121 119 Retained earnings 16,499 15,954
Accumulated other comprehensive income (loss) (1,187) (1,671)
-------------------------------------------------------------------------
22,940 21,404
-------------------------------------------------------------------------
Total liabilities and shareholders' equity $435,153 $422,124
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Certain comparative amounts have been reclassified to conform to the
current period's presentation.
The accompanying notes are an integral part of these Interim Consolidated
Financial Statements.
INTERIM CONSOLIDATED STATEMENT OF INCOME (unaudited)
-------------------------------------------------------------------------
For the three months ended
----------------------------
Jan. 31 Jan. 31
(millions of Canadian dollars) 2008 2007
-------------------------------------------------------------------------
Interest income
Loans $3,396 $3,074
Securities
Dividends 260 273
Interest 975 986
Deposits with banks 114 47
-------------------------------------------------------------------------
4,745 4,380
-------------------------------------------------------------------------
Interest expense
Deposits 2,254 2,048
Subordinated notes and debentures 158 108
Preferred shares and capital trust securities 23 30
Other liabilities 522 523
-------------------------------------------------------------------------
2,957 2,709
-------------------------------------------------------------------------
Net interest income 1,788 1,671
-------------------------------------------------------------------------
Other income
Investment and securities services 579 580
Credit fees 101 96
Net securities gains 152 70
Trading income 160 216
Income (loss) from financial instruments designated
as trading under the fair value option (49) (9)
Service charges 260 249
Loan securitizations (Note 5) 76 134
Card services 119 109
Insurance, net of claims 186 254
Trust fees 34 31
Other 198 104
-------------------------------------------------------------------------
1,816 1,834
-------------------------------------------------------------------------
Total revenue 3,604 3,505
-------------------------------------------------------------------------
Provision for credit losses (Note 4) 255 163
-------------------------------------------------------------------------
Non-interest expenses
Salaries and employee benefits 1,171 1,157
Occupancy, including depreciation 181 175
Equipment, including depreciation 144 144
Amortization of other intangibles 122 118
Marketing and business development 110 113
Brokerage-related fees 59 54
Professional and advisory services 111 126
Communications 47 49
Other 283 285
-------------------------------------------------------------------------
2,228 2,221
-------------------------------------------------------------------------
Income before provision for income taxes,
non-controlling interests in subsidiaries and
equity in net income of an associated company 1,121 1,121
Provision for income taxes 235 218
Non-controlling interests in subsidiaries, net of
income taxes 8 47
Equity in net income of an associated company, net
of income taxes 92 65
-------------------------------------------------------------------------
Net income 970 921
Preferred dividends 8 6
-------------------------------------------------------------------------
Net income available to common shareholders $962 $915
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average number of common shares outstanding
(millions) (Note 13)
Basic 718.3 718.3
Diluted 724.6 724.9
Earnings per share (in dollars) (Note 13)
Basic $1.34 $1.27
Diluted 1.33 1.26
Dividends per share (in dollars) 0.57 0.48
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Certain comparative amounts have been reclassified to conform to the
current period's presentation.
The accompanying notes are an integral part of these Interim Consolidated
Financial Statements.
INTERIM CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(unaudited)
-------------------------------------------------------------------------
For the three months ended
----------------------------
Jan. 31 Jan. 31
(millions of Canadian dollars) 2008 2007
-------------------------------------------------------------------------
Common shares (Note 8)
Balance at beginning of period $6,577 $6,334
Proceeds from shares issued on exercise of options 42 34
Shares issued as a result of dividend reinvestment plan 21 19
Impact of shares sold (acquired) in Wholesale Banking (8) 30
-------------------------------------------------------------------------
Balance at end of period 6,632 6,417
-------------------------------------------------------------------------
Preferred shares
Balance at beginning of period 425 425
Share issues 450 -
-------------------------------------------------------------------------
Balance at end of period 875 425
-------------------------------------------------------------------------
Contributed surplus
Balance at beginning of period 119 66
Stock options (Note 11) 2 2
-------------------------------------------------------------------------
Balance at end of period 121 68
-------------------------------------------------------------------------
Retained earnings
Balance at beginning of period 15,954 13,725
Transition adjustment on adoption of Financial
Instruments standards - 80
Net income 970 921
Common dividends (410) (345)
Preferred dividends (8) (6)
Other (7) -
-------------------------------------------------------------------------
Balance at end of period 16,499 14,375
-------------------------------------------------------------------------
Accumulated other comprehensive income (loss), net
of income taxes (Note 10)
Balance at beginning of period (1,671) (918)
Transition adjustment on adoption of Financial
Instruments standards - 426
Other comprehensive income for the period 484 224
-------------------------------------------------------------------------
Balance at end of period (1,187) (268)
-------------------------------------------------------------------------
Total shareholders' equity $22,940 $21,017
-------------------------------------------------------------------------
-------------------------------------------------------------------------
INTERIM CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (unaudited)
-------------------------------------------------------------------------
For the three months ended
----------------------------
Jan. 31 Jan. 31
(millions of Canadian dollars) 2008 2007
-------------------------------------------------------------------------
Net income $970 $921
Other comprehensive income (loss), net of income taxes
Change in unrealized gains and (losses) on
available-for-sale securities, net of hedging
activities(a) 340 49
Reclassification to earnings in respect of
available-for-sale securities(b) (27) (25)
Change in foreign currency translation gains and
(losses) on investments in subsidiaries, net of
hedging activities (c),(d) (231) 323
Change in gains and (losses) on derivative
instruments designated as cash flow hedgese 408 (127)
Reclassification to earnings of (gains) and losses
on cash flow hedges(f) (6) 4
-------------------------------------------------------------------------
Other comprehensive income for the period 484 224
-------------------------------------------------------------------------
Comprehensive income for the period $1,454 $1,145
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(a) Net of income tax expense of $209 million.
(b) Net of income tax expense of $10 million.
(c) Net of income tax benefit of $281 million (2007 - $279 million).
(d) Includes $632 million (2007 - $569 million) of after-tax losses
arising from hedges of the Bank's investment in foreign operations.
(e) Net of income tax expense of $167 million.
(f) Net of income tax expense of $3 million.
Certain comparative amounts have been reclassified to conform to the
current period's presentation.
The accompanying notes are an integral part of these Interim Consolidated
Financial Statements.
INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)
-------------------------------------------------------------------------
For the three months ended
----------------------------
Jan. 31 Jan. 31
(millions of Canadian dollars) 2008 2007
-------------------------------------------------------------------------
Cash flows from (used in) operating activities
Net income $970 $921
Adjustments to determine net cash flows from
(used in) operating activities:
Provision for credit losses 255 163
Depreciation 82 82
Amortization of other intangibles 122 118
Stock options 2 2
Net securities gains (152) (70)
Net gain on securitizations (Note 5) (23) (47)
Equity in net income of an associated company (92) (65)
Non-controlling interests 8 47
Future income taxes 282 170
Changes in operating assets and liabilities:
Current income taxes payable (998) (358)
Interest receivable and payable 48 72
Trading securities 4,014 (2,505)
Unrealized gains and amounts receivable on
derivative contracts 132 974
Unrealized losses and amounts payable on derivative
contracts (2,719) (1,015)
Other (4,753) (2,737)
-------------------------------------------------------------------------
Net cash used in operating activities (2,822) (4,248)
-------------------------------------------------------------------------
Cash flows from (used in) financing activities
Change in deposits 9,290 7,449
Securities sold under repurchase agreements 943 1,942
Securities sold short 1,602 (883)
Issue of subordinated notes and debentures 2,500 2,274
Liability for preferred shares and capital trust
securities - 6
Translation adjustment on subordinated notes and
debentures issued in a foreign currency and other (10) 35
Common shares issued on exercise of options 42 34
Common shares (acquired) sold in Wholesale Banking (8) 30
Dividends paid in cash on common shares (389) (326)
Issuance of preferred shares 443 -
Dividends paid on preferred shares (8) (6)
-------------------------------------------------------------------------
Net cash from financing activities 14,405 10,555
-------------------------------------------------------------------------
Cash flows from (used in) investing activities
Interest-bearing deposits with banks 1,647 39
Activity in available-for-sale, held-to-maturity
and investment securities:
Purchases (9,250) (48,230)
Proceeds from maturities 3,349 40,669
Proceeds from sales 5,361 4,349
Activity in lending activities:
Origination and acquisitions (37,694) (39,496)
Proceeds from maturities 30,344 34,602
Proceeds from sales 161 598
Proceeds from loan securitizations (Note 5) 1,346 3,124
Land, buildings and equipment (77) (97)
Securities purchased under reverse repurchase
agreements (6,586) (1,396)
Acquisitions and dispositions less cash and cash
equivalents acquired - (426)
-------------------------------------------------------------------------
Net cash used in investing activities (11,399) (6,264)
-------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash
equivalents 62 51
-------------------------------------------------------------------------
Net increase in cash and cash equivalents 246 94
Cash and cash equivalents at beginning of period 1,790 2,019
-------------------------------------------------------------------------
Cash and cash equivalents at end of period,
represented by cash and due from banks $2,036 $2,113
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplementary disclosure of cash flow information
Amount of interest paid during the period $2,993 $2,472
Amount of income taxes paid during the period 1,036 398
-------------------------------------------------------------------------
Certain comparative amounts have been reclassified to conform to the
current period's presentation.
The accompanying notes are an integral part of these Interim Consolidated
Financial Statements.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
-------------------------------------------------------------------------
Note 1: BASIS OF PRESENTATION
-------------------------------------------------------------------------
These Interim Consolidated Financial Statements have been prepared in
accordance with Canadian generally accepted accounting principles (GAAP)
and follow the same accounting policies and methods of application as the
Bank's audited Consolidated Financial Statements for the year ended
October 31, 2007, except as described in Note 2. Under GAAP, additional
disclosures are required in the annual financial statements and
accordingly, these Interim Consolidated Financial Statements should be
read in conjunction with the audited Consolidated Financial Statements
for the year ended October 31, 2007 and the accompanying notes included
on pages 82 to 121 of the Bank's 2007 Annual Report. Certain disclosures
are included in the Management Discussion & Analysis (MD&A) as permitted
by GAAP and as discussed on pages 17 to 22 of the MD&A in this report.
These disclosures are shaded in the MD&A and form an integral part of the
Interim Consolidated Financial Statements. The Interim Consolidated
Financial Statements include all adjustments which are, in the opinion of
management, necessary for a fair presentation of the results for the
periods presented.
Note 2: CHANGES IN ACCOUNTING POLICIES
-------------------------------------------------------------------------
Capital Disclosures
Effective November 1, 2007, the CICA's new accounting standard, Section
1535, Capital Disclosures, was implemented, which requires the disclosure
of both qualitative and quantitative information that enables users of
financial statements to evaluate the entity's objectives, policies and
processes for managing capital. The new guidance did not have an effect
on the financial position or earnings of the Bank.
Financial Instruments Disclosures and Presentation
Effective November 1, 2007, the accounting and disclosure requirements of
the CICA's two new accounting standards, Section 3862, Financial
Instruments - Disclosures, and Section 3863, Financial Instruments -
Presentation, were implemented. The new guidance did not have a material
effect on the financial position or earnings of the Bank.
Accounting for Transaction Costs of Financial Instruments Classified
Other Than as Held For Trading
Effective November 1, 2007, the Bank adopted EIC-166, Accounting Policy
Choice for Transaction Costs. This abstract provided clarity around the
application of accounting guidance related to transaction costs that is
codified in Section 3855, Financial Instruments - Recognition and
Measurement. More specifically the abstract contemplated whether an
entity must make one accounting policy choice that applies to all
financial assets and financial liabilities classified other than as held
for trading or whether these transaction costs may be recognized in net
income for certain of these financial assets and liabilities and added to
the carrying amount for other financial assets and liabilities. The new
guidance did not have a material effect on the financial position or
earnings of the Bank.
Note 3: FUTURE CHANGES IN ACCOUNTING POLICIES
-------------------------------------------------------------------------
Goodwill, Intangible Assets and Financial Statement Concepts
The CICA issued a new accounting standard, Section 3064, Goodwill and
Intangible Assets, which clarifies that costs can be deferred only when
they relate to an item that meets the definition of an asset, and as a
result, start-up costs must be expensed as incurred. Section 1000,
Financial Statement Concepts, was also amended to provide consistency
with the new standard. The new and amended standards are effective for
the Bank beginning November 1, 2008. The Bank is currently assessing the
impact of these standards on its Consolidated Financial Statements.
Note 4: LOANS, IMPAIRED LOANS, ALLOWANCE FOR CREDIT LOSSES AND COLLATERAL
-------------------------------------------------------------------------
The Bank maintains an allowance which it considers adequate to absorb all
credit-related losses in a portfolio of instruments which are both on and
off the Consolidated Balance Sheet. Assets in the portfolio which are
included on the Interim Consolidated Balance Sheet are deposits with
banks, loans other than loans designated as trading under the fair value
option, mortgages and acceptances. Items which are not recorded on the
Interim Consolidated Balance Sheet include certain guarantees, letters of
credit and undrawn lines of credit. The allowance, including the
allowance for acceptances and off-balance sheet items, is deducted from
loans in the Consolidated Balance Sheet. The change in the Bank's
allowance for credit losses for the three months ended January 31 is
shown in the table below.
Allowance for Credit Losses
-------------------------------------------------------------------------
Jan. 31, 2008 Jan. 31, 2007
------------------------------------------------------
(millions of Specific General Specific General
Canadian dollars) allowance allowance Total allowance allowance Total
-------------------------------------------------------------------------
Balance at beginning
of period $203 $1,092 $1,295 $176 $1,141 $1,317
Acquisitions of TD
Banknorth (including
Hudson and Interchange)
and VFC - - - - 14 14
Provision for credit
losses 235 20 255 153 10 163
Write-offs (212) - (212) (170) - (170)
Recoveries 32 - 32 31 - 31
Other(1) 6 (14) (8) 7 4 11
-------------------------------------------------------------------------
Allowance for credit
losses at end of
period $264 $1,098 $1,362 $197 $1,169 $1,366
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Includes foreign exchange rate changes.
A loan is past due when a counterparty has failed to make a payment by
the contractual due date. The following table provides aging information
for loans that are past due but not impaired. A grace period has been
incorporated if it is common to a product type and provided to the
counterparties. The grace period represents the additional time period
(e.g. 3 days) beyond the contractual due date during which a counterparty
is permitted to make the payment without the loan being classified as
past due.
Gross Amount of Loans Past Due but not Impaired
-------------------------------------------------------------------------
(millions of 1-30 31-60 61-89 90 days
Canadian dollars) days days days or more Total
-------------------------------------------------------------------------
Residential mortgages $697 $268 $47 $- $1,012
Consumer installment and other
personal loans 2,922 551 111 - 3,584
Credit cards 293 69 38 - 400
Business and government 1,096 88 35 - 1,219
Business and government
designated as trading under
the fair value option - - - - -
-------------------------------------------------------------------------
Total 5,008 976 231 - 6,215
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at January 31, 2008, the fair value of financial collateral held
against loans that were past due but not impaired was $38 million. 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. For impaired loans, an
assessment of the collateral is taken into consideration when estimating
the net realizable amount of the loan.
The carrying value of loans renegotiated during the three months ended
January 31, 2008 that would otherwise be impaired was $5 million.
As at January 31, 2008, the fair value of financial assets accepted as
collateral that the Bank is permitted to sell or repledge in the absence
of default is $19.9 billion. The fair value of financial assets accepted
as collateral that has been sold or repledged (excluding cash collateral)
was $6.6 billion. These transactions are conducted under terms that are
usual and customary to standard lending, and stock borrowing and lending
activities.
Note 5: LOAN SECURITIZATIONS
-------------------------------------------------------------------------
The following tables summarize the Bank's securitization activity for its
own assets securitized. In most cases, the Bank retained responsibility
for servicing the assets securitized.
Securitization Activity
-------------------------------------------------------------------------
For the three months ended
-------------------------------------------------------------------------
Jan. 31, 2008
---------------------------------------------------------
Residential Credit Commercial
(millions of mortgage Personal card mortgage
Canadian dollars) loans loans loans loans Total
-------------------------------------------------------------------------
Gross proceeds $1,346 $1,453 $800 $1 $3,600
Retained interests 23 12 6 - 41
Cash flows received on
retained interests 54 27 14 1 96
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three months ended
-------------------------------------------------------------------------
Jan. 31, 2007
---------------------------------------------------------
Residential Credit Commercial
(millions of mortgage Personal card mortgage
Canadian dollars) loans loans loans loans Total
-------------------------------------------------------------------------
Gross proceeds $2,333 $2,396 $800 $- $5,529
Retained interests 48 32 8 - 88
Cash flows received on
retained interests 41 28 17 - 86
-------------------------------------------------------------------------
The following table summarizes the impact of securitizations on the
Bank's Interim Consolidated Statement of Income.
Securitization Gains and Income on Retained Interests
-------------------------------------------------------------------------
For the three months ended
-------------------------------------------------------------------------
Jan. 31, 2008
---------------------------------------------------------
Residential Credit Commercial
(millions of mortgage Personal card mortgage
Canadian dollars) loans loans loans loans Total
-------------------------------------------------------------------------
Gain (loss) on sale $5 $12 $6 $- $23
Income on retained
interests(1) 24 7 22 - 53
-------------------------------------------------------------------------
Total $29 $19 $28 $- $76
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three months ended
-------------------------------------------------------------------------
Jan. 31, 2007
---------------------------------------------------------
Residential Credit Commercial
(millions of mortgage Personal card mortgage
Canadian dollars) loans loans loans loans Total
-------------------------------------------------------------------------
Gain (loss) on sale $7 $34 $7 $(1) $47
Income on retained
interests(1) 45 13 29 - 87
-------------------------------------------------------------------------
Total $52 $47 $36 $(1) $134
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Excludes income arising from changes in fair values. Unrealized gains
and losses on retained interests arising from changes in fair value
are included in trading income.
The key assumptions used to value the retained interests are as follows:
Key Assumptions
-------------------------------------------------------------------------
2008
-------------------------------------------------------------------------
Residential Credit Commercial
mortgage Personal card mortgage
loans loans loans loans
-------------------------------------------------------------------------
Prepayment rate(1) 20.0% 6.1% 44.0% 8.7%
Excess spread(2) 0.6 1.1 6.9 1.0
Discount rate 5.9 5.8 6.4 8.3
Expected credit losses(3) - - 2.4 0.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2007
-------------------------------------------------------------------------
Residential Credit Commercial
mortgage Personal card mortgage
loans loans loans loans
-------------------------------------------------------------------------
Prepayment rate(1) 20.0% 6.2% 42.5% 9.1%
Excess spread(2) 0.7 1.1 7.0 1.0
Discount rate 6.0 6.0 6.1 5.8
Expected credit losses(3) - - 2.0 0.1
-------------------------------------------------------------------------
(1) Represents monthly payment rate for secured personal and credit card
loans.
(2) The excess spread for credit card loans reflects the net portfolio
yield, which is interest earned less funding costs and losses.
(3) There are no expected credit losses for residential mortgage loans as
the loans are government-guaranteed.
During the three months ended January 31, 2008, there were maturities of
previously securitized loans and receivables of $2,254 million
(three months ended January 31, 2007 - $2,405 million). Proceeds from new
securitizations were $1,346 million for the three months ended
January 31, 2008 (three months ended January 31, 2007 - $3,124 million).
Note 6: SUBORDINATED NOTES AND DEBENTURES
-------------------------------------------------------------------------
Medium Term Notes
On November 1, 2007, the Bank issued $2.5 billion of medium term notes
constituting subordinated indebtedness pursuant to its medium term note
program. The medium term notes will pay a coupon of 5.382% until
November 1, 2012 and the bankers' acceptance rate plus 1.00% thereafter
until maturity on November 1, 2017. The notes are redeemable at the
Bank's option at par on November 1, 2012. The Bank has included the issue
as Tier 2B regulatory capital.
Note 7: LIABILITIES FOR PREFERRED SHARES AND CAPITAL TRUST SECURITIES
-------------------------------------------------------------------------
The Bank's liabilities for preferred shares and capital trust securities
are as follows:
Liabilities
-------------------------------------------------------------------------
(millions of Canadian dollars) Jan. 31, Oct. 31,
2008 2007
-------------------------------------------------------------------------
Preferred Shares
Preferred shares issued by the Bank (thousands of
shares):
Class A - 14,000 Series M $350 $350
Class A - 8,000 Series N 200 200
-------------------------------------------------------------------------
Total preferred shares 550 550
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital Trust Securities(1)
Trust units issued by TD Capital Trust (thousands
of units)
900 Capital Trust Securities - Series 2009 899 899
-------------------------------------------------------------------------
Total Capital Trust Securities 899 899
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total preferred shares and Capital Trust Securities $1,449 $1,449
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) TD Capital Trust II Securities - Series 2012-1 are issued by TD
Capital Trust II (Trust II), whose voting securities are 100% owned
by the Bank. Trust II is a variable interest entity. As the Bank is
not the primary beneficiary of Trust II, the Bank does not
consolidate it. The senior deposit note of $350 million that was
issued to Trust II is reflected in deposits on the Consolidated
Balance Sheet. For regulatory purposes, the $350 million issued by
Trust II is considered as part of the Bank's available capital.
Note 8: SHARE CAPITAL
-------------------------------------------------------------------------
Common Shares
The Bank is authorized by the 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.
Shares Issued and Outstanding
-------------------------------------------------------------------------
For the three months ended
--------------------------------------------
Jan. 31, 2008 Jan. 31, 2007
--------------------------------------------
(millions of shares
and millions of Number of Number of
Canadian dollars) shares Amount shares Amount
-------------------------------------------------------------------------
Common:
Balance at beginning of period 717.8 $6,577 717.4 $6,334
Issued on exercise of options 1.0 42 0.9 34
Issued as a result of dividend
reinvestment plan 0.3 21 0.3 19
Impact of shares (acquired) sold
in Wholesale Banking (0.1) (8) 0.4 30
-------------------------------------------------------------------------
Balance at end of period - common 719.0 $6,632 719.0 $6,417
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Preferred (Class A - Series O,
P, and Q):
Balance at beginning of period 17.0 $425 17.0 $425
Issued during the period 18.0 450 - -
-------------------------------------------------------------------------
Balance at end of period -
preferred 35.0 $875 17.0 $425
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Class A First Preferred Shares, Series P
On November 1, 2007, the Bank issued 10 million Class A First Preferred
Shares, Series P shares for gross cash consideration of $250 million.
Quarterly non-cumulative cash dividends, if declared, will be paid at a
per annum rate of 5.25% per Series P share.
On or after November 1, 2012, the Bank may redeem all, or from time to
time, part of the outstanding Series P shares by payment in cash of
$26.00 per share if redeemed on or prior to October 30, 2013; $25.75 if
redeemed after October 30, 2013 and on or prior to October 30, 2014;
$25.50 if redeemed after October 30, 2014 and on or prior to October 30,
2015; $25.25 if redeemed after October 30, 2015 and on or prior to
October 30, 2016; and $25.00 if redeemed thereafter, together with the
unpaid dividends to the date of redemption.
Class A First Preferred Shares, Series Q
On January 31, 2008, the Bank issued 8 million Class A First Preferred
Shares, Series Q shares for gross cash consideration of $200 million.
Quarterly non-cumulative cash dividends, if declared, will be paid at a
per annum rate of 5.60% per Series Q share.
On or after January 31, 2013, the Bank may redeem all, or from time to
time, part of the outstanding Series Q shares by payment in cash of
$26.00 per share if redeemed on or prior to January 30, 2014; $25.75 if
redeemed after January 30, 2014 and on or prior to January 30, 2015;
$25.50 if redeemed after January 30, 2015 and on or prior to January 30,
2016; $25.25 if redeemed after January 30, 2016 and on or prior to
January 30, 2017; and $25.00 if redeemed thereafter, together with the
unpaid dividends to the date of redemption.
Note 9: REGULATORY CAPITAL
-------------------------------------------------------------------------
The Bank manages its capital under guidelines established by the Office
of the Superintendent of Financial Institutions Canada (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 objectives include:
- Provide sufficient capital to maintain the confidence of investors
and depositors, while providing the Bank's common shareholders with a
satisfactory return.
- Be an appropriately capitalized institution, as measured internally,
defined by regulatory authorities and compared with the Bank's peers.
- Achieve the lowest overall cost of capital consistent with preserving
the appropriate mix of capital elements to meet target capitalization
levels.
The Bank's Total capital consists of two tiers of capital approved under
OSFI's regulatory capital guidelines.
As at January 31, 2008, Tier 1 capital includes items such as common
shares and preferred shares, retained earnings, contributed surplus,
innovative capital instruments and qualifying non-controlling interest in
subsidiaries. Tier 1 capital is reduced by items such as goodwill and net
intangible assets (in excess of the 5% limit) and 50% of the shortfall in
allowances related to the Internal Rating Based (IRB) approach
portfolios.
As at January 31, 2008, Tier 2 capital includes items such as the general
allowance for standardized portfolios and subordinated notes and
debentures. Tier 2 capital is reduced by items such as 50% of the
shortfall in allowances related to IRB approach portfolios and
substantial investments.
During the three months ended January 31, 2008, the Bank complied with
the capital guidelines issued by OSFI under the "International
Convergence of Capital Measurement and Capital Standards - A Revised
Framework" (Basel II). For the comparative period, the Bank complied with
the capital guidelines issued by OSFI under the Basel I Capital Accord
(Basel I). The Bank's regulatory capital position was as follows:
-------------------------------------------------------------------------
(millions of Canadian dollars) Jan. 31, Oct. 31,
2008(1) 2007(1)
(Basel II) (Basel I)
-------------------------------------------------------------------------
Tier 1 capital $15,888 $15,645
Tier 1 capital ratio(2) 10.9% 10.3%
Total capital(3) $22,014 $19,794
Total capital ratio(4) 15.1% 13.0%
Assets-to- capital multiple(5) 18.2 19.7
-------------------------------------------------------------------------
(1) The Bank's capital positions were calculated based on Basel II as at
January 31, 2008 and Basel I as at October 31, 2007, and as a result
may not provide comparable information.
(2) Tier 1 capital ratio is calculated as Tier 1 capital divided by risk-
weighted assets (RWA).
(3) Total capital includes Tier 1 and Tier 2 capital.
(4) Total capital ratio is calculated as Total capital divided by RWA.
(5) The assets-to-capital multiple is calculated as total assets plus
off-balance sheet credit instruments, such as certain letters of
credit and guarantees less investments in associated corporations,
goodwill and net intangibles, divided by Total capital.
OSFI's target Tier 1 and Total capital ratios for Canadian banks are 7%
and 10%, respectively.
Note 10: ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
-------------------------------------------------------------------------
Accumulated other comprehensive income (loss) includes the after-tax
change in unrealized gains and losses on available-for-sale securities,
cash flow hedging activities and foreign currency translation
adjustments.
Accumulated Other Comprehensive Income (Loss), Net of Income Taxes
-------------------------------------------------------------------------
As at As at
Jan. 31, Jan. 31,
(millions of Canadian dollars) 2008 2007
-------------------------------------------------------------------------
Unrealized gain on available-for-sale securities,
net of hedging activities $706 $311
Unrealized foreign currency translation losses on
investments in subsidiaries, net of hedging
activities (2,304) (595)
Gains on derivatives designated as cash flow hedges 411 16
-------------------------------------------------------------------------
Accumulated other comprehensive income (loss) balance
as at January 31 $(1,187) $(268)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Note 11: STOCK BASED COMPENSATION
-------------------------------------------------------------------------
The following table summarizes the compensation expense recognized by the
Bank for stock option awards for the three months ended January 31.
For the three months ended
-------------------------------------------------------------------------
(millions of Canadian dollars) Jan. 31 Jan. 31
2008 2007
-------------------------------------------------------------------------
TD Bank $5 $4
TD Banknorth - 2
-------------------------------------------------------------------------
During the three months ended January 31, 2008, 2.0 million (three months
ended January 31, 2007 - 1.5 million) options were granted by TD Bank
with a weighted average fair value of $10.80 per option (three months
ended January 31, 2007 - $11.46 per option). During the three months
ended January 31, 2007, 27 thousand options were granted by TD Banknorth
with a weighted average fair value of $5.83 per option. On closing of the
going-private transaction on April 20, 2007, TD Banknorth became a
wholly-owned subsidiary of the Bank and TD Banknorth's shares were
delisted from the New York Stock Exchange. As a result, there are no
longer any TD Banknorth-based stock options outstanding post
privatization.
Effective fiscal 2008, the fair value of options granted was estimated at
the date of grant using a binomial tree-based valuation model. Prior to
fiscal 2008, the fair value of options granted was estimated at the date
of grant using the Black-Scholes valuation model. The following
assumptions were used:
For the three months ended
----------------------------
TD Bank Jan. 31 Jan. 31
2008 2007
-------------------------------------------------------------------------
Risk-free interest rate 3.80% 3.90%
Expected option life 5.5 years 5.2 years
Expected volatility 15.9% 19.5%
Expected dividend yield 2.85% 2.92%
-------------------------------------------------------------------------
For the three months ended
----------------------------
TD Banknorth Jan. 31 Jan. 31
2008 2007
-------------------------------------------------------------------------
Risk- free interest rate - 4.45%
Expected option life - 6.0 years
Expected volatility - 15.07%
Expected dividend yield - 2.98%
-------------------------------------------------------------------------
Note 12: EMPLOYEE FUTURE BENEFITS
-------------------------------------------------------------------------
The Bank's pension plans and principal non-pension post-retirement
benefit plans expenses are as follows:
Principal Pension Plan Pension Expense
-------------------------------------------------------------------------
For the three months ended
----------------------------
Jan. 31 Jan. 31
(millions of Canadian dollars) 2008 2007
-------------------------------------------------------------------------
Elements of pension plan expense before adjustments
to recognize the long term nature of the cost:
Service cost - benefits earned $16 $16
Interest cost on projected benefit obligation 30 28
Actual return on plan assets (3) (87)
Plan amendments 7 -
Adjustments to recognize the long-term nature of
plan cost:
Difference between costs arising in the period and
costs recognized in the period in respect of:
Return on plan assets(1) (35) 53
Actuarial (gains) losses(2) - 3
Plan amendments(3) (4) 2
-------------------------------------------------------------------------
Total $11 $15
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) For the three months ended January 31, 2008, includes expected return
on plan assets of $38 million (three months ended January 31, 2007 -
$34 million) less actual return on plan assets of $3 million (three
months ended January 31, 2007 - $87 million).
(2) For the three months ended January 31, 2008, includes loss recognized
of nil (three months ended January 31, 2007 - $3 million) less
actuarial losses on projected benefit obligation of nil (three months
ended January 31, 2007 - nil).
(3) For the three months ended January 31, 2008, includes amortization of
costs for plan amendments of $3 million (three months ended January
31, 2007 - $2 million) less actual cost amendments of $7 million
(three months ended January 31, 2007 - nil).
Other Pension Plans' Expense
-------------------------------------------------------------------------
For the three months ended
----------------------------
Jan. 31 Jan. 31
(millions of Canadian dollars) 2008 2007
-------------------------------------------------------------------------
CT defined benefit pension plan $1 $1
TD Banknorth defined benefit pension plans (1) 2
Supplemental employee retirement plans 8 8
-------------------------------------------------------------------------
Total 8 $11
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Principal Non-Pension Post-Retirement Benefit Plan Expense
-------------------------------------------------------------------------
For the three months ended
----------------------------
Jan. 31 Jan. 31
(millions of Canadian dollars) 2008 2007
-------------------------------------------------------------------------
Elements of non- pension plan expense before
adjustments to recognize the long-term nature of
the cost:
Service cost - benefits earned $3 $3
Interest cost on projected benefit obligation 6 5
Adjustments to recognize the long-term nature of
plan cost:
Difference between costs arising in the period and
costs recognized in the period in respect of:
Actuarial (gains) losses 1 1
Plan amendments (1) (1)
-------------------------------------------------------------------------
Total $9 $8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash Flows
The Bank's contributions to its pension plans and its principal non-
pension post-retirement benefit plans are as follows:
Pension Plan Contributions
-------------------------------------------------------------------------
For the three months ended
----------------------------
Jan. 31 Jan. 31
(millions of Canadian dollars) 2008 2007
-------------------------------------------------------------------------
Principal pension plan $19 $17
CT defined benefit pension plan - 1
TD Banknorth defined benefit pension plan - 47
Supplemental employee retirement plans 4 3
Non- pension post-retirement benefit plan 2 2
-------------------------------------------------------------------------
Total $25 $70
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at January 31, 2008, the Bank expects to contribute an additional
$55 million to its principal pension plan, nil to its CT defined benefit
pension plan, $40 million to its TD Banknorth defined benefit pension
plan, $10 million to its supplemental employee retirement plans and
$7 million to its non-pension post-retirement benefit plan by the end of
the year. However, future contribution amounts may change upon the Bank's
review of the current contribution levels during the year.
Note 13: EARNINGS PER SHARE
-------------------------------------------------------------------------
The Bank's basic and diluted earnings per share at January 31 are as
follows:
Basic and Diluted Earnings per Share
-------------------------------------------------------------------------
For the three months ended
----------------------------
Jan. 31 Jan. 31
2008 2007
-------------------------------------------------------------------------
Basic Earnings per Share
Net income available to common shares ($ millions) $962 $915
Average number of common shares outstanding (millions) 718.3 718.3
Basic earnings per share ($) $1.34 $1.27
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Diluted Earnings per Share Net income available to
common shares ($ millions) $962 $915
Average number of common shares outstanding (millions) 718.3 718.3
Stock options potentially exercisable as determined
under the treasury stock method(1) 6.3 6.6
-------------------------------------------------------------------------
Average number of common shares outstanding - diluted
(millions) 724.6 724.9
-------------------------------------------------------------------------
Diluted earnings per share ($) $1.33 $1.26
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) For the three months ended January 31, 2008, the computation of
diluted earnings per share excluded weighted-average options
outstanding of 985 thousand with a weighted-average exercise price of
$72.67 as the options' exercise prices were greater than the average
market price of the Bank's common shares. For the three months ended
January 31, 2007, all options outstanding were included in the
computation of diluted earnings per share as the options' exercise
prices were less than the average market price of the Bank's common
shares.
Note 14: SEGMENTED INFORMATION
-------------------------------------------------------------------------
The Bank's operations and activities are organized around the following
operating business segments: Canadian Personal and Commercial Banking,
Wealth Management, U.S. Personal and Commercial Banking and Wholesale
Banking. Results for these segments for the three months ended January 31
are presented in the following table:
Results by Business Segment
-------------------------------------------------------------------------
Canadian Personal U.S. Personal and
(millions of and Commercial Wealth Commercial
Canadian dollars) Banking Management Banking(1)
-------------------------------------------------------------------------
For the three Jan. 31 Jan. 31 Jan. 31 Jan. 31 Jan. 31 Jan. 31
months ended 2008 2007 2008 2007 2008 2007
-------------------------------------------------------------------------
Net interest income $1,414 $1,307 $88 $77 $312 $341
Other income 733 703 482 474 140 145
-------------------------------------------------------------------------
Total revenue 2,147 2,010 570 551 452 486
Provision for
(reversal of) credit
losses 172 138 - - 26 17
Non-interest expenses 1,096 1,059 379 364 238 299
-------------------------------------------------------------------------
Income (loss) before
provision for
(benefit of) income
taxes 879 813 191 187 188 170
Provision for (benefit
of) income taxes 281 269 63 65 61 55
Non-controlling
interests in
subsidiaries, net of
income taxes - - - - - 51
Equity in net income
of an associated
company, net of
income taxes - - 88 64 - -
-------------------------------------------------------------------------
Net income (loss) $598 $544 $216 $186 $127 $64
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total assets
(billions of
Canadian dollars)
- balance sheet $154.8 $133.7 $14.0 $14.8 $60.3 $63.2
- securitized 43.2 46.7 - - - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(millions of Wholesale
Canadian dollars) Banking(2) Corporate(2) Total
For the three Jan. 31 Jan. 31 Jan. 31 Jan. 31 Jan. 31 Jan. 31
months ended 2008 2007 2008 2007 2008 2007
-------------------------------------------------------------------------
Net interest income $192 $203 $(218) $(257) $1,788 $1,671
Other income 416 432 45 80 1,816 1,834
-------------------------------------------------------------------------
Total revenue 608 635 (173) (177) 3,604 3,505
Provision for
(reversal of) credit
losses 56 24 1 (16) 255 163
Non-interest expenses 321 332 194 167 2,228 2,221
-------------------------------------------------------------------------
Income (loss) before
provision for
(benefit of) income
taxes 231 279 (368) (328) 1,121 1,121
Provision for (benefit
of) income taxes 68 82 (238) (253) 235 218
Non-controlling
interests in
subsidiaries, net of
income taxes - - 8 (4) 8 47
Equity in net income
of an associated
company, net of
income taxes - - 4 1 92 65
-------------------------------------------------------------------------
Net income (loss) $163 $197 $(134) $(70) $970 $921
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total assets
(billions of
Canadian dollars)
- balance sheet $184.6 $172.1 $21.5 $24.4 $435.2 $408.2
- securitized - - (15.3) (16.7) 27.9 30.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Commencing May 1, 2007, the results of TD Bank U.S.A. Inc.
(previously reported in the Corporate segment for the period from the
second quarter 2006 to the second quarter 2007 and in Wealth
Management segment prior to the second quarter of 2006) are included
in the U.S. Personal and Commercial Banking segment prospectively.
Prior periods have not been restated as the impact is not material.
(2) The taxable equivalent basis (TEB) increase to net interest income
and provision for income taxes reflected in the Wholesale Banking
segment results is reversed in the Corporate segment.
Note 15: DERIVATIVES
-------------------------------------------------------------------------
Hedge accounting results were as follows:
Hedge Accounting Results
-------------------------------------------------------------------------
For the For the
three three
months months
ended ended
Jan. 31, Jan. 31,
(millions of Canadian dollars) 2008 2007
-------------------------------------------------------------------------
Fair value hedges Gain (loss) arising from hedge
ineffectiveness $6.9 $(0.4)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash flow hedges (Loss) gain arising from hedge
ineffectiveness $(0.3) $0.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Portions of derivative gains (losses) that were excluded from the
assessment of hedge effectiveness for fair value and cash flow hedging
activities are included in the Consolidated Statement of Income and are
not significant for the three months ended January 31, 2008.
During the three months ended January 31, 2008, there were no firm
commitments that no longer qualified as hedges.
Over the next twelve months, the Bank expects an estimated $130 million
in net gains reported in other comprehensive income as at January 31,
2008 to be reclassified to net income. The maximum length of time over
which the Bank is hedging its exposure to the variability in future cash
flows from anticipated transactions is 18 years. During the three months
ended January 31, 2008, there were no forecasted transactions that failed
to occur.
Note 16: CONTINGENCIES
-------------------------------------------------------------------------
The two principal legal actions regarding Enron to which the Bank is a
party are the securities class action and the bankruptcy proceeding. In
2006, the Bank settled the bankruptcy court claims in this matter for
approximately $145 million (US$130 million). As at January 31, 2008, the
total contingent litigation reserve for Enron-related claims was
approximately $415 million (US$413 million).
The Bank and its subsidiaries are involved in various other legal actions
in the ordinary course of business, many of which are loan-related. In
management's opinion, the ultimate disposition of these actions,
individually or in the aggregate, will not have a material adverse effect
on the financial condition of the Bank.
Note 17: RISK MANAGEMENT
-------------------------------------------------------------------------
The risk management policies and procedures of the Bank are provided in
the MD&A. The shaded sections of the risk management section, included on
pages 17 to 22 of the MD&A, relating to credit, market and liquidity
risks are an integral part of the Interim Consolidated Financial
Statements.
Note 18: RELATED-PARTY TRANSACTIONS
-------------------------------------------------------------------------
During the three months ended January 31, 2008, the Bank purchased
certain securities with a notional value of approximately $300 million at
par from a fund that is managed by the Bank. The Bank immediately
recognized a securities loss of $45 million that was recorded in the
Wholesale Banking segment.
SHAREHOLDER AND INVESTOR INFORMATION
Shareholder Services
For shareholder inquiries relating to missing dividends, lost share
certificates, estate questions, address changes to the share register,
dividend bank account changes or the dividend reinvestment program,
please contact our transfer agent: CIBC Mellon Trust Company, P.O. Box
7010, Adelaide Street Postal Station, Toronto, Ontario, M5C 2W9,
1-800-387-0825 or 416-643-5500 (www.cibcmellon.com or
inquiries@cibcmellon.com).
For all other shareholder inquiries, please contact TD Shareholder
Relations at 416-944-6367 or 1-866-756-8936 or email tdshinfo@td.com.
Internet website: www.td.com
Internet e-mail: customer.service@td.com
Designation of Eligible Dividends
The Toronto-Dominion Bank for the purposes of the Income Tax Act, Canada
and any similar provincial legislation advises that the dividend declared
for the quarter ending April 30, 2008 and all future dividends will be
eligible dividends unless indicated otherwise.
General Information
Contact Corporate & Public Affairs:
(416) 982-8578
Products and services: Contact TD Canada Trust, 24 hours a day, seven
days a week:
1-866-567-8888
French: 1-866-233-2323
Cantonese/Mandarin: 1-800-328-3698
Telephone device for the deaf: 1-800-361-1180
On-line Investor Presentation: Full quarterly report and a presentation
to investors and analysts (available on February 28, 2008) are accessible
on the TD Bank Financial Group website, www.td.com/investor/index.jsp.
Quarterly Earnings Conference Call: a replay of the teleconference is
available from February 28, 2008 to March 27, 2008. Please call
1-877-289-8525 toll free, in Toronto (416) 640-1917,
passcode 21262847 (pound key).
Webcast of Call: A live audio and video internet webcast of TD Bank
Financial Group's quarterly earnings conference call with investors and
analysts is scheduled on February 28, 2008 at 3:00 p.m. ET. The call is
webcast via the TD Bank Financial Group website at www.td.com/investor.
In addition, recordings of the presentations are archived on TD's website
and will be available for replay for a period of approximately one month.
Annual Meeting
Thursday, April 3, 2008
9:30 a.m. MDT
Hyatt Regency Calgary
Calgary, Alberta
About TD Bank Financial Group
The Toronto-Dominion Bank and its subsidiaries are collectively known as
TD Bank Financial Group. TD Bank Financial Group serves more than
14 million customers in four key businesses operating in a number of
locations in key financial centres around the globe: Canadian Personal
and Commercial Banking, including TD Canada Trust; Wealth Management,
including TD Waterhouse and an investment in TD Ameritrade; U.S. Personal
and Commercial Banking through TD Banknorth; and Wholesale Banking,
including TD Securities. TD Bank Financial Group also ranks among the
world's leading on-line financial services firms, with more than
4.5 million on-line customers. TD Bank Financial Group had
CDN$435 billion in assets, as of January 31, 2008. The Toronto-Dominion
Bank trades on the Toronto and New York Stock Exchanges under the symbol
"TD", as well as on the Tokyo Stock Exchange.
For further information: Colleen Johnston, Group Head Finance and Chief Financial Officer, (416) 308-9030; Tim Thompson, Senior Vice President, Investor Relations, (416) 308-9030; or Simon Townsend, Senior Manager, Corporate Communications, (416) 944-7161
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