TD Bank Group Newsroom
TD Bank Financial Group Reports Third Quarter 2008 Results; Raises Dividend
THIRD QUARTER FINANCIAL HIGHLIGHTS, compared with the third quarter a
year ago:
- Reported diluted earnings per share(1) were $1.21, compared with
$1.51.
- Adjusted diluted earnings per share(2) were $1.35, compared with
$1.60.
- Reported net income(1) was $997 million, compared with
$1,103 million.
- Adjusted net income(2) was $1,115 million, compared with
$1,164 million.
YEAR-TO-DATE FINANCIAL HIGHLIGHTS, nine months ended July 31, 2008,
compared with the corresponding period a year ago:
- Reported diluted earnings per share(1) were $3.65, compared with
$3.98.
- Adjusted diluted earnings per share(2) were $4.12, compared with
$4.34.
- Reported net income(1) was $2,819 million, compared with
$2,903 million.
- Adjusted net income(2) was $3,148 million, compared with
$3,168 million.
THIRD QUARTER ADJUSTMENTS (ITEMS OF NOTE)
The third quarter reported diluted earnings per share figures include the
following items of note:
- Amortization of intangibles of $111 million after tax (13 cents
per share), compared with $91 million after tax (13 cents per share)
in the third quarter last year. The $111 million was net of a related
tax benefit in the future tax liability of $21 million, arising as
the combined overall tax rate for U.S. Personal and Commercial
Banking declined as a result of the Commerce Bancorp, Inc. (Commerce)
acquisition.
- A gain of $22 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 gain of
$30 million after tax (4 cents per share) in the same quarter last
year.
- Restructuring and integration charges of $15 million after tax
(2 cents per share), relating to the acquisition of Commerce.
- A negative impact of $14 million (2 cents per share) on the provision
for income taxes of a reduction in future income tax assets
associated with the Commerce acquisition.
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 under the "How the Bank
Reports" section.
TORONTO, Aug. 28 /CNW/ - TD Bank Financial Group (TDBFG) today announced
its financial results for the third quarter ended July 31, 2008. Overall
results for the quarter reflected solid earnings contributions from TDBFG's
personal and commercial banking operations in both Canada and the United
States and its Wealth Management segment, while the performance of Wholesale
Banking was affected by continuing challenges in financial markets. TDBFG also
announced its quarterly dividend will be raised to 61 cents from 59 cents per
fully paid common share for the quarter ended October 31, 2008, representing
an increase of 3.4%.
"Our retail businesses in both Canada and the U.S. led the way for us
again this quarter - delivering over $1 billion in combined net income," said
Ed Clark, TD Bank Financial Group President and Chief Executive Officer. "Our
strategy is delivering steady performance in tough market conditions while
allowing us to continue investing in future growth."
THIRD QUARTER BUSINESS SEGMENT PERFORMANCE
Canadian Personal and Commercial Banking
TD Canada Trust posted record earnings of $644 million in the third
quarter, up 8% over the same period last year. The quarter was defined by
strong volume growth across most Canadian Personal and Commercial Banking
operating businesses. Core banking, real estate secured lending, credit cards
and business banking led earnings growth.
"Our TD Canada Trust franchise achieved a record quarter - in volume
growth, customer satisfaction levels and efficiency. These very strong results
were delivered while we continued to invest in the business, opening 11 new
branches and supporting our longer-hours strategy," said Clark. "We are
certainly feeling good about these results and our position as the leader in
service and convenience in banking, which was highlighted by TDCT's winning of
the J.D. Power customer-satisfaction award for the third year in a row."
Wealth Management
Wealth Management, including TDBFG's equity share in TD Ameritrade,
earned $201 million in the quarter, up 9% year over year. As previously
announced, TD Ameritrade contributed $74 million in earnings to the segment.
In Canada, strong volumes in discount brokerage were moderated by a
lower-commission strategy, while current market conditions impacted revenues
in full-service brokerage.
"We are pleased with how the investments we've made in our Wealth
Management platform are positioning us for future growth," said Clark. "As we
expand our U.S. wealth business, we look forward to taking advantage of our
diversified offering to become the number-one wealth management provider to TD
Bank customers."
U.S. Personal and Commercial Banking
U.S. Personal and Commercial Banking, which now includes the earnings
contribution from Commerce, generated $273 million in adjusted net income. The
combination of TD Banknorth and Commerce (to be known as TD Bank) saw growth
in commercial loans while overall asset quality remained solid. As previously
announced, the rebranding as TD Bank, America's Most Convenient Bank, will
begin in the fall of 2008 and is expected to be completed in 2009.
"We're very pleased to see our U.S. Personal and Commercial operations
coming together as planned, exceeding our earnings expectations and creating a
first-rate U.S. franchise that is positioned to grow organically and deliver
long-term value to TD shareholders," said Clark. "We expect the quality of
TD Bank's loan portfolio will continue to set us apart as we operate in a
challenging environment."
Wholesale Banking
Wholesale Banking earned $37 million in the third quarter. As previously
announced, TD Securities identified incorrectly priced financial instruments
that led to a cumulative impact in the quarter of $96 million before tax.
Wholesale's underlying business performance in the quarter showed strength in
fixed income trading, while equity trading revenues and securities gains were
lower.
"This was a tough quarter for our wholesale bank. The mispricing that
occurred is particularly disappointing and not consistent with our strong
risk-management culture. We're continuing to work on a thorough review of our
risk practices across the organization to ensure we minimise the risk of this
kind of thing happening again," said Clark. "Looking forward, TD Securities
remains focused on producing high-quality earnings and solidifying its
position as a top-three dealer in Canada."
Conclusion
"Our retail businesses on both sides of the border - which again produced
more than 90% of our earnings this quarter - continued to perform very well,
providing TD with a solid base of consistent earnings," said Clark. "In what
continues to be a tough environment for banks, we're showing our strategy is
working."
"Our commitment to growth is reflected in the increase to our dividend.
We've said all along that our dividend will grow in line with our earnings
over the medium term. The increase this quarter demonstrates the Board's
confidence in the strength and stability of our earnings as we head into
2009."
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
From time to time, the Bank makes written and oral forward-looking
statements, including in this document, 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 forward-looking information contained in this document is
presented for the purpose of assisting our shareholders and analysts in
understanding our financial position as at and for the periods ended on the
dates presented and our strategic priorities and objectives, and may not be
appropriate for other purposes. 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 (including future accounting changes) and methods the Bank uses to
report its financial condition, including uncertainties associated with
critical accounting assumptions and estimates; changes to our credit ratings;
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 and nine months
ended July 31, 2008, compared with the corresponding periods. 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 August 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.gov (EDGAR filers
section).
FINANCIAL HIGHLIGHTS
-------------------------------------------------------------------------
For the nine
For the three months ended months ended
(millions of -------------------------------- ---------------------
Canadian dollars, July 31 Apr. 30 July 31 July 31 July 31
except as noted) 2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Results of
operations
Total revenue $4,037 $3,388 $3,682 $11,029 $10,731
Provision for
credit losses 288 232 171 775 506
Non-interest
expenses 2,701 2,206 2,216 7,135 6,734
Net income -
reported(1) 997 852 1,103 2,819 2,903
Net income -
adjusted(1) 1,115 973 1,164 3,148 3,168
Economic profit(2) 321 283 578 1,073 1,447
Return on common
equity - reported 13.4% 13.4% 21.0% 14.8% 18.9%
Return on invested
capital(2) 13.1% 13.2% 18.7% 14.2% 17.4%
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Financial position
Total assets $508,839 $503,621 $403,890 $508,839 $403,890
Total risk-weighted
assets(3) 184,674 178,635 150,783 184,674 150,783
Total shareholders'
equity 31,293 30,595 21,003 31,293 21,003
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Financial ratios -
reported
Efficiency ratio 66.9% 65.1% 60.2% 64.7% 62.8%
Tier 1 capital to
risk-weighted assets 9.5 9.1 10.2 9.5 10.2
Provision for credit
losses as a % of net
average loans 0.54 0.49 0.39 0.54 0.39
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Common share
information -
reported (Canadian
dollars)
Per share
Basic earnings $1.22 $1.12 $1.53 $3.68 $4.02
Diluted earnings 1.21 1.12 1.51 3.65 3.98
Dividends 0.59 0.59 0.53 1.75 1.54
Book value 36.75 36.70 28.65 36.75 28.65
Closing share price 62.29 66.11 68.26 62.29 68.26
Shares outstanding
(millions)
Average basic 804.0 747.7 719.5 756.8 719.0
Average diluted 811.0 753.7 726.9 763.2 725.9
End of period 807.3 802.9 718.3 807.3 718.3
Market capitalization
(billions of
Canadian dollars) $50.3 $53.1 $49.0 $50.3 $49.0
Dividend yield 3.7% 3.5% 2.9% 3.6% 2.9%
Dividend payout ratio 48.5% 56.2% 34.6% 48.8% 38.4%
Price to earnings
multiple 12.1 12.1 13.6 12.1 13.6
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Common share
information -
adjusted (Canadian
dollars)
Per share
Basic earnings $1.37 $1.33 $1.61 $4.15 $4.39
Diluted earnings 1.35 1.32 1.60 4.12 4.34
Dividend payout ratio 43.3% 49.2% 32.8% 43.6% 35.1%
Price to earnings
multiple 11.3 11.5 12.3 11.3 12.3
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(1) Reported and adjusted results are explained under the "How the Bank
Reports" section, which includes a 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),
issued by the Basel Committee on Banking Supervision for calculating
risk-weighted assets (RWA) and regulatory capital starting
November 1, 2007. Prior period 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 approximately 17 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, as well as the Bank's global insurance operations; 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 Commerce (to be known together as TD Bank); and Wholesale
Banking, including TD Securities. The Bank also ranks among the world's
leading on-line financial services firms, with more than 5.5 million on-line
customers. The Bank had $509 billion in assets as at July 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 symbol: TD, as
well as on the Tokyo Stock Exchange.
How the Bank Reports
The Bank prepares its consolidated financial statements in accordance
with GAAP and 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 relate to
items which management does not believe are indicative of underlying business
performance. The Bank believes that adjusted results provide the reader with a
better understanding of how management views the Bank's performance. The items
of note are listed in the table on the following page. As explained, adjusted
results are different from reported results determined in accordance with
GAAP. Adjusted results, items of note and related terms used in this document
are not defined terms under GAAP and, therefore, may not be comparable to
similar terms used by other issuers.
The following tables provide reconciliation between the Bank's reported
and adjusted results.
Operating Results - Reported
-------------------------------------------------------------------------
For the nine
For the three months ended months ended
-------------------------------- ---------------------
(millions of July 31 Apr. 30 July 31 July 31 July 31
Canadian dollars) 2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Net interest income $2,437 $1,858 $1,783 $6,083 $5,116
Other income 1,600 1,530 1,899 4,946 5,615
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Total revenue 4,037 3,388 3,682 11,029 10,731
Provision for
credit losses (288) (232) (171) (775) (506)
Non-interest
expenses (2,701) (2,206) (2,216) (7,135) (6,734)
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Income before
provision for
income taxes,
non-controlling
interests in
subsidiaries and
equity in net
income of an
associated company 1,048 950 1,295 3,119 3,491
Provision for
income taxes (122) (160) (248) (517) (700)
Non-controlling
interests in
subsidiaries, net
of income taxes (8) (9) (13) (25) (87)
Equity in net income
of an associated
company, net of
income taxes 79 71 69 242 199
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Net income - reported 997 852 1,103 2,819 2,903
Preferred dividends (17) (11) (2) (36) (15)
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Net income available
to common
shareholders -
reported $980 $841 $1,101 $2,783 $2,888
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-------------------------------------------------------------------------
Reconciliation of Non-GAAP Financial Measures(1)
Adjusted Net Income to Reported Results
-------------------------------------------------------------------------
Operating results - For the nine
adjusted For the three months ended months ended
-------------------------------- ---------------------
(millions of July 31 Apr. 30 July 31 July 31 July 31
Canadian dollars) 2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Net interest income $2,437 $1,858 $1,783 $6,083 $5,116
Other income(2) 1,566 1,529 1,853 4,886 5,566
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Total revenue 4,003 3,387 3,636 10,969 10,682
Provision for
credit losses(3) (288) (232) (171) (758) (506)
Non-interest
expenses(4) (2,512) (2,041) (2,085) (6,659) (6,287)
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Income before
provision for
income taxes,
non-controlling
interests in
subsidiaries and
equity in net
income of an
associated company 1,203 1,114 1,380 3,552 3,889
Provision for
income taxes(5) (175) (220) (282) (670) (844)
Non-controlling
interests in
subsidiaries, net
of income taxes(6) (8) (9) (14) (25) (111)
Equity in net income
of an associated
company, net of
income taxes(7) 95 88 80 291 234
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Net income - adjusted 1,115 973 1,164 3,148 3,168
Preferred dividends (17) (11) (2) (36) (15)
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Net income available
to common shareholders
- adjusted 1,098 962 1,162 3,112 3,153
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Items of note
affecting net income,
net of income taxes:
Amortization of
intangibles(8) (111) (92) (91) (278) (254)
TD Banknorth
restructuring,
privatization and
merger-related
charges(9) - - - - (43)
Restructuring and
integration
charges relating
to the Commerce
acquisition(10) (15) (30) - (45) -
Change in fair
value of credit
default swaps
hedging the
corporate loan
book, net of
provision for
credit losses(11) 22 1 30 48 32
Other tax items(12) (14) - - (34) -
Provision for
insurance claims(13) - - - (20) -
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Total items of note (118) (121) (61) (329) (265)
-------------------------------------------------------------------------
Net income available
to common
shareholders -
reported $980 $841 $1,101 $2,783 $2,888
-------------------------------------------------------------------------
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(1) Certain comparative amounts have been reclassified to conform to
the presentation adopted in the current period.
(2) Adjusted other income excludes the following items of note:
third quarter 2008 - $34 million gain due to change in fair value
of credit default swaps (CDS) hedging the corporate loan book;
second quarter 2008 - $1 million gain due to change in fair value
of CDS hedging the corporate loan book; first quarter 2008 -
$55 million gain due to change in fair value of CDS hedging the
corporate loan book; $30 million provision for insurance claims,
as explained in footnote 13; third quarter 2007 - $46 million gain
due to change in fair value of CDS hedging the corporate loan
book.
(3) Adjusted provision for credit losses excludes the following item
of note: first quarter 2008 - $17 million related to the portion
that was hedged via the CDS.
(4) Adjusted non-interest expenses excludes the following items of
note: third quarter 2008 - $166 million amortization of
intangibles; $23 million restructuring and integration charges, as
explained in footnote 10; second quarter 2008 - $117 million
amortization of intangibles; $48 million restructuring and
integration charges; first quarter 2008 - $122 million
amortization of intangibles; third quarter 2007 - $131 million
amortization of intangibles.
(5) For reconciliation between reported and adjusted provision for
income taxes, refer to the reconciliation table on page 12.
(6) Adjusted non-controlling interests excludes the following items of
note: third quarter 2007 - $1 million amortization of intangibles.
(7) Adjusted equity in net income of an associated company excludes
the following items of note: third quarter 2008 - $16 million
amortization of intangibles; second quarter 2008 - $17 million
amortization of intangibles; first quarter 2008 - $16 million
amortization of intangibles; third quarter 2007 - $11 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, Commerce
Bancorp, Inc (Commerce) acquisition in 2008, 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. See additional information in the
amortization of intangibles table on the following page.
(9) The TD Banknorth restructuring, privatization and merger-related
charges include the following: $31 million restructuring charge,
which primarily consisted of employee severance costs, the costs
of amending certain executive employment and award agreements and
write-down of long-lived assets due to impairment, included in
U.S. Personal and Commercial Banking; $4 million restructuring
charge related to the transfer of functions from TD Bank USA, N.A.
(TD Bank USA) to TD Banknorth, included in the Corporate segment;
$5 million privatization charges, which primarily consisted of
legal and investment banking fees, included in U.S. Personal and
Commercial Banking; and $3 million merger-related charges related
to conversion and customer notices in connection with the
integration of Hudson and Interchange with TD Banknorth, included
in U.S. Personal and Commercial Banking. In the Interim
Consolidated Statement of Income, the restructuring, privatization
and merger-related charges are included in non-interest expenses.
(10) As a result of the acquisition of Commerce and related
restructuring and integration initiatives undertaken, the Bank
incurred restructuring and integration charges. Restructuring
charges consisted of employee severance costs, the costs of
amending certain executive employment and award agreements and the
write-down of long-lived assets due to impairment. Integration
charges consisted of costs related to employee retention, external
professional consulting charges and marketing (including customer
communication and rebranding). In the Interim Consolidated
Statement of Income, the restructuring and integration charges are
included in non-interest expenses.
(11) The Bank purchases CDS to hedge the credit risk in Wholesale
Banking's corporate lending portfolio. These CDS do not qualify
for hedge accounting treatment and 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 prior 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).
(12) Third quarter 2008 - As a result of the Commerce acquisition, the
combined overall tax rate for U.S. Personal and Commercial Banking
segment declined, resulting in a negative impact on future income
tax assets of $14 million related to non-intangible future income
tax assets. First quarter 2008 - The negative impact of the
scheduled reductions in the income tax rate, resulting in a
decrease of $20 million in the net future income tax assets.
(13) The provision for insurance claims relates to a court decision in
Alberta. The Alberta government's legislation effectively capping
minor injury insurance claims was challenged and held to be
unconstitutional earlier this calendar year. 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(1)
-------------------------------------------------------------------------
For the nine
For the three months ended months ended
-------------------------------- ---------------------
July 31 Apr. 30 July 31 July 31 July 31
(Canadian dollars) 2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Diluted - reported $1.21 $1.12 $1.51 $3.65 $3.98
Items of note
affecting income
(as above) 0.14 0.16 0.09 0.43 0.36
Items of note
affecting EPS
only(2) - 0.04 - 0.04 -
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Diluted - adjusted $1.35 $1.32 $1.60 $4.12 $4.34
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Basic - reported $1.22 $1.12 $1.53 $3.68 $4.02
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(1) EPS is computed by dividing net income available to common
shareholders by the weighted-average number of shares outstanding
during the period. As a result, the sum of the quarterly EPS may not
equal to year-to-date EPS.
(2) The diluted EPS figures do not include Commerce earnings for the
month of April 2008 due to a one month lag between fiscal quarter
ends, while share issuance on close resulted in a one-time negative
earnings impact of 4 cents per share.
Amortization of Intangibles, Net of Income Taxes
-------------------------------------------------------------------------
For the nine
For the three months ended months ended
-------------------------------- ---------------------
(millions of July 31 Apr. 30 July 31 July 31 July 31
Canadian dollars) 2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Canadian Personal
and Commercial
Banking $46 $37 $41 $104 $135
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U.S. Personal and
Commercial Banking:
Reported
amortization of
intangibles 42 32 32 107 72
Less: non-controlling
interest - - 1 - 9
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Net amortization
of intangibles 42 32 31 107 63
TD Ameritrade
(included in
equity in net
income of an
associated company) 16 17 11 49 35
Other 7 6 8 18 21
-------------------------------------------------------------------------
Amortization of
intangibles, net of
income taxes(1) $111 $92 $91 $278 $254
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 equity 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 non-GAAP financial measures as these are not
defined terms under GAAP. Readers are cautioned 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 results, items of note
and related terms are discussed in the "How the Bank Reports" section.
Reconciliation of Economic Profit, Return on Invested Capital and
Adjusted Net Income
-------------------------------------------------------------------------
For the nine
For the three months ended months ended
-------------------------------- ---------------------
(millions of July 31 Apr. 30 July 31 July 31 July 31
Canadian dollars) 2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Average common
equity $29,065 $25,593 $20,771 $25,198 $20,478
Average cumulative
goodwill/intangible
assets amortized,
net of income taxes 4,171 4,082 3,857 4,091 3,785
-------------------------------------------------------------------------
Average invested
capital $33,236 $29,675 $24,628 $29,289 $24,263
Rate charged for
invested capital 9.3% 9.3% 9.4% 9.3% 9.4%
-------------------------------------------------------------------------
Charge for invested
capital $(777) $(679) $(584) $(2,039) $(1,706)
-------------------------------------------------------------------------
Net income available
to common
shareholders -
reported $980 $841 $1,101 $2,783 $2,888
Items of note
affecting net
income, net of
income taxes 118 121 61 329 265
-------------------------------------------------------------------------
Net income available
to common
shareholders -
adjusted $1,098 $962 $1,162 $3,112 $3,153
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Economic profit $321 $283 $578 $1,073 $1,447
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Return on invested
capital 13.1% 13.2% 18.7% 14.2% 17.4%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Significant Events in 2008
Acquisition of Commerce Bancorp, Inc.
On March 31, 2008, the Bank acquired 100% of the outstanding shares of
Commerce for purchase consideration of $8.5 billion, paid in cash and common
shares. As a result, $57.1 billion of assets (including additional goodwill of
approximately $6.4 billion and intangible assets of $1.5 billion) and
$48.6 billion of liabilities were included in the Bank's Consolidated Balance
Sheet. The allocation of the purchase price is subject to finalization.
Commerce is reported in the U.S. Personal and Commercial Banking segment.
For details, see Note 20 to the Interim Consolidated Financial Statements
for the quarter ended July 31, 2008.
The fiscal periods of Commerce and the Bank are not co-terminus.
Commerce's results for each calendar quarter are consolidated on a one month
lag with the Bank's results for the fiscal quarter. This is in the normal
course of the Bank's financial reporting and TD Banknorth is reported in a
similar manner. Because the Commerce transaction closed on March 31, due to
the one month lag, the Bank's second quarter results did not include any
results of Commerce. However, $48 million before tax ($30 million after tax)
restructuring and integration charges incurred in April 2008 were included in
the Bank's results for the quarter ended April 30, 2008 because they represent
material U.S. Personal and Commercial Banking events for the quarter ended
April 30, 2008.
As previously disclosed, the projected earnings of U.S. Personal and
Commercial Banking segment is estimated to be at least $750 million in 2008
and a minimum of $1,200 million in 2009(1).
(1) Projected results for 2008 are equal to the nine months ended
July 31, 2008 annualized including management's estimate of the
expected contribution from the Commerce transaction, taking into
account expected synergies and excluding restructuring and
integration charges. The 2009 estimate is equal to the 2008 estimate,
excluding the contribution from the Commerce transaction, increased
by our target growth rate range of 7% to 10%, plus management's
estimate of the contribution from the Commerce transaction. Projected
results exclude restructuring and integration charges, anticipated to
total US$420 million before tax, the majority of which will be taken
in 2008 and 2009. Commerce's future earnings and all other estimates
are subject to risks and uncertainties that may cause actual results
to differ materially. See the "Caution regarding forward-looking
statements" included in the Bank's press release dated April 21,
2008, which is available on the Bank's website at www.td.com, as well
as on SEDAR at www.sedar.com and on the SEC's website at www.sec.gov
(EDGAR filers section).
FINANCIAL RESULTS OVERVIEW
Performance Summary
An overview of the Bank's performance on an adjusted basis for the third
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 purposes 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.
Reported and adjusted results and items of note are explained under the "How
the Bank Reports" section.
- Adjusted diluted earnings per share for the nine months ended
July 31, 2008 were down 5% from the same period last year. The Bank's
goal is to grow adjusted earnings per share by 7% to 10% over the
longer term.
- Adjusted return on risk-weighted assets for the nine months ended
July 31, 2008 was 2.6%, down from 2.9% in 2007.
- Total shareholder return for the twelve months ended July 31, 2008
was (5.5)%, above the peer average of (14.5)%.
Net Income
Year-over-year comparison
-------------------------
Reported net income for the current quarter was $997 million, down
$106 million, or 10%, compared with the third quarter last year. Adjusted net
income was $1,115 million, a decline of $49 million or 4%. The decrease in
adjusted net income was due to a decline in Wholesale Banking and Corporate
segment earnings, partially offset by higher earnings generated from U.S.
Personal and Commercial Banking, and Canadian Personal and Commercial Banking.
Wholesale Banking net income was down due to the difficult capital markets
environment resulting in lower trading revenue and securities gains. U.S.
Personal and Commercial Banking earnings were higher, largely due to the
first-time inclusion of Commerce results. Canadian Personal and Commercial
Banking delivered earnings growth driven largely by strong volume growth
across most banking products.
Prior quarter comparison
------------------------
Reported net income increased $145 million, or 17%, compared with the
prior quarter. Adjusted net income for the quarter increased by $142 million
or 15%. The increase in adjusted net income was due to increased earnings in
most segments, partially offset by a decline in Wholesale Banking and
Corporate segment. Wholesale Banking net income was impacted by difficult
capital markets environment resulting in lower trading revenue and securities
gains. U.S. Personal and Commercial Banking earnings were higher, largely due
to the first-time inclusion of Commerce results. Canadian Personal and
Commercial Banking delivered earnings growth, driven largely by strong volume
growth across most banking products.
Year-to-date comparison
-----------------------
On a year-to-date basis, reported net income of $2,819 million decreased
$84 million, or 3%, compared with the same period last year. Adjusted net
income of $3,148 million decreased $20 million, or 1%. The decrease in
adjusted net income was primarily driven by lower Wholesale Banking earnings
due to challenging operating environments and a higher loss recorded in the
Corporate segment. These decreases were largely offset by higher core earnings
in Canadian Personal and Commercial Banking, the first-time inclusion of
Commerce results in U.S. Personal and Commercial Banking, and higher earnings
in TD Ameritrade.
Net Interest Income
Year-over-year comparison
-------------------------
Net interest income for the quarter was $2,437 million, an increase of
$654 million, or 37%, compared with the third quarter last year. The growth
was largely driven by U.S. Personal and Commercial Banking, with positive
contributions from the Canadian Personal and Commercial Banking and Wholesale
Banking segments. U.S. Personal and Commercial Banking net interest income
increased primarily due to the first-time inclusion of Commerce results.
Canadian Personal and Commercial Banking increased primarily due to strong
volume growth across most banking products, partially offset by a 9 basis
point (bps) decline in margin on average earning assets to 2.98%.
Prior quarter comparison
------------------------
Net interest income increased by $579 million, or 31%, compared with the
previous quarter. The increase was driven primarily by U.S. Personal and
Commercial Banking due to the first-time inclusion of Commerce results, with
positive contributions from all other segments.
Year-to-date comparison
-----------------------
On a year-to-date basis, net interest income of $6,083 million increased
$967 million, or 19%, compared with the same period last year, due to growth
across most segments. Canadian Personal and Commercial Banking net interest
income increased primarily due to strong volume growth in real estate secured
lending and deposits, which was partially offset by an 8 bps decline in margin
on average earning assets to 2.97%. U.S. Personal and Commercial Banking net
interest income increased primarily due to the first-time inclusion of
Commerce results.
Other Income
Year-over-year comparison
-------------------------
Reported other income for the third quarter was $1,600 million, down
$299 million, or 16%, compared with the third quarter of last year. On an
adjusted basis, other income was $1,566 million, lower by $287 million or 16%.
The decrease in adjusted other income was driven by a $494 million decline in
Wholesale Banking due to lower trading revenue and advisory fees as the
capital markets businesses were impacted by difficult market conditions. The
decrease was partially offset by an increase in Canadian Personal and
Commercial Banking and U.S. Personal and Commercial Banking other income,
driven by higher personal deposit and card services fee growth and the
first-time inclusion of Commerce results.
Prior quarter comparison
------------------------
Reported other income increased $70 million, or 5%, compared with the
prior quarter. Adjusted other income was $37 million, or 2%, above the prior
quarter. The increase in adjusted other income was due to increases in the
Canadian Personal and Commercial Banking, U.S. Personal and Commercial Banking
and Wealth Management segments; partially offset by a decrease in Wholesale
Banking resulting from weaker equity trading revenue and lower securities
gains.
Year-to-date comparison
-----------------------
Reported other income of $4,946 million decreased $669 million, or 12%,
compared with the same period last year. Prior year reported other income
included the favourable impact of higher gains due to the change in fair value
of CDS used to hedge the corporate loan book. Year-to-date adjusted other
income was down $680 million, or 12%, from the previous year. The decrease in
adjusted other income was due to a decrease of $894 million in Wholesale
Banking driven by weak trading revenue and lower security gains. Wealth
Management and Corporate segments experienced marginal declines in other
income. These declines were partially offset by higher other income in U.S.
Personal and Commercial Banking due to the first-time inclusion of Commerce
results, and higher fee income, primarily from personal deposit and credit
card growth in Canadian Personal and Commercial Banking.
Provision for Credit Losses
Year-over-year comparison
-------------------------
During the quarter, the Bank recorded a provision for credit losses of
$288 million, an increase of $117 million compared with the third quarter last
year, primarily due to higher specific provisions in the Canadian Personal and
Commerial Banking and Wholesale Banking segments and higher general provisions
in the U.S. Personal and Commercial Banking segment.
Prior quarter comparison
------------------------
Provision for credit losses for the third quarter was up $56 million from
$232 million in the prior quarter. The increase was primarily due to higher
specific provisions in Wholesale Banking and higher general provisions in the
U.S. Personal and Commercial Banking segment.
Year-to-date comparison
-----------------------
On a year-to-date basis, provision for credit losses increased
$269 million, from $506 million in the same period last year. The increase was
primarily due to higher specific provisions in the Canadian Personal and
Commercial Banking and Wholesale Banking segments, and higher general
provisions in the U.S. Personal and Commercial Banking segment.
Provision for Credit Losses
-------------------------------------------------------------------------
For the nine
For the three months ended months ended
-------------------------------- ---------------------
(millions of July 31 Apr. 30 July 31 July 31 July 31
Canadian dollars) 2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Net new specifics
(net of reversals) $260 $244 $181 $771 $586
Recoveries (30) (33) (40) (95) (108)
-------------------------------------------------------------------------
Provision for credit
losses - specifics 230 211 141 676 478
Change in general
allowance
VFC 16 16 12 47 34
U.S. Personal and
Commercial Banking 42 5 18 51 (6)
Other - - - 1 -
-------------------------------------------------------------------------
Total $288 $232 $171 $775 $506
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Non-Interest Expenses and Efficiency Ratio
Year-over-year comparison
-------------------------
Reported non-interest expenses for the third quarter were $2,701 million,
an increase of $485 million, or 22%, compared with the third quarter last
year. Adjusted non-interest expenses of $2,512 million, increased
$427 million, or 20%, compared with the third quarter last year. This increase
was largely driven by growth in U.S. Personal and Commercial Banking resulting
from the first-time inclusion of Commerce results, as well as growth in
Canadian Personal and Commercial Banking.
The reported efficiency ratio was 66.9%, compared with 60.2% in the third
quarter last year. The Bank's adjusted efficiency ratio was 62.8%, compared
with 57.3% in the same period last year.
Prior quarter comparison
------------------------
Reported non-interest expenses increased $495 million, or 22%, compared
with the prior quarter. Adjusted non-interest expenses increased $471 million,
or 23%. The increase was a result of higher expenses, primarily in U.S.
Personal and Commercial Banking due to the first-time inclusion of Commerce
results.
The reported efficiency ratio was 66.9%, compared with 65.1% in the prior
quarter. The Bank's adjusted efficiency ratio was 62.8% compared with 60.3% in
the prior quarter.
Year-to-date comparison
-----------------------
On a year-to-date basis, reported non-interest expenses of $7,135 million
were up $401 million, or 6%, compared with the same period last year, with the
growth in amortization of intangibles accounting for $44 million of the
increase. The current year-to-date reported expenses included $71 million of
restructuring and integration charges attributable to the Commerce acquisition
while the prior year-to-date period included $67 million in charges related to
the privatization of TD Banknorth and the transfer of functions from TD Bank
USA, N.A. to TD Banknorth. Adjusted non-interest expenses were $6,660 million,
an increase of $373 million, or 6%, due to increases in the Canadian Personal
and Commercial Banking, U.S. Personal and Commercial Banking, Wealth
Management and Corporate segments. Canadian Personal and Commercial Banking
expenses increased due to investments in new branches, higher staffing costs
associated with longer branch hours and higher employee compensation. U.S.
Personal and Commercial Banking accounted for the greatest portion of the
year-to-date increase, primarily due to the first-time inclusion of Commerce
results.
The reported efficiency ratio was 64.7%, compared with 62.8% in the same
period last year. The Bank's adjusted efficiency ratio was 60.7%, compared to
58.9% in the same period last year.
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 reported effective tax rate was 11.6% for the third quarter,
compared with 19.2% in the same quarter last year, and 16.8% in the prior
quarter. On a year-to-date basis, the Bank's reported effective tax rate was
16.6%, compared with 20.1% in the same period last year. The period over
period tax rate reduction was primarily due to a significantly lower effective
tax rate on international operations, which includes the tax synergies related
to the Commerce acquisition.
Taxes
-------------------------------------------------------------------------
For the three months ended
---------------------------------------------
(millions of July 31 Apr. 30 July 31
Canadian dollars) 2008 2008 2007
-------------------------------------------------------------------------
Income taxes at
Canadian statutory
income tax rate $343 32.7% $310 32.7% $452 34.9%
Increase (decrease)
resulting from:
Dividends received (93) (8.9) (79) (8.3) (92) (7.1)
Rate differentials on
international
operations (126) (12.0) (69) (7.3) (103) (8.0)
Other - net (2) (0.2) (2) (0.3) (9) (0.6)
-------------------------------------------------------------------------
Provision for income taxes
and effective income
tax rate - reported $122 11.6% $160 16.8% $248 19.2%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
----------------------------------------------------------
For the nine months ended
------------------------------
(millions of July 31 July 31
Canadian dollars) 2008 2007
----------------------------------------------------------
Income taxes at
Canadian statutory
income tax rate $1,019 32.7% $1,218 34.9%
Increase (decrease)
resulting from:
Dividends received (258) (8.3) (262) (7.5)
Rate differentials on
international
operations (279) (8.9) (250) (7.2)
Other - net 35 1.1 (6) (0.1)
----------------------------------------------------------
Provision for income taxes
and effective income
tax rate - reported $517 16.6% $700 20.1%
----------------------------------------------------------
----------------------------------------------------------
The Bank's adjusted effective tax rate was 14.5% for the third quarter,
compared with 20.4% in the same quarter last year, and 19.7% in the prior
quarter. On a year-to-date basis, the Bank's adjusted effective tax rate was
18.9%, compared with 21.7% in the same period last year.
Reconciliation of Adjusted Provision for Income Taxes
-------------------------------------------------------------------------
For the nine
For the three months ended months ended
-------------------------------- ---------------------
(millions of July 31 Apr. 30 July 31 July 31 July 31
Canadian dollars) 2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Provision for income
taxes - reported $122 $160 $248 $517 $700
Increase (decrease)
resulting from
items of note:
Amortization of
intangibles 71 42 50 176 133
TD Banknorth
restructuring,
privatization
and merger-
related charges - - - - 28
Restructuring and
integration
charges relating
to the Commerce
acquisition 8 18 - 26 -
Change in fair
value of credit
default swaps
hedging the
corporate loan
book, net of
provision for
credit losses (12) - (16) (25) (17)
Other tax items (14) - - (34) -
Provision for
insurance claims - - - 10 -
-------------------------------------------------------------------------
Tax effect - items
of note 53 60 34 153 144
-------------------------------------------------------------------------
Provision for income
taxes - adjusted $175 $220 $282 $670 $844
Effective income
tax rate -
adjusted 14.5% 19.7% 20.4% 18.9% 21.7%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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, including TD Banknorth and Commerce, and
Wholesale Banking. The Bank's other activities are grouped into the Corporate
segment. Effective the third quarter of 2008, U.S. insurance and credit card
businesses were transferred to the Canadian Personal and Commercial Banking
segment, and the U.S. wealth management businesses to the Wealth Management
segment for management reporting purposes to align with how these businesses
are now being managed on a North American basis. Prior periods have not been
reclassified as the impact was not material. 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 Annual Report 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 financial
measures, see page 7. Segmented information also appears in Note 15.
Net interest income within Wholesale Banking is calculated on a taxable
equivalent basis (TEB), which means that the value of non-taxable or
tax-exempt income, including dividends, is adjusted to its equivalent
before-tax value. Using TEB allows the Bank to measure income from all
securities and loans consistently and makes for a more meaningful comparison
of net interest income with similar institutions. The TEB adjustment reflected
in the Wholesale Banking segment is eliminated in the Corporate segment. The
TEB adjustment for the quarter was $129 million, compared with $161 million in
the third quarter last year, and $107 million in the prior quarter. On a
year-to-date basis, the TEB adjustment was $371 million, compared with $417
million in the same period last year.
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 quarter was
$644 million, an increase of $47 million, or 8%, compared with the third
quarter last year, and an increase of $62 million, or 11%, compared with the
prior quarter. The annualized return on invested capital was 31%, up from 28%
in the third quarter last year and 29% in the prior quarter.
Net income for the nine months ended July 31, 2008 was $1,824 million, an
increase of $143 million, or 9%, compared with the same period last year. The
return on invested capital, on a year-to-date basis, was 30%, compared with
27% in same period last year.
Revenue for the quarter was $2,262 million, which grew by $161 million,
or 8%, compared with the third quarter last year, due to strong volume growth
across most banking products, particularly in deposits, real estate secured
lending and credit cards. The inclusion of revenue from the U.S. credit card
business contributed to the growth as well. Revenue increased by $128 million,
or 6%, compared with the prior quarter, due mainly to more calendar days in
the current quarter and volume growth in real estate secured lending and
credits cards. On a year-to-date basis, revenue was $6,543 million, which
increased by $446 million, or 7%, compared with the same period last year, due
to good volume growth in deposits and real estate secured lending. Higher fee
income, primarily from personal deposit and credit card growth, and deposit
fee initiatives also contributed to the year-over-year growth. Margin on
average earning assets for the quarter decreased by 9 bps to 2.98%, compared
with the third quarter last year due to continued higher funding costs, price
competition in high-yield savings and term deposits and customer product
preference towards lower margin products. Margin on average earning assets
increased 2 bps compared with the prior quarter, and decreased by 8 bps to
2.97 on a year-to-date basis.
Compared with the third quarter last year, real estate secured lending
volume (including securitizations) grew by $15.3 billion, or 11%; personal
deposit volume grew by $10.3 billion, or 10%; and consumer loans volume grew
by 11% to $17.6 billion. Business deposits volume increased by $3.8 billion,
or 9.7%, and business loans and acceptances volume grew by $2.7 billion or
13.8%. Gross originated insurance premiums grew by $48 million or 7%. As at
May 2008, personal deposit market share was 21.2% and personal lending market
share was 19.9%. Small business lending (credit limits of less than $250,000)
market share as at March 31, 2008 was 18.6%.
Provision for credit losses for the quarter was $194 million, which
increased by $43 million, or 28%, compared with the third quarter last year.
Personal banking provision for credit losses of $179 million was $32 million
higher than the third quarter last year, primarily due to higher personal
lending and credit card volumes. Business banking provision for credit losses
was $15 million for the quarter, compared with $4 million in the third quarter
last year. Annualized provision for credit losses as a percentage of credit
volume was 0.38%, an increase of 5 bps, compared with the third quarter last
year. Provision for credit losses increased by $3 million, or 2%, compared
with the prior quarter. Personal banking provisions increased $4 million, or
2%, compared with the prior quarter primarily due to the first time inclusion
of the U.S. credit card business. Excluding the impact of the U.S. credit card
business, personal banking provisions improved mostly from credit cards and
real estate secured lending. Business banking provisions decreased slightly by
$1 million, compared with the prior quarter. On a year-to-date basis,
provision for credit losses was $557 million, which increased by $125 million,
or 29%, compared with the same period last year. Personal banking provisions
of $520 million increased $106 million, or 26%, compared with the same period
last year, primarily due to higher volume, while business banking provisions
amounted to $37 million, compared with $18 million in the same period last
year.
Non-interest expenses for the quarter were $1,129 million, which
increased by $79 million, or 8%, compared with the third quarter last year. On
a year-to-date basis, non-interest expenses were $3,320 million, which
increased by $178 million, or 6%, compared with the same period last year.
Primary drivers of the expense growth were investments in new branches, higher
staffing costs associated with longer branch hours and higher employee
compensation. Non-interest expenses increased by $34 million compared with the
prior quarter, mainly due to higher seasonal business volume-related costs.
The average full time equivalent (FTE) staffing levels increased by 1,876, or
6%, compared with the third quarter last year, and 776, or 2%, compared with
the prior quarter. On a year-to-date basis, FTE staffing levels increased by
1,647, or 5%, compared with the same period last year. The growth was
primarily from increases in branch sales and service personnel, continued
growth in the insurance business, as well as the inclusion of our U.S.
insurance and credit card businesses during the quarter. The efficiency ratio
for the current quarter was 49.9%, which was in line with the third quarter
last year of 50.0% and relatively flat compared with the prior quarter ratio
of 51.3%. On a year-to-date basis, the efficiency ratio improved to 50.7%,
compared with 51.5% in the same period last year.
Revenue growth is expected to be relatively stable in the near term.
While margins and volume growth continue to be vulnerable to economic
pressures, we believe that, over time, revenue growth will continue to benefit
from increasing our leading position in branch hours, customer service, and
new branch openings. Provision for credit losses on both personal and business
banking loans, in aggregate, is expected to grow, in line with the underlying
volume growth and will further increase if economic conditions continue to
worsen. Expenses will continue to be managed to ensure spending supports
long-term earnings growth.
Wealth Management
Wealth Management's net income for the third quarter was $201 million,
which represented an increase of $16 million, or 9%, compared with the third
quarter last year, and an increase of $19 million, or 10%, compared with the
prior quarter. The annualized return on invested capital for the quarter was
19% flat to the third quarter last year and to the prior quarter. Net income
in Global Wealth Management (excluding TD Ameritrade) was $127 million, flat
compared with the third quarter last year, and an increase of $12 million, or
10%, compared with the prior quarter due to stronger performance in discount
brokerage, mutual funds and the advice channels. The Bank's reported
investment in TD Ameritrade generated net income of $74 million, an increase
of $15 million, or 25%, compared with the third quarter last year and an
increase of $7 million, or 10%, compared with the prior quarter. Strong core
earnings growth was partially offset by the impact of the stronger Canadian
dollar. For its third quarter ended June 30, 2008, TD Ameritrade delivered net
income of US$204 million, up 29% from the same period last year and 9% above
the prior quarter.
Net income for the nine months ended July 31, 2008 was $599 million, an
increase of $31 million, or 5%, compared with the same period last year. The
year-to-date increase in net income included results from the Bank's
investment in TD Ameritrade, which generated $229 million of net income
compared with $186 million in the same period last year. On a year-to-date
basis, the return on invested capital was 20%, flat compared with the same
period last year.
Revenue for the quarter was $609 million, which increased by $22 million,
or 4%, compared with the third quarter last year, primarily due to the
inclusion of the U.S. wealth management businesses. Excluding this, revenue
increased in discount brokerage due to higher trade volumes as a result of
strategic pricing changes introduced last year and increased net interest
income, primarily due to growth in client cash deposits and margin loans,
partially offset by lower fees in the mutual funds business. Revenue increased
by $51 million, or 9%, compared with the prior quarter, primarily due to the
inclusion of the U.S. wealth management businesses and other items including a
combination of higher transactional revenue, net interest income, higher
management fees from mutual funds and on higher assets in the advice channels.
On a year-to-date basis, revenue was $1,737 million, which was flat compared
with the same period last year, primarily due to the inclusion of the U.S.
wealth management businesses and other items such as higher trade volumes in
discount brokerage and the new mutual fund administration fee, offset by lower
commissions in discount brokerage and current market conditions impacting new
issues and transactional revenues in full-service brokerage.
Expenses for the quarter were $421 million, which represented an increase
of $26 million, or 7%, compared with the third quarter last year, and
$34 million, or 9%, compared with the prior quarter, primarily due the
inclusion of the U.S. wealth management businesses and other items such as the
continued investment in growing our sales force. On a year-to-date basis,
expenses were $1,187 million, which increased by $35 million, or 3%, compared
with the same period last year, mainly due the inclusion of U.S. wealth
management businesses and other items such as the new mutual fund
administration fee and the continued investment in growing the sales force in
our advice-based businesses.
Assets under management of $180 billion at July 31, 2008 increased
$20 billion, or 13%, from October 31, 2007, primarily due to the inclusion of
U.S. wealth management businesses and other items such as the addition of net
new client assets and additional mutual fund assets under management from TD
Ameritrade, which were partially offset by the impact of market-related
declines. Assets under administration totalled $197 billion at the end of the
quarter, increasing by $12 billion, or 6%, from October 31, 2007, primarily
due to the inclusion of U.S. wealth management businesses and other items such
as the addition of net new client assets, which were partially offset by
declines driven by capital markets volatility.
Wealth Management is anticipated to continue to be impacted by volatile
capital markets for the balance of the fiscal year. Investment in
client-facing advisors, products and technology continues in order to ensure
that the business grows for the future.
Wealth Management
-------------------------------------------------------------------------
For the nine
For the three months ended months ended
-------------------------------- ---------------------
(millions of July 31 Apr. 30 July 31 July 31 July 31
Canadian dollars) 2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Global Wealth(1) $127 $115 $126 $370 $382
TD Ameritrade 74 67 59 229 186
-------------------------------------------------------------------------
Net income $201 $182 $185 $599 $568
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Effective the third quarter of 2008, the Bank transferred the U.S.
wealth management businesses to the Wealth Management segment for
management reporting purposes. Prior periods have not been
reclassified as the impact was not material to segment results.
U.S. Personal and Commercial Banking
The acquisition of Commerce closed last quarter and the results of
Commerce operations were included for the first time this quarter. Effective
this quarter, the results of the wealth management, insurance and credit card
business lines previously included in the U.S. Personal and Commercial Banking
segment were transferred to the Canadian Personal and Commercial Banking and
Wealth Management segments to align with how these businesses are now being
managed on a North American basis. Prior periods have not been reclassified as
the amounts are not material to the segment results.
U.S. Personal and Commercial Banking's reported net income for the
quarter was $244 million, compared with $109 million in the third quarter last
year, and $100 million in the prior quarter. Adjusted net income for the
quarter was $273 million, compared with $109 million in the third quarter last
year and $130 million in the prior quarter. Adjusted net income for the
quarter excludes $15 million of after-tax charges for restructuring and
integration costs and a $14 million tax expense for a reduction in the overall
tax rates applicable to future tax assets, both related directly to the
Commerce acquisition. Adjusted net income for the prior quarter excluded a
$30 million after-tax charge for restructuring and integration costs incurred
in connection with the Commerce acquisition. There were no items of note
affecting earnings in the third quarter last year. The quarter-over-quarter
and year-over-year increase in adjusted net income was due to the first-time
inclusion of Commerce results. The annualized return on invested capital was
6.2%, compared with 4.7% in the third quarter last year and 5.8% in the prior
quarter.
Reported net income for the nine months ended July 31, 2008 was
$471 million, compared with $196 million in the same period last year. On a
year-to-date basis, adjusted net income was $530 million, up from $235 million
in the same period last year; due largely to the Commerce acquisition as well
as an increased ownership percentage starting in April 2007 due to the
privatization of TD Banknorth. On a year-to-date basis, the return on invested
capital was 6.0%, compared with 4.3% in the same period last year.
Revenue for the quarter was $1.0 billion, an increase of $543 million, or
112%, compared with the third quarter last year, primarily due to the
acquisition of Commerce. Excluding Commerce and inter-segment business
transfers, revenue in U.S. dollars increased slightly compared with the prior
year due to higher fee income and solid lending growth partially offset by
margin compression. Revenue increased by $551 million, or 116%, compared with
the prior quarter, primarily due to the first-time inclusion of Commerce.
Excluding Commerce and inter-segment business transfers, revenue in U.S.
dollars declined slightly from the prior quarter due primarily to the gain
recorded in the second quarter related to the Visa IPO. On a year-to-date
basis, revenue increased $480 million, or 33%, compared with the same period
last year, primarily due to the addition of Commerce. Excluding Commerce,
year-to-date revenue in U.S. dollars increased, primarily due to growth in fee
income and the Visa IPO gain. Margin on average earning assets increased from
3.86% to 3.92%, compared with the third quarter last year, and increased
19 bps compared with the prior quarter. On a year-to-date basis, the margin on
average earning assets decreased by 6 bps from 3.90% to 3.84%, compared with
the same period last year. The addition of Commerce including the higher
yielding securities portfolio contributed to the higher margin. Excluding
Commerce, margins were slightly lower.
Provision for credit losses for the quarter was $76 million which
increased by $43 million, or 130%, compared with the third quarter last year,
and by $30 million, or 65%, compared with the prior quarter. The increased
provision for credit losses was due to the Commerce acquisition and continued
softness in real estate markets. Asset quality remains solid. Net impaired
loans increased by $104 million compared with the third quarter last year
primarily due to the inclusion of $97 million of net impaired loans from
Commerce on close. Net impaired loans increased by $38 million compared with
the prior quarter due to higher impaired commercial loans in the mid-Atlantic
region. Net impaired loans as a percentage of total loans and leases was
0.66%, compared with 0.61% as at the end of the prior quarter and 0.76% as at
the end of the third quarter last year.
Reported non-interest expenses for the quarter were $610 million, an
increase of $335 million, or 122%, from the third quarter last year and an
increase of $316 million, or 107%, over the prior quarter. On an adjusted
basis, non-interest expenses for the quarter were $587 million, an increase of
$312 million, or 113%, compared with the third quarter last year and an
increase of $341 million, or 139%, over the prior quarter. On a year-to-date
basis, adjusted non-interest expenses were $1.1 billion, an increase of
$191 million, or 22%, compared with the same period last year. These increases
were primarily due to the Commerce acquisition partially offset by the impact
of the strengthening Canadian dollar; in U.S. dollars, year-to-date adjusted
expenses increased 38%. The Commerce acquisition increased average FTE
staffing levels by approximately 12 thousand compared with the prior periods.
The efficiency ratio for the quarter on a reported basis was 59.5% for the
quarter, compared with 56.9% in the third quarter last year and 61.9% in the
prior quarter. On an adjusted basis, the efficiency ratio for the quarter was
57.2%, compared with 56.9% in the same period last year and 51.7% in the prior
quarter. On a year-to-date basis, the reported efficiency ratio was 58.5%,
compared with 65.0% in the same period last year, and the adjusted efficiency
ratio was 54.8%, compared with 59.7% in the same period last year.
Management continues to focus on asset quality, organic growth of loans
and deposits, and on the ongoing integration of the TD Banknorth and Commerce
organizations. We remain committed to protecting and enhancing our combined
customer base during the extended integration period and all significant
decisions regarding integration matters must consider the effect on the
customer experience. The conversion of operating systems remains on track for
the latter part of 2009. Although the banking market in the U.S. remains
challenging, and there is continuing uncertainty of the ongoing market issues
related to subprime real estate lending and related issues, we expect to be
able to achieve our previously communicated target earnings of at least
$750 million for the current fiscal year and a minimum of $1.2 billion for
2009. For more detail, see the Bank's press release dated April 21, 2008,
which is available on the Bank's website at www.td.com, as well as on SEDAR at
www.sedar.com and on the SEC's at www.sec.gov (EDGAR filers section).
Wholesale Banking
Wholesale Banking reported net income for the quarter of $37 million, a
decrease of $216 million, or 85%, compared with the third quarter last year,
and a decrease of $56 million, or 60%, compared with the prior quarter.
Wholesale Banking results this quarter included a $96 million before tax
($65 million after tax) cumulative impact related to incorrectly priced
financial instruments and favourable tax items. The annualized return on
invested capital was 4% in the current quarter, compared with 37% in the third
quarter last year and 11% in the prior quarter.
Net income for the nine months ended July 31, 2008 was $293 million, down
$374 million, or 56%, while the return on invested capital was 12%, compared
with 34% for the same period last year.
Wholesale Banking revenue was derived primarily from capital markets,
investing and corporate lending activities. Revenue for the quarter was
$328 million, compared with $692 million in the third quarter last year and
$428 million in the prior quarter. The capital markets businesses generate
revenue from advisory, underwriting fees, trading, facilitation and execution
services. Capital markets revenue decreased from the third quarter last year,
primarily due to the cumulative impact related to incorrectly priced financial
instruments noted above, weaker credit and equity trading revenue as well as
lower advisory revenue, partially offset by very strong revenue in interest
rate trading. Interest rate trading generated strong revenue, mainly driven by
interest rates volatility and higher client activity. Credit trading revenue
declined from strong revenues in the prior year due to weakness in credit
markets and lower liquidity. Equity trading revenue declined primarily due to
weaker equity markets and lower non-taxable transaction revenue. A decline in
overall capital markets activity led to lower advisory revenue. Capital
markets revenue decreased from the prior quarter, primarily due to weaker
equity trading revenue, partially offset by stronger revenue in interest rate
trading. The equity investment portfolio posted lower securities gains this
quarter compared with the third quarter last year and the prior quarter due to
weaker equity markets and lower realizations from merchant banking
investments. Corporate lending revenue decreased compared with the third
quarter last year and the prior quarter, primarily due to higher funding
costs.
On a year-to-date basis, revenue was $1,364 million, a decrease of
$605 million, or 31%, compared with the same period last year, primarily due
to lower credit and equity trading revenue, weaker M&A revenue and lower
securities gains.
Provision for credit losses was comprised of allowances for credit losses
and accrual costs for credit protection. Provision for credit losses was
$30 million in the quarter, compared with $8 million in the third quarter last
year and $10 million in the prior quarter. The provision for this quarter
includes specific allowances of $19 million primarily related to a single
credit exposure in the merchant banking portfolio. The third quarter last year
included a $3 million recovery in the merchant banking portfolio. On a
year-to-date basis, provision for credit losses was $96 million, an increase
of $52 million compared with the same period last year, mainly due to higher
provisions in merchant banking. Wholesale Banking continues to proactively
manage its credit risk and currently holds $2.4 billion in notional CDS
protection.
Expenses for the quarter were $281 million, a decrease of $45 million, or
14%, compared with the third quarter last year, and a decrease of $10 million,
or 3%, from the prior quarter, mainly due to lower variable compensation. On a
year-to-date basis, expenses were $893 million, a decrease of $94 million, or
10%, compared with the same period last year. The efficiency ratio for the
quarter was 86%, compared with 47% in the third quarter last year and 68% in
the prior quarter. On a year-to-date basis, the efficiency ratio was 66%,
compared with 50% in the same period last year.
Overall, Wholesale Bank had a weak third quarter driven by the charge
related to incorrectly priced financial instruments, a lower net income
contribution from the equity investment portfolio, and weaker capital markets
activity. We expect the operating environment to remain challenging which may
lead to continued weak capital market activity and lower trading revenue
relative to the prior year. Our 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's reported net loss was $129 million for the quarter,
compared with a reported net loss of $41 million in the third quarter last
year and a reported net loss of $105 million in the prior quarter. The
adjusted net loss for the quarter was $40 million, compared with adjusted net
income of $20 million in the same quarter last year and an adjusted net loss
of $14 million in the previous quarter. Compared with last year, the increase
in net loss of $60 million on an adjusted basis was driven by higher
unallocated corporate expenses and costs associated with increased corporate
financing activity, partially offset by tax benefits. The current quarter
adjusted net loss was $26 million higher than the prior quarter, which also
resulted from higher unallocated corporate expenses, partially offset by tax
benefits. Unallocated corporate expenses were higher due to the timing of
expense recoveries and higher capital taxes.
The Corporate segment's reported net loss was $368 million for the nine
months ended July 31, 2008. On an adjusted basis, the year-to-date net loss
was $98 million or $115 million higher than last year, primarily due to higher
unallocated corporate expenses, a decrease in securitization activity and
costs related to increased corporate financing activity.
The difference between reported and adjusted net income for the corporate
segment was due to items of note as outlined below. These items are described
more fully on page 6.
Reconciliation of Corporate Segment Reported and Adjusted Net Income
-------------------------------------------------------------------------
For the nine
For the three months ended months ended
-------------------------------- ---------------------
(millions of July 31 Apr. 30 July 31 July 31 July 31
Canadian dollars) 2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Corporate segment net
income/(loss) -
reported $(129) $(105) $(41) $(368) $(209)
-------------------------------------------------------------------------
Items of note
affecting net
income, net of
income taxes:
Amortization of
intangibles 111 92 91 278 254
Change in fair
value of credit
default swaps
hedging the
corporate loan
book, net of
provision for
credit losses (22) (1) (30) (48) (32)
Other tax items - - - 20 -
Provision for
insurance claims - - - 20 -
Restructuring
charges - - - - 4
-------------------------------------------------------------------------
Total items of note 89 91 61 270 226
-------------------------------------------------------------------------
Corporate segment net
income/(loss) -
adjusted $(40) $(14) $20 $(98) $17
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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
-------------------------------------------------------------------------
June 30, Sept. 30,
(millions of U.S. dollars) 2008 2007
-------------------------------------------------------------------------
Assets
Receivables from brokers, dealers and clearing
organizations $5,694 $6,750
Receivables from clients, net of allowance for
doubtful accounts 8,644 7,728
Other assets 5,356 3,614
-------------------------------------------------------------------------
Total assets 19,694 18,092
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities
Payable to brokers, dealers and clearing
organizations 8,881 8,387
Payable to clients 4,743 5,314
Other liabilities 3,320 2,236
-------------------------------------------------------------------------
Total liabilities 16,944 15,937
-------------------------------------------------------------------------
Stockholders' equity $2,750 $2,155
-------------------------------------------------------------------------
Total liabilities and stockholders' equity $19,694 $18,092
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Condensed Consolidated Statements of Income
-------------------------------------------------------------------------
For the nine
For the three months ended months ended
-------------------------------- ---------------------
(millions of U.S.
dollars, except June 30 June 30 June 30 June 30
per share amounts) 2008 2007 2008 2007
-------------------------------------------------------------------------
Revenues
Net interest revenue $132 $139 $419 $415
Fee-based and other revenue 492 403 1,469 1,187
-------------------------------------------------------------------------
Total revenue 624 542 1,888 1,602
-------------------------------------------------------------------------
Expenses
Employee compensation
and benefits 129 115 367 321
Other 167 172 537 563
-------------------------------------------------------------------------
Total expenses 296 287 904 884
-------------------------------------------------------------------------
Other income 0 0 1 5
-------------------------------------------------------------------------
Pre-tax income 328 255 985 723
Provision for income taxes 124 96 353 278
-------------------------------------------------------------------------
Net income(1) 204 159 632 445
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per share - basic $0.34 $0.27 $1.06 $0.74
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earning per share - diluted $0.34 $0.26 $1.05 $0.73
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 $509 billion as at July 31, 2008, $87 billion higher
than at October 31, 2007 of which $57 billion related to the acquisition of
Commerce. The net increase was composed primarily of a $44 billion increase in
loans, a $22 billion increase in securities, and a $16 billion increase in
other assets. Residential mortgage loans increased $15 billion, due to volume
growth in Canadian Personal and Commercial Banking and growth in U.S. Personal
and Commercial Banking due to the acquisition of Commerce. Consumer and
personal loans were $10 billion higher with the increase arising from volume
growth in Canadian Personal and Commercial Banking and from growth in U.S.
Personal and Commercial Banking due to the acquisition of Commerce. Business
and government loans were up $18 billion, primarily due to the acquisition of
Commerce and business loan volume growth in Wholesale Banking. Securities
purchased under reverse repurchase agreements increased $6 billion as the
business experienced higher client demand. Available-for-sale securities
increased $25 billion, mainly due to the acquisition of Commerce. Other assets
increased $16 billion, primarily due to a $6 billion increase in goodwill from
U.S. Personal and Commercial Banking, and a combination of higher customer
liabilities under acceptances in Canadian Commercial and Personal Banking and
Wholesale Banking, an increase in land, building and equipment in U.S.
Personal and Commercial Banking, and an increase in trading derivatives,
primarily in Wholesale Banking due to market movement.
Total deposits were $354 billion as at July 31, 2008, $78 billion higher
than at October 31, 2007 of which $47 billion related to the acquisiton of
Commerce. Personal deposits increased $37 billion, largely due to increased
volumes in Canadian Personal and Commercial Banking and from growth in U.S.
Personal and Commercial Banking due to the acquisition of Commerce. Business
and government deposits were up $39 billion, driven primarily by higher
deposits in Canadian Personal and Commercial Banking, and U.S. Personal and
Commercial Banking due to the acquisition of Commerce, and Corporate segment
balances. Wholesale Banking trading deposits were also up $2 billion. Other
liabilities decreased $5 billion, largely due to lower Wealth Management and
Wholesale Banking broker payables and a lower net future tax liability in U.S.
Personal and Commercial Banking. Subordinated notes and debentures increased
$4 billion due to the $1 billion medium term note issuance in July 2008, a
$0.5 billion issuance in the second quarter, and $2.5 billion issuance of
medium term notes in the first quarter. Preferred stock increased $1.5 billion
due to issuances throughout this year.
The table below presents the impact of the acquisition of Commerce on the
Bank's consolidated balance sheet as at July 31, 2008:
Impact of Commerce on the Bank's Consolidated Balance Sheet
-------------------------------------------------------------------------
TDBFG
Consolidated,
excluding the Commerce TDBFG TDBFG
acquisition acquisition Consoli- Consoli-
impact of impact(2) dated(3) dated
(millions of Commerce(1) (March 31, (July 31, (October 31,
Canadian dollars) (July 31, 2008) 2008) 2008) 2007)
-------------------------------------------------------------------------
Assets
Cash and cash
equivalents $14,756 $408 $15,164 $16,536
Securities 120,019 25,154 145,173 123,036
Loans, net of
allowance for
credit losses 201,765 18,031 219,796 175,915
Goodwill 7,958 6,359 14,317 7,918
Other intangibles
(gross) 1,699 1,514 3,213 2,104
Other 105,553 5,623 111,176 96,615
-------------------------------------------------------------------------
Total assets $451,750 $57,089 508,839 $422,124
-------------------------------------------------------------------------
Liabilities
Deposits $306,947 $47,271 $354,218 $276,393
Other 104,458 3,408 107,866 112,905
Subordinated notes and
debentures, liability
for preferred shares,
capital trust
securities and
non-controlling
interests in
subsidiaries 15,462 - 15,462 11,422
-------------------------------------------------------------------------
Total liabilities 426,867 50,679 477,546 400,720
-------------------------------------------------------------------------
Shareholders' equity
Common shares 6,943 6,147 13,090 6,577
Contributed surplus 92 263 355 119
Preferred shares,
retained earnings
and accumulated
other comprehensive
income 17,848 - 17,848 14,708
-------------------------------------------------------------------------
Total shareholders'
equity 24,883 6,410 31,293 21,404
-------------------------------------------------------------------------
Total liabilities and
shareholders' equity $451,750 $57,089 $508,839 $422,124
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Amounts include changes in the balance sheet of Commerce subsequent
to acquisition.
(2) Commerce impact includes the Commerce assets and liabilities acquired
(shown in Note 20 to the Interim Consolidated Financial Statements
for the quarter ended July 31, 2008) and the purchase consideration
for the Commerce acquisition. Cash portion of the purchase
consideration is included in other liabilities.
(3) The fiscal periods of Commerce and the Bank are not co-terminus. As a
result, Commerce's results for the three months ended each calendar
quarter are consolidated on a one month lag with the Bank's results
for the fiscal quarter. This is the normal course of the Bank's
financial reporting.
CREDIT PORTFOLIO QUALITY
Gross impaired loans were $1,001 million at July 31, 2008, $432 million
higher than at October 31, 2007, largely due to a $219 million increase in the
Canadian Personal and Commercial Banking segment (the majority of which was
due to a change in the definition of gross impaired loans for insured
residential mortgages from 360 to 90 days past the contractual due date; as
the majority are insured residential mortgages, there was no material impact
to specific allowance), $150 million attributable to Commerce, and an
$81 million increase in the Wholesale Banking segment. These increases were
partially offset by decreases in other segments.
Net impaired loans as at July 31, 2008, after deducting specific
allowances, totalled $709 million, compared with $366 million as at
October 31, 2007.
The total allowance for credit losses of $1,447 million as at July 31,
2008 comprised total specific allowances of $292 million and a general
allowance of $1,155 million. Specific allowances increased by $89 million from
$203 million as at October 31, 2007. The general allowance for credit losses
as at July 31, 2008 was up by $63 million, compared with October 31, 2007,
mainly due to the increase related to VFC and TD Banknorth. 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
------------------------------------
July 31 Oct. 31 July 31
(millions of Canadian dollars) 2008 2007 2007
-------------------------------------------------------------------------
Balance at beginning of period $909 $590 $603
Additions 554 387 375
Return to performing status,
repaid or sold (231) (188) (166)
Write-offs (229) (202) (200)
Foreign exchange and other adjustments (2) (18) (22)
-------------------------------------------------------------------------
Balance at end of period $1,001 $569 $590
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Allowance for Credit Losses(1)
-------------------------------------------------------------------------
As at
------------------------------------
July 31 Oct. 31 July 31
(millions of Canadian dollars) 2008 2007 2007
-------------------------------------------------------------------------
Specific allowance $292 $203 $211
General allowance 1,155 1,092 1,146
-------------------------------------------------------------------------
Total allowance for credit losses $1,447 $1,295 $1,357
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Impaired loans net of specific
allowance $709 $366 $379
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 0.54% 0.30% 0.39%
-------------------------------------------------------------------------
(1) Certain comparative amounts have been restated to conform to the
presentation adopted in the current period.
Non-prime Loans
As at July 31, 2008, the Bank's wholly-owned subsidiary, VFC Inc., had
approximately $1.1 billion (October 31, 2007: $0.9 billion) gross exposure to
non-prime loans which mainly consist of automotive loans originated in Canada.
The credit loss rate, defined as the average provision for credit losses
divided by the average month-end loan balance, which is an indicator of credit
quality, is approximately 6% on an annual basis. The Bank's portfolio
continues to perform as expected. These loans are recorded at amortized cost.
See Note 3 to the 2007 Annual Consolidated Financial Statements for further
information regarding the accounting for loans and related credit losses.
Exposure to Alt-A Securities
As discussed in Note 20 to the Interim Consolidated Financial Statements
for the quarter ended July 31, 2008, the results of Commerce are recorded on a
one month lag basis, therefore the balance sheet values of Commerce assets
recorded in the Bank's consolidated balance sheet as at July 31, 2008,
represent the fair value of Commerce assets at June 30, 2008.
As at July 31, 2008, due to its acquisition of Commerce, the Bank had
$3.6 billion (October 31, 2007: nil) exposure to Alt-A mortgages in
residential mortgage-backed securities (RMBS) collateralized primarily by
fixed-rate mortgages with no rate reset features. Upon the acquisition of
Commerce, this portfolio was recorded at fair value. The Bank's Alt-A
exposures are fair valued using broker-dealer quotes. Based on the Bank's
analysis, the intrinsic value of the portfolio is considered to exceed the
fair value, net of a liquidity discount, in today's market. The Bank does not
hedge the portfolio for credit risk. These securities have public debt ratings
of mainly AAA and are accounted for as available-for-sale securities. The fair
value of the Alt-A RMBS declined by $233 million in the month of July 2008,
due to deterioration in liquidity in the market for these securities, which
will be reflected in the fourth quarter of 2008.
Subsequent to June 30, 2008, the public debt ratings for certain
securities have been down graded from AAA to AA, BBB and BB. The following
table discloses the fair value of the securities by vintage year:
Alt-A Securities Exposure by Vintage Year
-------------------------------------------------------------------------
As at
------------
July 31
(millions of Canadian dollars) 2008
-------------------------------------------------------------------------
2003 $434
2004 774
2005 1,008
2006 541
2007 814
-------------------------------------------------------------------------
Total Alt-A securities $3,571
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CAPITAL POSITION
The Bank's capital ratios are calculated using the guidelines of the
Office of the Superintendent of Financial Institutions (OSFI). Effective
November 1, 2007, 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
-------------------------------------------------------------------------
As at As at
July 31, Apr. 30,
(millions of Canadian dollars) 2008 2008
-------------------------------------------------------------------------
Risk-weighted assets (RWA) for:
Credit risk $152,326 $147,617
Market risk 8,179 7,140
Operational risk 24,169 23,878
-------------------------------------------------------------------------
Total RWA $184,674 $178,635
-------------------------------------------------------------------------
-------------------------------------------------------------------------
OSFI's target Tier 1 and Total capital ratios for Canadian banks are 7%
and 10%, respectively. As at July 31, 2008, the Bank's Tier 1 capital ratio
was 9.5% and the Total capital ratio was 13.4%, 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.
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
such as 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 5-Year Rate Reset
Preferred Shares, Series S and $250 million of its 5-Year Rate Reset Preferred
Shares, Series Y. Also during the quarter, the Bank issued $650 million and
$375 million 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 substantially 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 RWA 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
portfolios. Detailed plans are in place to implement the AIRB
approach for these portfolios within timelines agreed with OSFI.
Commerce portfolios are reported using the Interim Approach to
Reporting, moving to the Standardized approach in 2009.
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 and Commerce. For the rest of the Bank, we use
The Standardized Approach.
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 Canadian Institute of Chartered Accountants (CICA) Handbook
Section 3862, Financial Instruments - Disclosures, which permits these
specific disclosures to be included in the MD&A. Therefore, these sections
form an integral part of the unaudited interim consolidated financial
statements for the quarter ended July 31, 2008. These sections, which are
included non-continuously below, are shaded on pages 21 to 28 of the fully
formatted version of this third quarter 2008 Report to Shareholders, which can
be found on the Bank's website at www.td.com/investor/earnings.jsp.
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
exposes the Bank to some degree of credit risk.
Our primary objective is to create a methodological approach to our
credit risk assessment in order to better understand, select and 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.
Each business segment's credit risk control unit is primarily responsible
for credit 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. Risk ratings are
also used to determine the amount of credit exposure we are willing
to extend to a particular borrower.
- Approval of the scoring techniques and standards used in extending,
monitoring and reporting of personal credit in our retail businesses;
- Implementation of management processes to monitor country, industry
and counterparty risk ratings which include daily, monthly and
quarterly review requirements for credit exposures;
- Implementation of an ongoing monitoring process for the key risk
parameters 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 managed on an
ongoing basis and subject to a detailed review at least annually.
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 maximum exposure
limit or a concentration limit which is a percentage of our total wholesale
and commercial exposure. We regularly review industry risk ratings to ensure
that those ratings properly reflect the risk of the industry.
Credit derivatives may be used from time to time to mitigate industry
concentration and borrower-specific exposure as part of our portfolio risk
management techniques.
Credit Risk Exposures 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 undrawn
commitments, guarantees and certain repo-style transactions. The calculation
of gross credit risk exposures differs under each of the two approaches we use
to measure credit risk: the Standardized approach and the AIRB approach.
Gross credit risk exposures, measured before credit risk mitigants, are
given below:
Gross Credit Risk Exposures(1) by Counterparty Type - Standardized and
AIRB Approaches
-------------------------------------------------------------------------
As at July 31, 2008 As at April 30, 2008
(millions ------------------------------------------------------------
of
Canadian Standard- Standard-
dollars) ized AIRB Total ized AIRB Total
-------------------------------------------------------------------------
Retail
Residential
secured $7,517 $134,518 $142,035 $7,849 $124,927 $132,776
Qualifying
revolving
retail - 41,979 41,979 - 41,019 41,019
Other
retail 15,942 19,715 35,657 15,375 20,040 35,415
-------------------------------------------------------------------------
Total retail 23,459 196,212 219,671 23,224 185,986 209,210
Non-retail
Corporate 45,703 102,884 148,587 45,019 99,646 144,665
Sovereign 282 40,515 40,797 724 42,261 42,985
Bank 6,126 80,533 86,659 6,841 84,982 91,823
-------------------------------------------------------------------------
Total
non-retail 52,111 223,932 276,043 52,584 226,889 279,473
-------------------------------------------------------------------------
Gross credit
risk
exposures $75,570 $420,144 $495,714 $75,808 $412,875 $488,683
-------------------------------------------------------------------------
(1) Gross credit risk exposures exclude equity and securitization
exposures.
Credit Risk Exposures subject to the Standardized approach
Under the Standardized approach, used primarily for TD Banknorth
portfolios, balance sheet exposures (net of specific allowances) are
multiplied by OSFI-prescribed risk-weights to calculate RWA. Risk-weights are
assigned based on certain factors including counterparty type, product type
and the nature/extent of credit risk mitigation. External credit ratings from
Moody's Investors Service are used to determine the risk-weight of our
Sovereign and U.S. Bank exposures. For off-balance sheet exposures, the
notional amount of the exposure is multiplied by a credit conversion factor to
produce a credit equivalent amount which is then treated in the same manner as
an on-balance sheet exposure.
Commerce exposures are currently subject to the Interim Approach to
Reporting. This approach is similar to the Standardized approach, with the
exception of Small business entities, which receive a higher risk-weight under
the Interim Approach to Reporting than they do under the Standardized
approach.
Credit Risk Exposures subject to the AIRB approach
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 in our financial statements.
Our credit risk exposures are categorized into two main portfolios, non-
retail and retail. For the non-retail portfolio, exposures are managed on an
individual basis, using industry and sector-specific credit risk models, and
expert judgement. We have categorized non-retail credit risk exposures
according to the following Basel II counterparty types: corporate (wholesale
and commercial customers), sovereign (governments, central banks and certain
public sector entities), and bank (regulated deposit-taking institutions,
securities firms and certain public sector entities).
For the retail portfolio (individuals and small businesses), exposures
are managed on a pooled basis, using predictive credit scoring techniques. We
have categorized three sub-types of retail 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).
Risk Parameters
Under the AIRB approach, we have developed internal risk rating systems
based on key risk estimates; first, probability of default (PD) - The
likelihood the borrower will default within a one-year time horizon; second,
exposure at default (EAD) - the estimated value of the expected exposure at
the time of default; and third, loss given default (LGD) - the expected loss
when a borrower defaults, expressed as a percentage of EAD. Application of
these risk parameters allows us to measure and monitor our credit risk to
ensure it remains within pre-determined thresholds.
Non-retail Exposures
Credit risk for non-retail exposures is evaluated through a two-
dimensional risk rating system comprised of a borrower risk rating and a
facility risk rating, which is applied to all corporate, sovereign, and bank
exposures. The risk ratings are determined through the use of industry and
sector-specific credit risk models designed to quantify and monitor the level
of risk and facilitate its management. All borrowers and facilities are
assigned an internal risk rating which must be reviewed at least once each
year.
Each borrower is assigned a borrower risk rating that reflects the PD of
the borrower. Key factors in the assessment of borrower risk include the
borrower's competitive position, industry, financial performance, economic
trends, management and access to funds. The facility risk rating maps to LGD
and takes into account facility-specific characteristics, such as collateral,
seniority of debt, and structure.
Internal risk ratings form the basis of several decision-making processes
within the organization, including the calculation of general allowances for
credit losses, regulatory capital and economic capital. Internal ratings are
also integral to portfolio monitoring and management, and are used in setting
exposure limits and loan pricing.
Retail Exposures
Our retail credit segment is composed of a large number of customers, and
includes residential mortgages, unsecured loans, credit card receivables and
small business credits. Requests for retail 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 designated approval limits. Once retail credits are funded they
are monitored on an ongoing basis using quantitative customer management
programs which utilize current internal and external risk indicators to
identify changes in risk.
Retail exposures are assessed on a pooled basis, with each pool
consisting of exposures that possess similar homogeneous characteristics.
Pools are segmented by product type and by the forward-looking one-year PD
estimate. Credit risk is evaluated through statistically derived analytical
models and decision strategies. Proprietary statistical models have been
developed for each retail product portfolio based on a minimum of 10 years of
internal historical data. Credit risk parameters (PD, EAD and LGD) for each
individual facility are updated quarterly using the most recent borrower
credit bureau and product-related information. The calculation of LGD includes
an adjustment to reflect the potential of increased loss during an economic
downturn.
Validation of the Credit Risk Rating System
Credit risk rating systems and methodologies are subject to independent
validation to verify that they remain accurate predictors of risk. The
validation process includes the following considerations:
- Risk parameter estimates - PDs, EADs and LGDs are reviewed and
updated against actual loss experience and benchmarked against public
sources of information to ensure estimates continue to be reasonable
predictors of potential loss
- Model performance - estimates continue to be discriminatory, stable
and predictive
- Data quality - data used in the risk rating system is accurate,
appropriate and sufficient
- Assumptions - key assumptions underlying model development remain
valid for the current portfolio and environment
The Risk Management Department contributes to the oversight of the credit
risk rating system in accordance with the Bank's model risk rating policy. The
Risk Committee of the Board is apprised of the performance of the credit risk
rating system, at a minimum, on an annual basis. The Risk Committee must
approve any material changes to the Bank's credit risk rating system.
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 and 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.
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 connection with retail
exposures. Enterprise-wide standards for collateral valuation, frequency of
recalculation of the collateral requirement, documentation, registration and
perfection procedures and monitoring are in effect. 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 connection with non-retail
exposures. Financial collateral processes are centralized in the Treasury
Credit group within Wholesale Banking and include pre-defined haircuts and
procedures for the receipt, 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 issuers.
Guarantees may be taken in order to reduce the risk in credit exposures.
For guarantees taken in support of a pool of retail exposures, the guarantor
must be 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
investment grade 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 25 of the fully
formatted version of this third quarter 2008 Report to Shareholders, which can
be found on TD's website at www.td.com/investor/earnings.jsp. During the
quarter, there was one day where the loss exceeded the Total VaR. This was a
result of the $96 million pre-tax cumulative impact related to the incorrectly
priced financial instruments.
(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
For the nine months
quarters ended ended
---------------------------------------------- ---------------
(millions July 31,
of 2008 April July July July
Canadian ----------------------------- 30, 31, 31, 31,
dollars) As at Average High Low 2008 2007 2008 2007
Average Average Average Average
-------------------------------------------------------------------------
Interest
rate and
credit
spread
risk $29.1 $25.6 $31.1 19.2 $26.3 $7.2 22.6 $7.2
Equity
risk 12.9 13.4 18.7 10.5 10.2 6.0 9.7 7.8
Foreign
exchange
risk 4.1 3.8 7.0 1.6 2.4 1.9 2.9 2.0
Commodity
risk 0.5 1.5 2.6 0.5 1.6 1.5 1.4 1.5
Debt
specific
risk 43.4 35.1 47.0 24.2 31.2 13.2 28.5 13.5
Diversi-
fication
effect(1) (35.5) (33.0) n/m(2) n/m(2) (29.8) (13.5) (27.6) (15.2)
-------------------------------------------------------------------------
Total
Value-
at-Risk $54.5 $46.4 $57.8 $34.7 $41.9 16.3 $37.5 $16.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 bps
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 bps 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 bps
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 27 of the fully
formatted version of this third quarter 2008 Report to Shareholders, which can
be found on TD's website at www.td.com/investor/earnings.jsp. Starting this
quarter, the EVaR exposure includes the Commerce portfolios.
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 July 31, 2008, an immediate and
sustained 100 bps increase in interest rates would have decreased the economic
value of shareholders' equity by $66.4 million after tax. An immediate and
sustained 100 bps decrease in interest rates would have reduced the economic
value of shareholders' equity by $88.7 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 July 31, 2008 As at April 30, 2008
-------------------------------------------------------------------------
100 bps 100 bps 100 bps 100 bps
Currency increase decrease increase decrease
-------------------------------------------------------------------------
Canadian dollar $(7.8) $(21.6) $16.1 $(53.4)
U.S. dollar (58.7) (67.1) 35.3 (70.6)
-------------------------------------------------------------------------
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 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, Risk 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.
- U.S. Personal and Commercial Banking 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 July 31, 2008, our consolidated surplus
liquid asset position up to 90 days was $3.6 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
The Bank carries out certain business activities via arrangements with
special purpose entities (SPEs). We use SPEs to obtain sources of liquidity by
securitizing certain of the Bank's financial assets, to assist our clients in
securitizing their financial assets, and to create investment products for our
clients. SPEs may be organized as trusts, partnerships or corporations and
they may be formed as qualifying special purpose entities (QSPEs) or variable
interest entities (VIEs). When an entity is deemed a VIE, the entity must be
consolidated by the primary beneficiary. Consolidated SPEs have been presented
in the Bank's Consolidated Balance Sheet.
Securitization of Bank-originated Assets
The Bank securitizes residential mortgages, personal loans, credit card
loans and commercial mortgages to enhance its liquidity position, to diversify
sources of funding and to optimize the management of the balance sheet. All
products securitized by the Bank were originated in Canada and sold to
Canadian securitization structures. Details of these securitization exposures
are as follows:
Total Outstanding Exposures Securitized by the Bank as an
Originator(1),(2)
-------------------------------------------------------------------------
(millions
of Canadian As at
dollars) July 31, 2008
-------------------------------------------------------------------------
Significant Significant
unconsolidated unconsolidated
QSPEs SPEs
--------------------------------------
Carrying Carrying
Securi- value of Securi- value of
tized retained itized retained
assets interests assets interests
-------------------------------------------------------------------------
Residential mortgage loans $- $- $20,262 $316
Personal loans 8,500 90 - -
Credit card loans - - - -
Commercial mortgage loans 151 4 - -
$8,651 $94 $20,262 $316
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(millions
of Canadian As at
dollars) October 31, 2007
-------------------------------------------------------------------------
Significant Significant
unconsolidated unconsolidated
QSPEs SPEs
--------------------------------------
Carrying Carrying
Securi- value of Securi- value of
tized retained itized retained
assets interests assets interests
-------------------------------------------------------------------------
Residential mortgage loans $- $- $20,352 $289
Personal loans 9,000 71 - -
Credit card loans 800 6 - -
Commercial mortgage loans 163 5 - -
$9,963 $82 $20,352 $289
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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, it has acted as an originating bank and retained
securitization exposure.
Residential mortgage loans
The Bank may be exposed to the risks of transferred loans to the
securitization vehicles through retained interests. There are no expected
credit losses on the retained interests of the securitized residential
mortgages as the mortgages are all government guaranteed.
Personal loans
The Bank securitizes personal loans through QSPEs, as well as single-
seller conduits via QSPEs. These structures are used to enhance the Bank's
liquidity position, to diversify its sources of funding and to optimize the
management of its balance sheet. As at July 31, 2008, the single-seller
conduits had $5.1 billion (October 31, 2007 - $5.1 billion) of commercial
paper outstanding while another Bank-sponsored QSPE had $3.4 billion
(October 31, 2007 - $3.9 billion) of term notes outstanding. While the
probability of loss is negligible, as at July 31, 2008, the Bank's maximum
potential exposure to loss for these conduits through the sole provision of
liquidity facilities was $5.1 billion (October 31, 2007 - $5.1 billion) of
which $1.1 billion of underlying personal loans was government insured.
Additionally, the Bank had retained interests of $90 million (October 31, 2007
- $71 million) relating to excess spread.
Credit card loans
The Bank provides credit enhancement to the QSPE through its retained
interests in the excess spread. As at July 31, 2008, the outstanding term
notes issued by the credit card loan securitization vehicle matured; as such,
the maximum potential exposure to loss was nil (October 31, 2007 - $6 million)
through retained interests.
Commercial mortgage loans
As at July 31, 2008, the Bank's maximum potential exposure to loss was
$4.3 million (October 31, 2007 - $5 million) through retained interests in the
excess spread and cash collateral account of the QSPE.
Securitization of Third Party-originated Assets
The Bank administers multi-seller conduits and provides liquidity
facilities as well as securities distribution services; it may also provide
credit enhancements. All Bank-sponsored third party-originated assets are
securitized through SPEs, which are not consolidated by the Bank. The Bank's
maximum potential exposure to loss due to its ownership interest in commercial
paper and through the provision of global style liquidity facilities for
multi- seller conduits was $11.6 billion (October 31, 2007 - $12.7 billion) as
at July 31, 2008. Further, the Bank has committed to an additional $1.56
billion (October 31, 2007 - $2.5 billion) in liquidity facilities for
asset-backed commercial paper that could potentially be issued by the
conduits. As at July 31, 2008, the Bank also provided deal-specific credit
enhancement in the amount of $79 million (October 31, 2007 - $59 million).
Note 25 to the Bank's 2007 Annual Consolidated Financial Statements provides
detailed information about the maximum amount of additional credit the Bank
could be obligated to commit.
All third-party assets securitized by the Bank were originated in Canada
and sold to Canadian securitization structures. Details of the Bank-
administered multi-seller, asset-backed commercial paper conduits are as
follows:
-------------------------------------------------------------------------
Total Exposure to Third-Party originated Assets Securitized by Bank-
Sponsored Conduits(1)
-------------------------------------------------------------------------
(millions of Canadian dollars) As at July 31, 2008
-------------------------------------------------------------------------
Ratings profile of
SPE asset class
------------------
Signif- Expected
icant weighted
unconsol- average
idated AA+ to life
SPEs AAA AA- (years)(2)
-------------------------------------------------------------------------
Residential mortgage loans $3,435 $3,381 $54 1.77
Credit card loans 500 500 - 3.97
Automobile loans and leases 5,003 4,999 4 1.39
Equipment loans and leases 726 726 - 1.91
Trade receivables 1,923 1,896 27 3.19
-------------------------------------------------------------------------
$11,587 $11,502 $85 1.94
-------------------------------------------------------------------------
-------------------------------------------------------------------------
---------------------------------------------------------------
(millions of Canadian dollars) As at October 31, 2007
---------------------------------------------------------------
Ratings profile of
SPE asset class
------------------
Signif-
icant
unconsol-
idated AA+ to
SPEs AAA AA-
---------------------------------------------------------------
Residential mortgage loans $3,046 $2,998 $48
Credit card loans 486 486 -
Automobile loans and leases 5,593 5,589 4
Equipment loans and leases 701 700 1
Trade receivables 2,833 2,805 28
---------------------------------------------------------------
$12,659 $12,578 $81
---------------------------------------------------------------
---------------------------------------------------------------
(1) Certain comparative amounts have been restated and reclassified to
conform to the presentation adopted in the current period.
(2) Expected weighted average life for each asset type is based upon each
of the conduit's remaining purchase commitment for revolving pools
and the expected weighted average life of the assets for amortizing
pools.
Liquidity Facilities to Third Party-sponsored Conduits
The Bank has exposure to the U.S. arising from providing liquidity
facilities of $462 million (October 31, 2007 - $427 million) to third party-
sponsored conduits of which none has been drawn. The assets within these
conduits are primarily comprised of automotive-related financing assets,
including loans and leases. In the event that the facilities are drawn, the
Bank's credit exposure will mainly be AAA rated.
Other Investment and Financing Products
Other Financing Transactions
The Bank enters into transactions with major U.S. corporate clients
through jointly-owned VIEs as a means to provide them with cost efficient
financing. Under these transactions, as at July 31, 2008, the Bank provided
approximately $2.0 billion (October 31, 2007 - $3.0 billion) in financing to
these VIEs. The Bank has received guarantees from or has recourse to major
U.S. banks with credit ratings from AA to AA+ on an S&P equivalent basis fully
covering its investments in these VIEs. At the inception of the transactions,
the counterparties posted collateral in favour of the Bank and the Bank
purchased credit protection to further reduce its exposure to the U.S. banks.
At July 31, 2008, the Bank's net exposure to the U.S. banks after taking into
account collateral and CDS was approximately $785 million (October 31, 2007 -
$1.5 billion). As at July 31, 2008, the Bank's maximum total exposure to loss
before considering guarantees, recourse, collateral and CDS was approximately
$2.0 billion (October 31, 2007 - $3.0 billion). The transactions allow the
Bank unilateral discretion to exit the transactions every 30 to 90 days. As at
July 31, 2008, these VIEs had assets totaling more than $9.8 billion
(October 31, 2007 - $12.0 billion).
Exposure to Collateralized Debt Obligations
Since the decision was made in 2005 to exit the structured products
business, the Bank no longer originates Collateralized Debt Obligation
vehicles (CDOs). Total CDOs purchased and sold in the trading portfolio were
as follows:
-------------------------------------------------------------------------
(millions of Canadian dollars) July 31, 2008(1) October 31, 2007(1)
-------------------------------------------------------------------------
Positive/ Positive/
(negative) (negative)
Notional fair Notional fair
amount value amount value
-------------------------------------------------------------------------
Funded
CDOs - Purchased protection via
TD-issued credit linked notes $296 $(136) $304 $(205)
Unfunded
CDOs - Sold protection
- positive
fair value 834 - 742 5
- negative fair value - (118) - (13)
CDOs - Purchased protection
- positive fair value 256 47 371 10
- negative fair value - (36) - (7)
Unfunded - Similar Reference Portfolio
CDOs - Sold protection
- positive fair value 1,562 6 1,367 -
- negative fair value - (183) - (38)
CDOs - Purchased protection
- positive fair value 1,616 196 1,485 47
- negative fair value - (6) - (6)
-------------------------------------------------------------------------
(1) This table excludes standard index tranche CDOs.
The Bank does not have any exposure to U.S. subprime mortgages via the
CDOs. The CDOs are referenced to primarily investment-grade corporate debt
securities. The hedges on the similar reference portfolio are not entered into
with monoline insurers; rather they are entered into with global financial
institutions, such as universal banks or broker-dealers. All exposures are
managed with risk limits that have been approved by the Bank's risk management
group and are hedged with various financial instruments, including credit
derivatives and bonds within the trading portfolio, not included in this
table. Counterparty exposure on hedges is collateralized under Credit Support
Agreements (CSAs) and netting arrangements, consistent with other over-the-
counter (OTC) derivative contracts. The Bank's CDO positions are fair valued
using valuation techniques with significant non-observable market inputs. The
potential effect of using reasonable possible alternative assumptions for
valuing these CDO positions would range from a reduction in the fair value by
$23 million to an increase in the fair value by $26 million. A sensitivity
analysis was performed for all items fair valued using valuation techniques
with significant non-observable market inputs, and disclosed in the Bank's
2007 Annual Consolidated Financial Statements.
Leveraged Finance Credit Commitments
The Bank enters into various commitments to meet the financing needs of
the Bank's clients and to earn fee income. Included in 'commitments to extend
credit', in Note 25 to the Bank's 2007 Annual Consolidated Financial
Statements, are leveraged finance commitments. Leveraged finance commitments,
are agreements that provide funding to a wholesale borrower with higher levels
of debt, typically measured by the ratio of debt capital to equity capital of
the borrower, relative to the industry in which it operates. The Bank's
exposure to leveraged finance commitments as at July 31, 2008, was not
significant, except for its commitment to provide funding in the amount of
$3.3 billion (October 31, 2007 - $3.3 billion) to a consortium led by Ontario
Teachers' Pension Plan in their bid to privatize BCE Inc. and is now expected
to close in December 2008. These products may expose the Bank to liquidity and
credit risks. There are adequate risk management and control processes in
place to mitigate these risks. Note 25 to the Bank's 2007 Annual Consolidated
Financial Statements provides detailed information about the maximum amount of
additional credit the Bank could be obligated to extend. Funding commitments
on loans that the Bank intends to syndicate are recorded as a derivative at
fair value with changes in fair value recorded through income.
RELATED-PARTY TRANSACTIONS
During the quarter 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 2007
--------------------------------------------------------------- ---------
(millions of Canadian dollars) July 31 Apr. 30 Jan. 31 Oct. 31
-------------------------------------------------------------------------
Net interest income $2,437 $1,858 $1,788 $1,808
Other income 1,600 1,530 1,816 1,742
-------------------------------------------------------------------------
Total revenue 4,037 3,388 3,604 3,550
Provision for credit losses (288) (232) (255) (139)
Non-interest expenses (2,701) (2,206) (2,228) (2,241)
Provision for income taxes (122) (160) (235) (153)
Non-controlling interests (8) (9) (8) (8)
Equity in net income of an
associated company, net of income
taxes 79 71 92 85
-------------------------------------------------------------------------
Net income - reported 997 852 970 1,094
Items of note affecting net
income, net of income taxes:
Amortization of intangibles 111 92 75 99
Gain relating to restructuring
of Visa - - - (135)
TD Banknorth restructuring,
privatization and merger-related
charges - - - -
Restructuring and integration
charges relating to the Commerce
acquisition 15 30 - -
Change in fair value of credit
default swaps hedging the
corporate loan book, net of
provision for credit losses (22) (1) (25) 2
Other tax items 14 - 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 118 121 90 (73)
-------------------------------------------------------------------------
Net income - adjusted 1,115 973 1,060 1,021
Preferred dividends (17) (11) (8) (5)
-------------------------------------------------------------------------
Net income available to common
shareholders - adjusted $1,098 $962 $1,052 $1,016
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(Canadian dollars)
-------------------------------------------------------------------------
Basic earnings per share
- reported $1.22 $1.12 $1.34 $1.52
- adjusted 1.37 1.33 1.46 1.42
Diluted earnings per share
- reported 1.21 1.12 1.33 1.50
- adjusted 1.35 1.32 1.45 1.40
Return on common shareholders'
equity 13.4% 13.4% 18.0% 20.8%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three months ended
2007 2006
--------------------------------------------------------------- ---------
(millions of Canadian dollars) July 31 Apr. 30 Jan. 31 Oct. 31
-------------------------------------------------------------------------
Net interest income $1,783 $1,662 $1,671 $1,714
Other income 1,899 1,882 1,834 1,604
-------------------------------------------------------------------------
Total revenue 3,682 3,544 3,505 3,318
Provision for credit losses (171) (172) (163) (170)
Non-interest expenses (2,216) (2,297) (2,221) (2,211)
Provision for income taxes (248) (234) (218) (175)
Non-controlling interests (13) (27) (47) (48)
Equity in net income of an
associated company, net of income
taxes 69 65 65 48
-------------------------------------------------------------------------
Net income - reported 1,103 879 921 762
Items of note affecting net
income, net of income taxes:
Amortization of intangibles 91 80 83 87
Gain relating to restructuring
of Visa - - - -
TD Banknorth restructuring,
privatization and merger-related
charges - 43 - -
Restructuring and integration
charges relating to the Commerce
acquisition - - - -
Change in fair value of credit
default swaps hedging the
corporate loan book, net of
provision for credit losses (30) (7) 5 8
Other tax items - - - -
Provision for insurance claims - - - -
Initial set up of specific
allowance for credit card and
overdraft loans - - - 18
General allowance release - - - -
-------------------------------------------------------------------------
Total adjustments for items of
note, net of income taxes 61 116 88 113
-------------------------------------------------------------------------
Net income - adjusted 1,164 995 1,009 875
Preferred dividends (2) (7) (6) (5)
-------------------------------------------------------------------------
Net income available to common
shareholders - adjusted $1,162 $988 $1,003 $870
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(Canadian dollars)
-------------------------------------------------------------------------
Basic earnings per share
- reported $1.53 $1.21 $1.27 $1.05
- adjusted 1.61 1.37 1.40 1.21
Diluted earnings per share
- reported 1.51 1.20 1.26 1.04
- adjusted 1.60 1.36 1.38 1.20
Return on common shareholders'
equity 21.0% 17.1% 18.2% 15.7%
-------------------------------------------------------------------------
(1) Certain comparative amounts have been reclassified 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 33 to 47 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
-------------------
July 31 Oct. 31
(millions of Canadian dollars) 2008 2007
-------------------------------------------------------------------------
ASSETS
Cash and due from banks $2,719 $1,790
Interest-bearing deposits with banks 12,445 14,746
-------------------------------------------------------------------------
15,164 16,536
-------------------------------------------------------------------------
Securities
Trading 73,670 77,637
Designated as trading under the fair value option 2,037 2,012
Available-for-sale 60,155 35,650
Held-to-maturity 9,311 7,737
-------------------------------------------------------------------------
145,173 123,036
-------------------------------------------------------------------------
Securities purchased under reverse repurchase
agreements 34,138 27,648
-------------------------------------------------------------------------
Loans
Residential mortgages 73,229 58,485
Consumer installment and other personal 77,206 67,532
Credit card 7,227 5,700
Business and government 62,964 44,258
Business and government designated as trading
under the fair value option 617 1,235
-------------------------------------------------------------------------
221,243 177,210
Allowance for credit losses (Note 4) (1,447) (1,295)
-------------------------------------------------------------------------
Loans, net of allowance for credit losses 219,796 175,915
-------------------------------------------------------------------------
Other
Customers' liability under acceptances 10,844 9,279
Investment in TD Ameritrade 4,877 4,515
Trading derivatives 38,385 36,052
Goodwill 14,317 7,918
Other intangibles 3,213 2,104
Land, buildings and equipment 3,687 1,822
Other assets 19,245 17,299
-------------------------------------------------------------------------
94,568 78,989
-------------------------------------------------------------------------
Total assets $508,839 $422,124
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
-------------------------------------------------------------------------
Deposits
Personal $184,643 $147,561
Banks 10,169 10,162
Business and government 111,964 73,322
Trading 47,442 45,348
-------------------------------------------------------------------------
354,218 276,393
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other
Acceptances 10,844 9,279
Obligations related to securities sold short 24,493 24,195
Obligations related to securities sold under
repurchase agreements 15,058 16,574
Trading derivatives 37,244 39,028
Other liabilities 20,227 23,829
-------------------------------------------------------------------------
107,866 112,905
-------------------------------------------------------------------------
Subordinated notes and debentures (Note 6) 13,478 9,449
-------------------------------------------------------------------------
Liabilities for preferred shares and capital trust
securities (Note 7) 1,448 1,449
-------------------------------------------------------------------------
Non-controlling interests in subsidiaries 536 524
-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common shares (millions of shares issued and
outstanding: July 31, 2008 - 807.3 and
Oct. 31, 2007 - 717.8) (Note 8) 13,090 6,577
Preferred shares (millions of shares issued and
outstanding: July 31, 2008 - 65.0 and
Oct. 31, 2007 - 17.0) (Note 8) 1,625 425
Contributed surplus 355 119
Retained earnings 17,362 15,954
Accumulated other comprehensive income (loss)
(Note 10) (1,139) (1,671)
-------------------------------------------------------------------------
31,293 21,404
-------------------------------------------------------------------------
Total liabilities and shareholders' equity $508,839 $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 For the nine
months ended months ended
---------------------------------------
July 31 July 31 July 31 July 31
(millions of Canadian dollars) 2008 2007 2008 2007
-------------------------------------------------------------------------
Interest income
Loans $3,410 $3,228 $10,046 $9,419
Securities
Dividends 259 210 761 672
Interest 1,267 950 3,171 2,855
Deposits with banks 194 47 467 205
-------------------------------------------------------------------------
5,130 4,435 14,445 13,151
-------------------------------------------------------------------------
Interest expense
Deposits 2,068 1,987 6,378 6,024
Subordinated notes and debentures 165 125 482 357
Preferred shares and capital trust
securities 24 19 70 81
Other liabilities 436 521 1,432 1,573
-------------------------------------------------------------------------
2,693 2,652 8,362 8,035
-------------------------------------------------------------------------
Net interest income 2,437 1,783 6,083 5,116
-------------------------------------------------------------------------
Other income
Investment and securities services 591 627 1,714 1,826
Credit fees 121 109 330 308
Net securities gains 14 94 276 266
Trading (loss) income (196) 235 (140) 643
Income (loss) from financial
instruments designated as trading
under the fair value option (10) (87) (54) (91)
Service charges 356 263 874 756
Loan securitizations (Note 5) 77 86 244 317
Card services 175 117 410 333
Insurance, net of claims 243 257 679 762
Trust fees 36 33 106 102
Other 193 165 507 393
-------------------------------------------------------------------------
1,600 1,899 4,946 5,615
-------------------------------------------------------------------------
Total revenue 4,037 3,682 11,029 10,731
-------------------------------------------------------------------------
Provision for credit losses (Note 4) 288 171 775 506
-------------------------------------------------------------------------
Non-interest expenses
Salaries and employee benefits 1,342 1,161 3,650 3,487
Occupancy, including depreciation 279 188 648 548
Equipment, including depreciation 188 150 480 447
Amortization of other intangibles 166 131 405 361
Restructuring costs (Note 13) - - 48 67
Marketing and business development 131 106 343 330
Brokerage-related fees 64 61 186 172
Professional and advisory services 135 119 364 353
Communications 54 46 149 144
Other 342 254 862 825
-------------------------------------------------------------------------
2,701 2,216 7,135 6,734
-------------------------------------------------------------------------
Income before provision for income
taxes, non-controlling interests
in subsidiaries and equity in net
income of an associated company 1,048 1,295 3,119 3,491
Provision for income taxes 122 248 517 700
Non-controlling interests in
subsidiaries, net of income taxes 8 13 25 87
Equity in net income of an
associated company, net of
income taxes 79 69 242 199
-------------------------------------------------------------------------
Net income 997 1,103 2,819 2,903
Preferred dividends 17 2 36 15
-------------------------------------------------------------------------
Net income available to common
shareholders $980 $1,101 $2,783 $2,888
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average number of common shares
outstanding (millions) (Note 14)
Basic 804.0 719.5 756.8 719.0
Diluted 811.0 726.9 763.2 725.9
Earnings per share (in dollars)
(Note 14)
Basic $1.22 $1.53 $3.68 $4.02
Diluted 1.21 1.51 3.65 3.98
Dividends per share (in dollars) 0.59 0.53 1.75 1.54
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 For the nine
months ended months ended
---------------------------------------
July 31 July 31 July 31 July 31
(millions of Canadian dollars) 2008 2007 2008 2007
-------------------------------------------------------------------------
Common shares (Note 8)
Balance at beginning of period $12,818 $6,455 $6,577 $6,334
Proceeds from shares issued on
exercise of options 129 79 200 132
Shares issued as a result of
dividend reinvestment plan 142 22 185 62
Repurchase of common shares - (29) - (29)
Impact of shares (acquired) sold
for trading purposes(1) 1 (2) (19) 26
Shares issued on acquisition
of Commerce - - 6,147 -
-------------------------------------------------------------------------
Balance at end of period 13,090 6,525 13,090 6,525
-------------------------------------------------------------------------
Preferred shares (Note 8)
Balance at beginning of period 1,125 425 425 425
Share issues 500 - 1,200 -
-------------------------------------------------------------------------
Balance at end of period 1,625 425 1,625 425
-------------------------------------------------------------------------
Contributed surplus
Balance at beginning of period 383 124 119 66
Stock options (Note 11) (28) (6) (27) -
Conversion of TD Banknorth stock
options on privatization (Note 11) - - - 52
Conversion of Commerce stock
options on acquisition (Note 11) - - 263 -
-------------------------------------------------------------------------
Balance at end of period 355 118 355 118
-------------------------------------------------------------------------
Retained earnings
Balance at beginning of period 16,864 14,865 15,954 13,725
Transition adjustment on adoption
of Financial Instruments standards - - - 80
Net income 997 1,103 2,819 2,903
Common dividends (475) (381) (1,358) (1,108)
Preferred dividends (17) (2) (36) (15)
Premium paid on repurchase of
common shares - (207) - (207)
Other (7) - (17) -
-------------------------------------------------------------------------
Balance at end of period 17,362 15,378 17,362 15,378
-------------------------------------------------------------------------
Accumulated other comprehensive
income (loss), net of income
taxes (Note 10)
Balance at beginning of period (595) (94) (1,671) (918)
Transition adjustment on adoption
of Financial Instruments standards - - - 426
Other comprehensive income for
the period (544) (1,349) 532 (951)
-------------------------------------------------------------------------
Balance at end of period (1,139) (1,443) (1,139) (1,443)
-------------------------------------------------------------------------
Total shareholders' equity $31,293 $21,003 $31,293 $21,003
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Purchased by subsidiaries of the Bank, which are regulated securities
entities in accordance with Regulation 92-313 under the Bank Act.
INTERIM CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (unaudited)
-------------------------------------------------------------------------
For the three For the nine
months ended months ended
---------------------------------------
July 31 July 31 July 31 July 31
(millions of Canadian dollars) 2008 2007 2008 2007
-------------------------------------------------------------------------
Net income $997 $1,103 $2,819 $2,903
Other comprehensive income (loss),
net of income taxes
Change in unrealized gains and
(losses) on available-for-sale
securities, net of hedging
activities(a) (272) (188) (80) (76)
Reclassification to earnings in
respect of available-for-sale
securities(b) (17) (9) (58) (36)
Change in foreign currency
translation gains and (losses)
on investments in subsidiaries,
net of hedging activities(c),(d) (231) (971) 8 (551)
Change in gains and (losses) on
derivative instruments designated
as cash flow hedges(e) 41 (196) 764 (310)
Reclassification to earnings
of (gains) and losses on cash
flow hedges(f) (65) 15 (102) 22
-------------------------------------------------------------------------
Other comprehensive income for
the period (544) (1,349) 532 (951)
-------------------------------------------------------------------------
Comprehensive income for the period $453 $(246) $3,351 $1,952
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(a) Net of income tax benefit of $153 million and $83 million for the
three and nine months ended July 31, 2008 respectively (income tax
benefit of $79 million and $17 million for the three and nine months
ended July 31, 2007 respectively).
(b) Net of income tax expense of $4 million and $21 million for the three
and nine months ended July 31, 2008 respectively (income tax benefit
of $22 million and $42 million for the three and nine months ended
July 31, 2007 respectively).
(c) Net of income tax benefit of $97 million for the three months ended
July 31, 2008 (three months ended July 31, 2007 - tax expense of
$217 million). Net of income tax benefit of $392 million for the nine
months ended July 31, 2008 (nine months ended July 31, 2007 - tax
expense of $269 million).
(d) Includes $(215) million for the three months ended July 31, 2008
(three months ended July 31, 2007 - $448 million) of after-tax gains
(losses) arising from hedges of the Bank's investment in foreign
operations. Includes $(887) million for the nine months ended
July 31, 2008 (nine months ended July 31, 2007 - $560 million) of
after-tax gains (losses) arising from hedges of the Bank's investment
in foreign operations.
(e) Net of income tax expense of $10 million and $328 million for the
three and nine months ended July 31, 2008 respectively (income tax
benefit of $85 million and $155 million for the three and nine months
ended July 31, 2007 respectively).
(f) Net of income tax expense of $29 million and $45 million for the
three and nine months ended July 31, 2008 respectively (income tax
expense of $7 million and $11 million for the three and nine months
ended July 31, 2007 respectively).
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 For the nine
months ended months ended
---------------------------------------
July 31 July 31 July 31 July 31
(millions of Canadian dollars) 2008 2007 2008 2007
-------------------------------------------------------------------------
Cash flows from (used in)
operating activities
Net income $997 $1,103 $2,819 $2,903
Adjustments to determine net cash
flows from (used in) operating
activities:
Provision for credit losses 288 171 775 506
Restructuring costs - - 48 67
Depreciation 135 87 302 262
Amortization of other intangibles 166 131 405 361
Stock options 5 7 16 15
Net securities gains (14) (94) (276) (266)
Net gain on securitizations
(Note 5) (24) (29) (85) (113)
Equity in net income of an
associated company (79) (69) (242) (199)
Non-controlling interests 8 13 25 87
Future income taxes (563) (263) (616) 96
Changes in operating assets and
liabilities:
Current income taxes payable (446) 288 (1,958) 182
Interest receivable and payable (18) (534) (132) (397)
Trading securities 9,420 (3,736) 10,092 2,791
Unrealized gains and amounts
receivable on derivative
contracts (783) (1,951) (2,333) (1,675)
Unrealized losses and amounts
payable on derivative contracts (486) (84) (1,784) (278)
Other 1,643 2,121 685 (1,068)
-------------------------------------------------------------------------
Net cash used in operating
activities 10,249 (2,839) 7,741 3,274
-------------------------------------------------------------------------
Cash flows from (used in)
financing activities
Change in deposits 4,695 (2,426) 30,554 5,497
Securities sold under repurchase
agreements 208 4,836 (1,516) (2,497)
Securities sold short 947 1,481 298 (489)
Issue of subordinated notes and
debentures 1,025 1,798 4,025 4,072
Repayment of subordinated notes
and debentures - (874) - (874)
Liability for preferred shares
and capital trust securities 20 1 (1) 4
Translation adjustment on
subordinated notes and debentures
issued in a foreign currency
and other (13) (129) 4 (93)
Common shares issued on exercise
of options 96 66 157 117
Common shares (acquired) sold in
Wholesale Banking 1 (2) (19) 26
Repurchase of common shares - (29) - (29)
Dividends paid in cash on common
shares (333) (359) (1,173) (1,046)
Premium paid on common shares
repurchased - (207) - (207)
Issuance of preferred shares 493 - 1,183 -
Dividends paid on preferred shares (17) (2) (36) (15)
-------------------------------------------------------------------------
Net cash from financing activities 7,122 4,154 33,476 4,466
-------------------------------------------------------------------------
Cash flows from (used in)
investing activities
Interest-bearing deposits
with banks 3,154 (1,547) 2,301 (2,580)
Activity in available-for-sale
and held-to-maturity securities:
Purchases (37,956) (19,809) (76,940) (90,371)
Proceeds from maturities 13,642 21,710 20,339 85,618
Proceeds from sales 16,851 1,099 48,540 8,108
Activity in lending activities:
Origination and acquisitions (42,383) (32,598) (111,995) (105,259)
Proceeds from maturities 28,917 24,964 80,265 82,577
Proceeds from sales 372 2,993 825 4,781
Proceeds from loan
securitizations (Note 5) 1,395 2,383 4,809 8,714
Land, buildings and equipment (107) (6) (262) (224)
Securities purchased under
reverse repurchase agreements (1,071) (471) (6,490) 5,056
Acquisitions and dispositions
less cash and cash equivalents
acquired (Note 20) - - (1,761) (4,139)
-------------------------------------------------------------------------
Net cash used in investing
activities (17,186) (1,282) (40,369) (7,719)
-------------------------------------------------------------------------
Effect of exchange rate changes
on cash and cash equivalents 14 (41) 81 (54)
-------------------------------------------------------------------------
Net increase in cash and cash
equivalents 199 (8) 929 (33)
Cash and cash equivalents at
beginning of period 2,520 1,994 1,790 2,019
-------------------------------------------------------------------------
Cash and cash equivalents at
end of period, represented by
cash and due from banks $2,719 $1,986 $2,719 $1,986
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplementary disclosure of
cash flow information
Amount of interest paid
during the period $2,886 $3,064 $8,486 $8,329
Amount of income taxes paid
during the period 413 101 1,945 774
-------------------------------------------------------------------------
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 21 to 28 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: ALLOWANCE FOR CREDIT LOSSES, COLLATERAL AND LOANS PAST DUE BUT
NOT IMPAIRED
-------------------------------------------------------------------------
The Bank maintains an allowance it considers adequate to absorb all
credit-related losses in a portfolio of instruments that 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 nine months ended July 31 is shown in
following table.
Allowance for Credit Losses
-------------------------------------------------------------------------
July 31, 2008 July 31, 2007
------------------------------------------------------------
(millions
of Canadian Specific General Specific General
dollars) allowance allowance Total allowance allowance Total
-------------------------------------------------------------------------
Balance at
beginning
of year $203 $1,092 $1,295 $176 $1,141 $1,317
Acquisitions of
TD Banknorth
(including
Interchange)(1) - - - - 14 14
Provision for
(reversal of)
credit losses 676 99 775 478 28 506
Write-offs (699) - (699) (561) - (561)
Recoveries 95 - 95 108 - 108
Other(2) 17 (36) (19) 10 (37) (27)
-------------------------------------------------------------------------
Allowance for
credit losses
at end of
period $292 $1,155 $1,447 $211 $1,146 $1,357
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) All loans acquired from Commerce were recorded at their fair value on
the date of acquisition which takes into consideration the credit
quality of the loans. As a result, an allowance for credit losses was
not recorded on acquisition.
(2) 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 as at July 31, 2008
-------------------------------------------------------------------------
(millions of 1-30 31-60 61-89 90 days
Canadian dollars) days days days or more Total
-------------------------------------------------------------------------
Residential mortgages $911 $319 $57 $- $1,287
Consumer installment and
other personal loans 3,178 562 109 - 3,849
Credit cards 365 67 37 - 469
Business and government 2,364 168 75 - 2,607
-------------------------------------------------------------------------
Total $6,818 $1,116 $278 $- $8,212
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at July 31, 2008, the fair value of financial collateral held against
loans that were past due but not impaired was $36.8 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 nine months ended
July 31, 2008, that would otherwise be impaired, was $9.4 million.
As at July 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 $26.2 billion. The fair value of financial assets accepted
as collateral that has been sold or repledged (excluding cash collateral)
was $5.1 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, for the three and nine months ended July 31.
In most cases, the Bank retained responsibility for servicing the assets
securitized.
Securitization Activity
-------------------------------------------------------------------------
For the three months ended
------------------------------------------------------
July 31, 2008
-------------------------------------------------------------------------
Residential Credit Commercial
(millions of mortgage Personal card mortgage
Canadian dollars) loans loans loans loans Total
-------------------------------------------------------------------------
Gross proceeds $2,195 $1,477 $- $- $3,672
Retained interests 45 12 - - 57
Cash flows received
on retained interests 56 18 14 1 89
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three months ended
------------------------------------------------------
July 31, 2007
-------------------------------------------------------------------------
Residential Credit Commercial
(millions of mortgage Personal card mortgage
Canadian dollars) loans loans loans loans Total
-------------------------------------------------------------------------
Gross proceeds $2,178 $1,882 $800 $237 $5,097
Retained interests 45 29 8 - 82
Cash flows received
on retained interests 55 25 14 1 95
-------------------------------------------------------------------------
Securitization Activity
-------------------------------------------------------------------------
For the nine months ended
------------------------------------------------------
July 31, 2008
-------------------------------------------------------------------------
Residential Credit Commercial
(millions of mortgage Personal card mortgage
Canadian dollars) loans loans loans loans Total
-------------------------------------------------------------------------
Gross proceeds $6,109 $4,221 $1,600 $- $11,930
Retained interests 145 38 12 - 195
Cash flows received
on retained interests 164 70 43 2 279
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the nine months ended
------------------------------------------------------
July 31, 2007
-------------------------------------------------------------------------
Residential Credit Commercial
(millions of mortgage Personal card mortgage
Canadian dollars) loans loans loans loans Total
-------------------------------------------------------------------------
Gross proceeds $7,601 $5,806 $2,400 $455 $16,262
Retained interests 167 84 23 - 274
Cash flows received
on retained interests 145 78 46 2 271
-------------------------------------------------------------------------
The following tables summarize the impact of securitizations on the
Bank's Interim Consolidated Statement of Income for the three and nine
months ended July 31.
Securitization Gains and Income on Retained Interests
-------------------------------------------------------------------------
For the three months ended
------------------------------------------------------
July 31, 2008
-------------------------------------------------------------------------
Residential Credit Commercial
(millions of mortgage Personal card mortgage
Canadian dollars) loans loans loans loans Total
-------------------------------------------------------------------------
Gain on sale $13 $11 $- $- $24
Income on retained
interests(1) 23 1 29 - 53
-------------------------------------------------------------------------
Total $36 $12 $29 $- $77
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three months ended
------------------------------------------------------
July 31, 2007
-------------------------------------------------------------------------
Residential Credit Commercial
(millions of mortgage Personal card mortgage
Canadian dollars) loans loans loans loans Total
-------------------------------------------------------------------------
Gain on sale $(8) $28 $7 $2 $29
Income on retained
interests(1) 30 6 21 - 57
-------------------------------------------------------------------------
Total $22 $34 $28 $2 $86
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Securitization Gains and Income on Retained Interests
-------------------------------------------------------------------------
For the nine months ended
------------------------------------------------------
July 31, 2008
-------------------------------------------------------------------------
Residential Credit Commercial
(millions of mortgage Personal card mortgage
Canadian dollars) loans loans loans loans Total
-------------------------------------------------------------------------
Gain on sale $36 $37 $12 $- $85
Income on retained
interests(1) 69 14 76 - 159
-------------------------------------------------------------------------
Total $105 $51 $88 $- $244
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the nine months ended
------------------------------------------------------
July 31, 2007
-------------------------------------------------------------------------
Residential Credit Commercial
(millions of mortgage Personal card mortgage
Canadian dollars) loans loans loans loans Total
-------------------------------------------------------------------------
Gain on sale $3 $85 $21 $4 $113
Income on retained
interests(1) 107 27 70 - 204
-------------------------------------------------------------------------
Total $110 $112 $91 $4 $317
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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) 18.5% 6.0% 43.5% 5.2%
Excess spread(2) 0.8 1.1 7.1 1.0
Discount rate 5.2 5.7 6.1 8.1
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% 6.4% 43.0% 8.9%
Excess spread(2) 0.7 1.1 7.1 1.0
Discount rate 6.5 6.2 6.4 10.0
Expected credit losses(3) - - 2.2 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 July 31, 2008, there were maturities of
previously securitized loans and receivables of $2,277 million (three
months ended July 31, 2007 - $2,714 million). Proceeds from new
securitizations were $1,395 million for the three months ended July 31,
2008 (three months ended July 31, 2007 - $2,383 million). During the nine
months ended July 31, 2008, there were maturities of previously
securitized loans and receivables of $7,121 million (nine months ended
July 31, 2007 - $7,548 million). Proceeds from new securitizations were
$4,809 million for the nine months ended July 31, 2008 (nine months ended
July 31, 2007 - $8,714 million).
Note 6: SUBORDINATED NOTES AND DEBENTURES
-------------------------------------------------------------------------
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.
On April 2, 2008, the Bank issued $500 million of medium term notes
constituting subordinated indebtedness pursuant to its medium term note
program. The medium term notes will pay a coupon of 5.48% until April 2,
2015 and the bankers' acceptance rate plus 2.00% thereafter until
maturity on April 2, 2020. The notes are redeemable at the Bank's option
at par on April 2, 2015. On July 7, 2008, the Bank issued a $375 million
second tranche of its medium term notes due April 2, 2020, carrying the
same terms and conditions as the original issue. The Bank has included
the issue as Tier 2B regulatory capital.
On July 7, 2008, the Bank issued $650 million of medium term notes
constituting subordinated indebtedness pursuant to its medium term note
program. The medium term notes will pay a coupon of 5.828% until July 9,
2018 and the bankers' acceptance rate plus 2.55% thereafter until
maturity on July 9, 2023. The notes are redeemable at the Bank's option
at par on July 9, 2018. The Bank has included the issue as Tier 2B
regulatory capital.
On July 31, 2008, the Bank announced its intention to redeem on
September 5, 2008, all of its $1.0 billion of outstanding 4.54%
subordinated debentures due September 5, 2013, at a redemption price of
100 per cent of the principal amount. Interest on the debentures will
cease to accrue on and after the redemption date.
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
-------------------------------------------------------------------------
July 31, Oct. 31,
(millions of Canadian dollars) 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 898 899
-------------------------------------------------------------------------
Total Capital Trust Securities 898 899
-------------------------------------------------------------------------
Total preferred shares and Capital Trust Securities $1,448 $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 a 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 nine months ended
----------------------------------------
July 31, 2008 July 31, 2007
----------------------------------------
(millions of shares and Number of Number of
millions 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 3.5 200 2.9 132
Issued as a result of dividend
reinvestment plan 3.0 185 0.9 62
Impact of shares (acquired) sold
for trading purposes(1) (0.3) (19) 0.3 26
Purchased for cancellation - - (3.2) (29)
Issued on the acquisition of
Commerce 83.3 6,147 - -
-------------------------------------------------------------------------
Balance at end of period - common 807.3 $13,090 718.3 $6,525
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Preferred (Class A - Series O, P,
Q, R, S and Y):
Balance at beginning of period 17.0 $425 17.0 $425
Issued during the period 48.0 1,200 - -
-------------------------------------------------------------------------
Balance at end of period - preferred 65.0 $1,625 17.0 $425
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Purchased by subsidiaries of the Bank, which are regulated securities
entities in accordance with Regulation 92-313 under the Bank Act.
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. The Series P shares are
redeemable by the Bank for cash, subject to regulatory consent, at a
declining premium on or after November 1, 2012. The Series P shares
qualify as Tier 1 capital of the Bank.
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. The Series Q shares are
redeemable by the Bank for cash, subject to regulatory consent, at a
declining premium on or after January 31, 2013. The Series Q shares
qualify as Tier 1 capital of the Bank.
Class A First Preferred Shares, Series R
On March 12, 2008, the Bank issued 10 million Class A First Preferred
Shares, Series R shares for gross cash consideration of $250 million.
Quarterly non-cumulative cash dividends, if declared, will be paid at a
per annum rate of 5.60% per Series R share. The Series R shares are
redeemable by the Bank for cash, subject to regulatory consent, at a
declining premium on or after April 30, 2013. The Series R shares qualify
as Tier 1 capital of the Bank.
5-Year Rate Reset Preferred Shares, Series S
On June 11, 2008, the Bank issued 10 million non-cumulative 5-Year Rate
Reset Preferred Shares, Series S for $250 million. Quarterly non-
cumulative cash dividends, if declared, will be paid at a per annum rate
of 5.00% for the initial period from and including June 11, 2008 to but
excluding July 31, 2013. Thereafter, the dividend rate will reset every
five years to equal the then five-year Government of Canada bond yield
plus 1.60%. Holders of the Series S Shares will have the right to convert
all or any part of their shares into non-cumulative Floating Rate
Preferred Shares, Series T, subject to certain conditions, on July 31,
2013, and on July 31 every five years thereafter and vice versa. The Bank
may redeem all or part of the outstanding Series S Shares by payment in
cash of $25.00 per share on July 31, 2013 and on July 31 every five years
thereafter together, in each case, with declared and unpaid dividends to
the date of redemption. The Series S Shares qualify as Tier 1 capital of
the Bank.
5-Year Rate Reset Preferred Shares, Series Y
On July 16, 2008, the Bank issued 10 million non-cumulative 5-Year Rate
Reset Preferred Shares, Series Y for $250 million. Quarterly non-
cumulative cash dividends, if declared, will be paid at a per annum rate
of 5.10% for the initial period from and including July 16, 2008 to but
excluding October 31, 2013. Thereafter, the dividend rate will reset
every five years to equal the then five-year Government of Canada bond
yield plus 1.68%. Holders of the Series Y Shares will have the right to
convert their shares into non-cumulative Floating Rate Preferred Shares,
Series Z, subject to certain conditions, on October 31, 2013, and on
October 31 every five years thereafter and vice versa. The Bank may
redeem all or part of the outstanding Series Y Shares by payment in cash
of $25.00 per share on October 31, 2013 and on October 31 every five
years thereafter together, in each case, with declared and unpaid
dividends to the date of redemption. The Series Y Shares qualify as
Tier 1 capital of the Bank.
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;
and
- 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 July 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 interests 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 Ratings Based (IRB) approach
portfolios.
As at July 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 nine months ended July 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:
-------------------------------------------------------------------------
July 31, Oct. 31,
2008(1) 2007(1)
(millions of Canadian dollars) (Basel II) (Basel I)
-------------------------------------------------------------------------
Tier 1 capital $17,491 $15,645
Tier 1 capital ratio(2) 9.5% 10.3%
Total capital(3) $24,702 $19,794
Total capital ratio(4) 13.4% 13.0%
Assets-to-capital multiple(5) 17.9 19.7
-------------------------------------------------------------------------
(1) The Bank's capital positions were calculated based on Basel II as at
July 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 adjusted 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) consists of 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
July 31, July 31,
(millions of Canadian dollars) 2008 2007
-------------------------------------------------------------------------
Unrealized gain on available-for-sale securities,
net of hedging activities $231 $175
Unrealized foreign currency translation losses
on investments in subsidiaries, net of hedging
activities (2,065) (1,469)
Gain (loss) on derivatives designated as cash
flow hedges 695 (149)
-------------------------------------------------------------------------
Accumulated other comprehensive income (loss)
balance as at July 31 $(1,139) $(1,443)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Note 11: STOCK BASED COMPENSATION
-------------------------------------------------------------------------
The following table summarizes the compensation expense recognized by the
Bank for stock option awards for the three and nine months ended July 31.
For the three For the nine
months ended months ended
-------------------------------------------------------------------------
July 31 July 31 July 31 July 31
(millions of Canadian dollars) 2008 2007 2008 2007
-------------------------------------------------------------------------
The Bank $5 $5 $16 $14
TD Banknorth - 2 - 6
-------------------------------------------------------------------------
During the three months ended July 31, 2008 and July 31, 2007, there were
no options granted by the Bank.
During the nine months ended July 31, 2008, 2.0 million (nine months
ended July 31, 2007 - 1.5 million) options were granted by the Bank with
a weighted average fair value of $10.80 per option (nine months ended
July 31, 2007 - $11.46 per option). During the nine months ended July 31,
2007, 0.03 million 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 nine months ended
------------------------------
July 31 July 31
The Bank 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 nine months ended
------------------------------
July 31 July 31
TD Banknorth 2008 2007
-------------------------------------------------------------------------
Risk-free interest rate - 4.45%
Expected option life - 6 years
Expected volatility - 15.07%
Expected dividend yield - 2.98%
-------------------------------------------------------------------------
As a result of the acquisition of Commerce Bancorp, Inc. (Commerce),
19.5 million Commerce stock options were converted into 10.8 million
stock options of the Bank using the exchange ratio set out in the merger
agreement. All Commerce stock options vested on acquisition and the fair
value of the converted options was $263 million. This was recorded in
contributed surplus and was part of the purchase consideration. As a
result of the conversion, there are no longer any Commerce stock options
outstanding.
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 For the nine
months ended months ended
---------------------------------------
July 31 July 31 July 31 July 31
(millions of Canadian dollars) 2008 2007 2008 2007
-------------------------------------------------------------------------
Elements of pension plan expense
before adjustments to recognize
the long-term nature of the cost:
Service cost - benefits earned $21 $16 $58 $49
Interest cost on projected
benefit obligation 33 28 96 84
Actual return on plan assets (71) (38) 36 (232)
Plan amendments - - 7 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) 33 4 (150) 130
Actuarial losses(2) 5 3 10 8
Plan amendments(3) 2 2 - (1)
-------------------------------------------------------------------------
Total $23 $15 $57 $45
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) For the three months ended July 31, 2008, includes expected return on
plan assets of $38 million (three months ended July 31, 2007 -
$34 million) less actual return on plan assets of $71 million (three
months ended July 31, 2007 - $38 million). For the nine months ended
July 31, 2008, includes expected return on plan assets of
$114 million (nine months ended July 31, 2007 - $102 million) less
actual return on plan assets of $(36) million (nine months ended
July 31, 2007 - $232 million).
(2) For the three months ended July 31, 2008, includes loss recognized of
$5 million (three months ended July 31, 2007 - $3 million) less
actuarial losses on projected benefit obligation of nil (three months
ended July 31, 2007 - nil). For the nine months ended July 31, 2008,
includes loss recognized of $10 million (nine months ended July 31,
2007 - $8 million) less actuarial losses on projected benefit
obligation of nil (nine months ended July 31, 2007 - nil).
(3) For the three months ended July 31, 2008, includes amortization of
costs for plan amendments of $2 million (three months ended July 31,
2007 - $2 million) less actual cost amendments of nil (three months
ended July 31, 2007 - nil). For the nine months ended July 31, 2008,
includes amortization of costs for plan amendments of $7 million
(nine months ended July 31, 2007 - $6 million) less actual cost
amendments of $7 million (nine months ended July 31, 2007 -
$7 million).
Other Pension Plans' Expense
-------------------------------------------------------------------------
For the three For the nine
months ended months ended
---------------------------------------
July 31 July 31 July 31 July 31
(millions of Canadian dollars) 2008 2007 2008 2007
-------------------------------------------------------------------------
CT defined benefit pension plan $1 $1 $3 $3
TD Banknorth defined benefit
pension plans 1 1 - 3
Supplemental employee retirement plans 8 8 24 25
-------------------------------------------------------------------------
Total $10 $10 $27 $31
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Principal Non-Pension Post-Retirement Benefit Plan Expense
-------------------------------------------------------------------------
For the three For the nine
months ended months ended
---------------------------------------
July 31 July 31 July 31 July 31
(millions of Canadian dollars) 2008 2007 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 $9 $9
Interest cost on projected
benefit obligation 6 5 17 16
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 losses 1 1 4 4
Plan amendments (1) (1) (4) (4)
-------------------------------------------------------------------------
Total $9 $8 $26 $25
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 For the nine
months ended months ended
---------------------------------------
July 31 July 31 July 31 July 31
(millions of Canadian dollars) 2008 2007 2008 2007
-------------------------------------------------------------------------
Principal pension plan $30 $37 $67 $69
CT defined benefit pension plan (1) 1 (1) 3
TD Banknorth defined benefit
pension plan 1 - 1 47
Supplemental employee retirement plans 1 3 8 9
Non-pension post-retirement
benefit plan 3 2 7 6
-------------------------------------------------------------------------
Total $34 $43 $82 $134
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at July 31, 2008, the Bank expects to contribute an additional
$25 million to its principal pension plan, nil to its CT defined benefit
pension plan, nil to its TD Banknorth defined benefit pension plan,
$2 million to its supplemental employee retirement plans and $2 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: RESTRUCTURING AND INTEGRATION CHARGES
-------------------------------------------------------------------------
As a result of the acquisition of Commerce and related restructuring and
integration initiatives undertaken, the Bank incurred integration charges
of $23 million during the three months ended July 31, 2008. Integration
charges consisted of costs related to resources dedicated to the
integration, employee retention, external professional consulting
charges, marketing (including customer communication and rebranding) and
integration related travel costs. In the Interim Consolidated Statement
of Income, the integration charges are included in other non-interest
expenses.
For the three months ended April 30, 2008, the Bank accrued $48 million
of restructuring and integration charges. Restructuring charges consisted
primarily of employee severance costs, the costs of amending certain
executive employment and award agreements and the write-down of long-
lived assets due to impairment (primarily locations to be closed or
consolidated). In the Interim Consolidated Statement of Income, the
restructuring charges are included in restructuring costs. As at July 31,
2008, the remaining balance of the restructuring liability related to the
acquisition of Commerce was $20 million.
Note 14: EARNINGS PER SHARE
-------------------------------------------------------------------------
The Bank's basic and diluted earnings per share at July 31 are as
follows:
Basic and Diluted Earnings per Share
-------------------------------------------------------------------------
For the three For the nine
months ended months ended
---------------------------------------
July 31 July 31 July 31 July 31
2008 2007 2008 2007
-------------------------------------------------------------------------
Basic Earnings per Share
Net income available to common
shares ($ millions) $980 $1,101 $2,783 $2,888
Average number of common shares
outstanding (millions) 804.0 719.5 756.8 719.0
Basic earnings per share ($) $1.22 $1.53 $3.68 $4.02
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Diluted Earnings per Share
Net income available to common
shares ($ millions) $980 $1,101 $2,783 $2,888
Average number of common shares
outstanding (millions) 804.0 719.5 756.8 719.0
Stock options potentially
exercisable as determined under
the treasury stock method(1) 7.0 7.4 6.4 6.9
-------------------------------------------------------------------------
Average number of common shares
outstanding - diluted (millions) 811.0 726.9 763.2 725.9
-------------------------------------------------------------------------
Diluted earnings per share ($) $1.21 $1.51 $3.65 $3.98
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) For the nine months ended July 31, 2008, the computation of diluted
earnings per share excluded weighted-average options outstanding of
4,193 thousand with a weighted-average exercise price of $69.49 as
the options' exercise prices were greater than the average market
price of the Bank's common shares. For the nine months ended July 31,
2007, the computation of diluted earnings per share excluded
weighted-average options outstanding of 0.1 thousand with a
weighted-average exercise price of $68.10 as the options' exercise
prices were greater than the average market price of the Bank's
common shares.
Note 15: 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 and nine months ended
July 31 are presented in the following table:
Results by Business Segment
-------------------------------------------------------------------------
U.S.
Canadian Personal Personal and
(millions of and Commercial Wealth Commercial
Canadian dollars) Banking(1) Management(1) Banking(2),(3)
-------------------------------------------------------------------------
For the three July 31 July 31 July 31 July 31 July 31 July 31
months ended 2008 2007 2008 2007 2008 2007
-------------------------------------------------------------------------
Net interest income $1,485 $1,388 $89 $80 $759 $338
Other income 777 713 520 507 267 145
-------------------------------------------------------------------------
Total revenue 2,262 2,101 609 587 1,026 483
Provision for (reversal
of) credit losses 194 151 - - 76 33
Non-interest expenses 1,129 1,050 421 395 610 275
-------------------------------------------------------------------------
Income (loss) before
provision for (benefit
of) income taxes 939 900 188 192 340 175
Provision for (benefit of)
income taxes 295 303 61 66 96 57
Non-controlling interests
in subsidiaries, net
of income taxes - - - - - 9
Equity in net income of
an associated company,
net of income taxes - - 74 59 - -
-------------------------------------------------------------------------
Net income (loss) $644 $597 $201 $185 $244 $109
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total assets
(billions of
Canadian dollars)
- balance sheet $170.5 $146.8 $14.8 $14.7 $117.6 $61.2
- securitized 39.1 47.6 - - - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(millions of Wholesale
Canadian dollars) Banking(4),(5) Corporate(4) Total
-------------------------------------------------------------------------
For the three July 31 July 31 July 31 July 31 July 31 July 31
months ended 2008 2007 2008 2007 2008 2007
-------------------------------------------------------------------------
Net interest income $348 $218 $(244) $(241) $2,437 $1,783
Other income (20) 474 56 60 1,600 1,899
-------------------------------------------------------------------------
Total revenue 328 692 (188) (181) 4,037 3,682
Provision for (reversal
of) credit losses 30 8 (12) (21) 288 171
Non-interest expenses 281 326 260 170 2,701 2,216
-------------------------------------------------------------------------
Income (loss) before
provision for (benefit
of) income taxes 17 358 (436) (330) 1,048 1,295
Provision for (benefit of)
income taxes (20) 105 (310) (283) 122 248
Non-controlling interests
in subsidiaries, net
of income taxes - - 8 4 8 13
Equity in net income of
an associated company,
net of income taxes - - 5 10 79 69
-------------------------------------------------------------------------
Net income (loss) $37 $253 $(129) $(41) $997 $1,103
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total assets
(billions of
Canadian dollars)
- balance sheet $181.6 $162.7 $24.3 $18.5 $508.8 $403.9
- securitized 2.7 - (12.9) (15.9) 28.9 31.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Results by Business Segment
-------------------------------------------------------------------------
U.S.
Canadian Personal Personal and
(millions of and Commercial Wealth Commercial
Canadian dollars) Banking(1) Management(1) Banking(2),(3)
-------------------------------------------------------------------------
For the nine July 31 July 31 July 31 July 31 July 31 July 31
months ended 2008 2007 2008 2007 2008 2007
-------------------------------------------------------------------------
Net interest income $4,301 $3,993 $259 $235 $1,380 $1,030
Other income 2,242 2,104 1,478 1,497 573 443
-------------------------------------------------------------------------
Total revenue 6,543 6,097 1,737 1,732 1,953 1,473
Provision for (reversal
of) credit losses 557 432 - - 148 85
Non-interest expenses 3,320 3,142 1,187 1,152 1,142 958
-------------------------------------------------------------------------
Income (loss) before
provision for (benefit
of) income taxes 2,666 2,523 550 580 663 430
Provision for (benefit of)
income taxes 842 842 180 198 192 143
Non-controlling interests
in subsidiaries, net of
income taxes - - - - - 91
Equity in net income of
an associated company,
net of income taxes - - 229 186 - -
-------------------------------------------------------------------------
Net income (loss) $1,824 $1,681 $599 $568 $471 $196
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(millions of Wholesale
Canadian dollars) Banking(4),(5) Corporate(4) Total
-------------------------------------------------------------------------
For the nine July 31 July 31 July 31 July 31 July 31 July 31
months ended 2008 2007 2008 2007 2008 2007
-------------------------------------------------------------------------
Net interest income $854 $565 $(711) $(707) $6,083 $5,116
Other income 510 1,404 143 167 4,946 5,615
-------------------------------------------------------------------------
Total revenue 1,364 1,969 (568) (540) 11,029 10,731
Provision for (reversal
of) credit losses 96 44 (26) (55) 775 506
Non-interest expenses 893 987 593 495 7,135 6,734
-------------------------------------------------------------------------
Income (loss) before
provision for (benefit
of) income taxes 375 938 (1,135) (980) 3,119 3,491
Provision for (benefit of)
income taxes 82 271 (779) (754) 517 700
Non-controlling interests
in subsidiaries, net of
income taxes - - 25 (4) 25 87
Equity in net income of
an associated company,
net of income taxes - - 13 13 242 199
-------------------------------------------------------------------------
Net income (loss) $293 $667 $(368) $(209) $2,819 $2,903
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Effective the third quarter ended July 31, 2008, the Bank transferred
the U.S. insurance and credit card businesses to the Canadian
Personal and Commercial Banking segment, and the U.S. wealth
businesses to the Wealth Management segment for management reporting
purposes. Prior periods have not been reclassified as the impact was
not material to segment results.
(2) Commencing May 1, 2007, the results of TD Bank USA, N.A. (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 reclassified as the impact was not material.
(3) Commencing the third quarter ended July 31, 2008, the results of U.S.
Personal and Commercial Banking segment include Commerce. For
details, see Note 20 to the Interim Consolidated Financial
Statements.
(4) 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.
(5) The Wholesale Banking segment included a $96 million cumulative
impact due to incorrectly priced financial instruments. This amount
was included in other income.
Note 16: DERIVATIVES
-------------------------------------------------------------------------
Hedge accounting results were as follows:
Hedge Accounting Results
-------------------------------------------------------------------------
For the three For the nine
months ended months ended
---------------------------------------
July 31 July 31 July 31 July 31
(millions of Canadian dollars) 2008 2007 2008 2007
-------------------------------------------------------------------------
Fair value hedges
Gain (loss) arising from hedge
ineffectiveness $1.3 $4.9 $9.9 $4.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash flow hedges
(Loss)/Gain arising from hedge
ineffectiveness $(0.9) $(0.9) $0.5 $2.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 Interim Consolidated Statement of Income
and are not significant for the three and nine months ended July 31,
2008.
During the three and nine months ended July 31, 2008, there were no firm
commitments that no longer qualified as hedges.
Over the next twelve months, the Bank expects approximately $180 million
in net gains reported in other comprehensive income as at July 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 23 years. During the three and nine
months ended July 31, 2008, there were no forecasted transactions that
failed to occur.
Note 17: 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 July 31, 2008, the
total contingent litigation reserve for Enron-related claims was
approximately $422 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 18: 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 21 to 28 of the MD&A, relating to credit, market and liquidity
risks are an integral part of the Interim Consolidated Financial
Statements.
Note 19: 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.
Note 20: ACQUISITIONS AND DISPOSITIONS
-------------------------------------------------------------------------
Commerce Bancorp, Inc.
On March 31, 2008, the Bank acquired 100% of the outstanding shares of
Commerce for total consideration of $8,510 million, primarily paid in
cash and common shares in the amount of $2,167 million and
$6,147 million, respectively. Each share of Commerce was exchanged for
0.4142 of a Bank common share and US$10.50 in cash, resulting in the
issuance of 83.3 million common shares of the Bank. The value of the
83.3 million common shares was determined based on the average market
price of the Bank's common shares over the 2 day period before and after
the terms of the acquisition were agreed to and announced. The
acquisition was accounted for by the purchase method. The purchase price
allocation is subject to finalization.
The fiscal periods of the Bank and Commerce are not co-terminus. The
results of Commerce for the period from April 1, 2008 to June 30, 2008
have been consolidated with the Bank's results for the quarter ended
July 31, 2008 due to the one month lag. In the future, Commerce's results
for each calendar quarter will be consolidated with the Bank's results
for the fiscal quarter. Commerce is reported in the U.S. Personal and
Commercial Banking segment.
The following table presents the estimated fair values of the assets and
liabilities of Commerce as of the date of acquisition. Goodwill increased
by $245 million during the quarter to $6,359 million primarily due to the
reallocation of the intangibles, net of related future income tax
liabilities, as a result of the decision to no longer use the Commerce
brand name.
Fair value of assets acquired
-------------------------------------------------------------------------
(millions of Canadian dollars)
-------------------------------------------------------------------------
Cash and cash equivalents $408
Securities 25,154
Loans 18,031
Intangibles
Core deposit intangibles 1,505
Other identifiable intangibles 9
Land, buildings and equipment 1,904
Future income tax assets 447
Other assets 3,272
-------------------------------------------------------------------------
50,730
-------------------------------------------------------------------------
Less: liabilities assumed
Deposits 47,271
Obligations related to securities sold under repurchase
agreements 105
Accrued restructuring costs 127
Other liabilities 1,076
-------------------------------------------------------------------------
48,579
-------------------------------------------------------------------------
Fair value of identifiable net assets acquired 2,151
Goodwill 6,359
-------------------------------------------------------------------------
Total purchase consideration $8,510
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Goodwill from the acquisition is not amortized but assessed for
impairment on a periodic basis. Finite life intangible assets are
amortized on an economic life basis over 4 to 15 years, based on the
estimated useful lives.
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.
Please note that by leaving us an e-mail or voicemail message you are
providing your consent for us to forward your inquiry to the appropriate
party for response.
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 October 31, 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
Quarterly Earnings Conference Call
TD Bank Financial Group will host an earnings conference call on
Thursday, August 28, 2008. The call will be webcast live via TDBFG's
website at 3:00 p.m. ET. The call and webcast will feature presentations
by TDBFG executives on the bank's financial results for the third
quarter, followed by a question-and-answer-period with analysts. The
presentation material referenced during the call will be available on the
TDBFG website at www.td.com/investor/earnings.jsp on August 28, 2008, by
approximately 12:00 p.m. ET. A listen-only telephone line is available at
416-915-5762 or 1-800-733-7571 (toll free).
The webcast and presentations will be archived at
www.td.com/investor/calendar_arch.jsp. Replay of the teleconference will
be available from 6:00 p.m. ET on August 28, 2008, until September 28,
2008, by calling 416-640-1917 or 1-877-289-8525 (toll free). The passcode
is 21279590, followed by the pound key (No.).
Annual Meeting
Thursday, April 2, 2009
Saint John Trade and Convention Centre
Saint John, New Brunswick
About TD Bank Financial Group
The Toronto-Dominion Bank and its subsidiaries are collectively known as
TD Bank Financial Group. TD Bank Financial Group is the seventh largest
bank in North America by branches and serves approximately 17 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 Commerce Bank (to be known
together as TD Bank); 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 5.5 million on-line customers.
TD Bank Financial Group had CDN$509 billion in assets as of July 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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