TD Bank Group Newsroom
TD Bank Financial Group Reports Second Quarter 2008 Results
SECOND QUARTER FINANCIAL HIGHLIGHTS, compared with the second quarter a
year ago:
- Reported diluted earnings per share(1) were $1.12, compared with
$1.20.
- Adjusted diluted earnings per share(2) were $1.32, compared with
$1.36.
- Reported net income(1) was $852 million, compared with $879 million.
- Adjusted net income(2) was $973 million, compared with $995 million.
YEAR-TO-DATE FINANCIAL HIGHLIGHTS, six months ended April 30, 2008,
compared with the corresponding period a year ago:
- Reported diluted earnings per share(1) were $2.44, compared with
$2.46.
- Adjusted diluted earnings per share(2) were $2.77, compared with
$2.74.
- Reported net income(1) was $1,822 million, compared with
$1,800 million.
- Adjusted net income(2) was $2,033 million, compared with
$2,004 million.
SECOND QUARTER ADJUSTMENTS (ITEMS OF NOTE)
The second quarter reported diluted earnings per share figures above
include the following items of note:
- Amortization of intangibles of $92 million after tax (12 cents per
share), compared with $80 million after tax (11 cents per share) in
the second quarter last year.
- A gain of $1 million after tax 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 $7 million after
tax (1 cent per share) in the same quarter last year.
- Restructuring and integration charges of $30 million after tax
(4 cents per share), relating to the acquisition of Commerce Bancorp,
Inc. (Commerce) which closed on March 31, 2008.
- The reported diluted earnings per share figures above do not include
Commerce earnings for the month of April 2008 because there is 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.
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, May 28 /CNW/ - TD Bank Financial Group (TDBFG) today announced
its financial results for the second quarter ended April 30, 2008. The quarter
reflected solid earnings contributions from TD's Canadian and U.S. Personal
and Commercial Banking segments, while Wholesale Banking results were impacted
by challenging financial market conditions.
"I would characterize our second quarter as slightly disappointing but
quite acceptable in the context of what's happening in the markets. Our retail
businesses in both Canada and the U.S. - which produced more than 90% of our
earnings - delivered very solid results this quarter. This shows that we're
competing well in a tougher operating environment," said Ed Clark, TD Bank
Financial Group President and Chief Executive Officer.
SECOND QUARTER BUSINESS SEGMENT PERFORMANCE
Canadian Personal and Commercial Banking
TD Canada Trust posted solid earnings of $582 million in the second
quarter, up 8% over the same period last year. The quarter was defined by good
volume growth across all Canadian Personal and Commercial Banking operating
businesses. Strength in core banking, real estate secured lending, and
business banking and insurance, led earnings growth in the quarter.
"Our second quarter performance clearly demonstrated the strength and
resilience of the TD Canada Trust franchise. We made further investments in
our businesses by opening more new branches with longer hours, and adding more
employees to deliver the great customer experience we're known for," said
Clark.
Wealth Management
Wealth Management, including TDBFG's equity share of TD Ameritrade,
earned $182 million in the quarter. Within Canadian Wealth Management,
discount brokerage was impacted by a lower trading commission strategy, while
the full service broker business saw lower new issue activity and trading
volumes due to weaker capital markets. As previously announced, TD Ameritrade
contributed $67 million to Wealth Management's earnings for the quarter.
"We continue to believe our diversified Wealth Management offering
positions us well for future growth through a long-term focus on growing
assets, building an advisor network, and increasing trading volumes. But the
reality is, this quarter our Canadian Wealth Management business was affected
by weaker market activity, and to a lesser extent, strategic pricing decisions
we made last year which we believe will pay off in the future," said Clark.
U.S. Personal and Commercial Banking
TD Banknorth earned $130 million in the second quarter. The business
continued to see strength in commercial banking and solid overall asset
quality.
"We're very pleased with the performance of TD Banknorth, which delivered
core earnings growth in a challenging environment and is building momentum on
organic growth initiatives," said Clark.
TDBFG completed the acquisition of Commerce during the quarter. As
previously announced, earnings from the Commerce operations will be included
in TDBFG's results beginning in the third quarter of 2008.
"The close of the Commerce deal is a major milestone for TD, and we're
incredibly excited about the progress we have already made on the integration.
We're feeling very positive about our U.S. Personal and Commercial Banking
segment's ability to grow organically and deliver value to our shareholders.
That's why last month we increased our 2008 earnings target for the segment
from $700 million to at least $750 million, and reiterated our expectation for
a minimum of $1.2 billion in earnings for 2009," Clark said.
Wholesale Banking
Wholesale Banking produced earnings of $93 million for the second
quarter. The segment's results were impacted by the capital markets operating
environment, resulting in lower trading revenue, a decline in origination fees
and reduced security gains.
"Despite the near-term market challenges, TD Securities remains committed
to our focus on delivering high-quality earnings without extending out the
risk curve. While our Wholesale Banking strategy has helped us avoid the
direct hits of significant asset writedowns, our second quarter clearly
reflected we haven't been able to outrun the collateral effects of the issues
facing the financial services industry," said Clark.
Conclusion
"At the halfway mark of the year, we remain confident that all of our
businesses are well positioned to perform in a challenging environment and
deliver on their longer term strategies," said Clark. "And while we don't
expect to see earnings growth in 2008, we continue to believe TD will be a
positive outlier in both Canada and the United States."
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 and methods the Bank uses to report its financial condition,
including uncertainties associated with critical accounting assumptions and
estimates; the effect of applying future accounting changes; global capital
market activity; the Bank's ability to attract and retain key executives;
reliance on third parties to provide components of the Bank's business
infrastructure; the failure of third parties to comply with their obligations
to the Bank or its affiliates as such obligations relate to the handling of
personal information; technological changes; the use of new technologies in
unprecedented ways to defraud the Bank or its customers; legislative and
regulatory developments; change in tax laws; unexpected judicial or regulatory
proceedings; continued negative impact of the U.S. securities litigation
environment; unexpected changes in consumer spending and saving habits; the
adequacy of the Bank's risk management framework, including the risk that the
Bank's risk management models do not take into account all relevant factors;
the possible impact on the Bank's businesses of international conflicts and
terrorism; acts of God, such as earthquakes; the effects of disease or illness
on local, national or international economies; and the effects of disruptions
to public infrastructure, such as transportation, communication, power or
water supply. A substantial amount of the Bank's business involves making
loans or otherwise committing resources to specific companies, industries or
countries. Unforeseen events affecting such borrowers, industries or countries
could have a material adverse effect on the Bank's financial results,
businesses, financial condition or liquidity. The preceding list is not
exhaustive of all possible factors. Other factors could also adversely affect
the Bank's results. For more information, see the discussion starting on page
59 of the Bank's 2007 Annual Report. All such factors should be considered
carefully when making decisions with respect to the Bank, and undue reliance
should not be placed on the Bank's forward-looking statements as they may not
be suitable for other purposes. The Bank does not undertake to update any
forward-looking statements, whether written or oral, that may be made from
time to time by or on its behalf, except as required under applicable
securities legislation.
This document was reviewed by the Bank's Audit Committee and was approved
by the Bank's Board of Directors, on the Audit Committee's recommendation,
prior to its release.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATING PERFORMANCE
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This Management's Discussion and Analysis (MD&A) is presented to enable
readers to assess material changes in the financial condition and operational
results of TD Bank Financial Group (the Bank) for the three and six months
ended April 30, 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 May 27, 2008. Unless
otherwise indicated, all amounts are expressed in Canadian dollars and have
been primarily derived from the Bank's Annual or Interim Consolidated
Financial Statements prepared in accordance with Canadian generally accepted
accounting principles (GAAP). Certain comparative amounts have been
reclassified to conform to the presentation adopted in the current period.
Additional information relating to the Bank is available on the Bank's website
www.td.com, as well as on SEDAR at www.sedar.com and on the U.S. Securities
and Exchange Commission's (SEC's) website at www.sec.org (EDGAR filers
section).
FINANCIAL HIGHLIGHTS
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For the six
For the three months ended months ended
(millions of ------------------------------ -------------------
Canadian dollars, Apr. 30 Jan. 31 Apr. 30 Apr. 30 Apr. 30
except as noted) 2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Results of operations
Total revenue $3,388 $3,604 $3,544 $6,992 $7,049
Provision for credit
losses 232 255 172 487 335
Non-interest expenses 2,206 2,228 2,297 4,434 4,518
Net income - reported(1) 852 970 879 1,822 1,800
Net income - adjusted(1) 973 1,060 995 2,033 2,004
Economic profit(2) 283 462 421 735 864
Return on common
equity - reported 13.4% 18.0% 17.1% 15.4% 17.6%
Return on invested
capital(2) 13.2% 16.6% 16.4% 14.6% 16.6%
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Financial position
Total assets $503,621 $435,153 $396,734 $503,621 $396,734
Total risk-weighted
assets(3) 178,635 145,900 149,391 178,635 149,391
Total shareholders'
equity 30,595 22,940 21,775 30,595 21,775
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Financial ratios -
reported
Efficiency ratio 65.1% 61.8% 64.8% 63.4% 64.1%
Tier 1 capital to
risk-weighted assets 9.1 10.9 9.8 9.1 9.8
Provision for credit
losses as a % of net
average loans 0.49 0.57 0.41 0.53 0.39
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Common share information
- reported
(Canadian dollars)
Per share
Basic earnings $1.12 $1.34 $1.21 $2.46 $2.49
Diluted earnings 1.12 1.33 1.20 2.44 2.46
Dividends 0.59 0.57 0.53 1.16 1.01
Book value 36.70 30.69 29.66 36.70 29.66
Closing share price 66.11 68.01 67.80 66.11 67.80
Shares outstanding
(millions)
Average basic 747.7 718.3 719.1 732.9 718.7
Average diluted 753.7 724.6 725.9 739.0 725.4
End of period 802.9 719.0 719.9 802.9 719.9
Market capitalization
(billions of Canadian
dollars) $53.1 $48.9 $48.8 $53.1 $48.8
Dividend yield 3.5% 3.2% 2.8% 3.4% 2.8%
Dividend payout ratio 56.2% 42.6% 43.8% 49.0% 40.7%
Price to earnings
multiple 12.1 12.3 14.8 12.1 14.8
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Common share information
- adjusted
(Canadian dollars)
Per share
Basic earnings $1.33 $1.46 $1.37 $2.79 $2.77
Diluted earnings 1.32 1.45 1.36 2.77 2.74
Dividend payout ratio 49.2% 39.0% 38.7% 43.8% 36.5%
Price to earnings
multiple 11.5 11.7 13.2 11.5 13.2
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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 periods numbers are based on the Basel I
Capital Accord (Basel I). For details, see the "Capital Position"
section.
HOW WE PERFORMED
Corporate Overview
The Toronto-Dominion Bank and its subsidiaries are collectively known as
TD Bank Financial Group. The Bank serves 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 (excluding
the U.S.); 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; 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
$504 billion in assets as at April 30, 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's financial results, as presented on pages 32 to 46 of this
Report to Shareholders, have been prepared in accordance with GAAP. The Bank
refers to results prepared in accordance with GAAP as "reported" results. The
Bank also utilizes non-GAAP financial measures referred to as "adjusted"
results to assess each of its businesses and to measure overall Bank
performance. To arrive at adjusted results, the Bank removes "items of note",
net of income taxes, from reported results. The items of note 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 a reconciliation between the Bank's reported
and adjusted results.
Operating Results - Reported
-------------------------------------------------------------------------
For the six
For the three months ended months ended
------------------------------ -------------------
(millions of Apr. 30 Jan. 31 Apr. 30 Apr. 30 Apr. 30
Canadian dollars, 2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Net interest income $1,858 $1,788 $1,662 $3,646 $3,333
Other income 1,530 1,816 1,882 3,346 3,716
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Total revenue 3,388 3,604 3,544 6,992 7,049
Provision for credit
losses (232) (255) (172) (487) (335)
Non-interest expenses (2,206) (2,228) (2,297) (4,434) (4,518)
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Income before provision
for income taxes, non-
controlling interests
in subsidiaries and
equity in net income of
an associated company 950 1,121 1,075 2,071 2,196
Provision for income taxes (160) (235) (234) (395) (452)
Non-controlling interests
in subsidiaries, net
of income taxes (9) (8) (27) (17) (74)
Equity in net income of
an associated company,
net of income taxes 71 92 65 163 130
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Net income - reported 852 970 879 1,822 1,800
Preferred dividends (11) (8) (7) (19) (13)
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Net income available to
common shareholders -
reported $841 $962 $872 $1,803 $1,787
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-------------------------------------------------------------------------
Reconciliation of Non-GAAP Financial Measures(1)
Adjusted Net Income to Reported Results
-------------------------------------------------------------------------
Operating results
- adjusted For the six
For the three months ended months ended
------------------------------ -------------------
(millions of Apr. 30 Jan. 31 Apr. 30 Apr. 30 Apr. 30
Canadian dollars, 2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Net interest income $1,858 $1,788 $1,662 $3,646 $3,333
Other income(2) 1,529 1,791 1,871 3,320 3,713
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Total revenue 3,387 3,579 3,533 6,966 7,046
Provision for credit
losses(3) (232) (238) (172) (470) (335)
Non-interest expenses(4) (2,041) (2,106) (2,099) (4,147) (4,202)
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Income before provision
for income taxes, non-
controlling interests
in subsidiaries and
equity in net income of
an associated company 1,114 1,235 1,262 2,349 2,509
Provision for
income taxes(5) (220) (275) (298) (495) (562)
Non-controlling interests
in subsidiaries, net
of income taxes(6) (9) (8) (46) (17) (97)
Equity in net income of
an associated company,
net of income taxes(7) 88 108 77 196 154
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Net income - adjusted 973 1,060 995 2,033 2,004
Preferred dividends (11) (8) (7) (19) (13)
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Net income available to
common shareholders -
adjusted 962 1,052 988 2,014 1,991
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Items of note affecting
net income, net of
income taxes:
Amortization of
intangibles(8) (92) (75) (80) (167) (163)
TD Banknorth
restructuring,
privatization and
merger-related charges(9) - - (43) - (43)
Restructuring and
integration charges
relating to the Commerce
acquisition(10) (30) - - (30) -
Change in fair value
of credit default swaps
hedging the corporate
loan book, net of
provision for credit
losses(11) 1 25 7 26 2
Other tax items(12) - (20) - (20) -
Provision for
insurance claims(13) - (20) - (20) -
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Total items of note (121) (90) (116) (211) (204)
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Net income available to
common shareholders -
reported $841 $962 $872 $1,803 $1,787
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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: second
quarter 2008 - $1million gain due to change in fair value of credit
default swaps (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 pre-tax provision for insurance
claims, as explained in footnote 13; second quarter 2007 -
$11 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:
second quarter 2008 - $117 million amortization of intangibles;
$48 million restructuring and integration charges, as explained in
footnote 10; first quarter 2008 - $122 million amortization of
intangibles; second quarter 2007 - $112 million amortization of
intangibles; $86 million TD Banknorth restructuring, privatization
and merger-related charges, as explained in footnote 9.
(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: second quarter 2007 - $4 million amortization of intangibles;
$15 million on restructuring, privatization and merger-related
charges.
(7) Adjusted equity in net income of an associated company excludes the
following items of note: second quarter 2008 - $17 million
amortization of intangibles; first quarter 2008 - $16 million
amortization of intangibles; second quarter 2007 - $12 million
amortization of intangibles.
(8) Amortization of intangibles primarily relates to the Canada Trust
acquisition in 2000, the TD Banknorth Inc. (TD Banknorth)
acquisition in 2005 and its privatization in 2007, and the
acquisitions by TD Banknorth of Hudson United Bancorp (Hudson) in
2006 and Interchange Financial Services Corporation (Interchange) in
2007, and the amortization of intangibles included in equity in net
income of TD Ameritrade.
(9) The TD Banknorth restructuring, privatization and merger-related
charges include the following: $31million 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) This represents the negative impact of the scheduled reductions in
the income tax rate on reduction of net future income tax assets.
(13) The provision for insurance claims relates to a recent court
decision in Alberta. The Alberta government's legislation
effectively capping minor injury insurance claims was challenged and
held to be unconstitutional. While the government of Alberta has
appealed the decision, the ultimate outcome remains uncertain. As a
result, the Bank accrued an additional actuarial liability for
potential claims in the first quarter of 2008.
Reconciliation of Reported Earnings per Share (EPS) to Adjusted EPS(1)
-------------------------------------------------------------------------
For the six
For the three months ended months ended
------------------------------ -------------------
Apr. 30 Jan. 31 Apr. 30 Apr. 30 Apr. 30
(Canadian dollars) 2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Diluted - reported $1.12 $1.33 $1.20 $2.44 $2.46
Items of note affecting
income (as above) 0.16 0.12 0.16 0.29 0.28
Items of note affecting
EPS only(2) 0.04 - - 0.04 -
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Diluted - adjusted $1.32 $1.45 $1.36 $2.77 $2.74
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Basic - reported $1.12 $1.34 $1.21 $2.46 $2.49
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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 earnings per share figures do not include Commerce
earnings for the month of April 2008 because there is 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 six
For the three months ended months ended
------------------------------ -------------------
(millions of Apr. 30 Jan. 31 Apr. 30 Apr. 30 Apr. 30
Canadian dollars, 2008 2008 2007 2008 2007
-------------------------------------------------------------------------
TD Canada Trust $37 $21 $45 $58 $94
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TD Banknorth:
Reported amortization
of intangibles 32 33 20 65 40
Less: non-controlling
interest - - 4 - 8
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Net amortization of
intangibles 32 33 16 65 32
TD Ameritrade (included
in equity in net income
of an associated company) 17 16 12 33 24
Other 6 5 7 11 13
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Amortization of
intangibles, net of
income taxes(1) $92 $75 $80 $167 $163
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(1) Amortization of intangibles is included in the Corporate segment.
Economic Profit and Return on Invested Capital
The Bank utilizes economic profit as a tool to measure shareholder value
creation. Economic profit is adjusted net income available to common
shareholders less a charge for average invested capital. Average invested
capital is equal to average common equity for the period plus the average
cumulative after-tax goodwill and intangible assets amortized as of the
reporting date. The rate used in the charge for capital is the equity cost of
capital calculated using the capital asset pricing model. The charge
represents an assumed minimum return required by common shareholders on the
Bank's invested capital. The Bank's goal is to achieve positive and growing
economic profit.
Return on invested capital (ROIC) is adjusted net income available to
common shareholders divided by average invested capital. ROIC is a variation
of the economic profit measure that is useful in comparison to the equity cost
of capital. Both ROIC and the 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 six
For the three months ended months ended
------------------------------ -------------------
(millions of Apr. 30 Jan. 31 Apr. 30 Apr. 30 Apr. 30
Canadian dollars, 2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Average common equity $25,593 $21,221 $20,940 $23,599 $20,435
Average cumulative
goodwill/intangible
assets amortized,
net of income taxes 4,082 4,015 3,784 4,049 3,750
-------------------------------------------------------------------------
Average invested
capital $29,675 $25,236 $24,724 $27,648 $24,185
Rate charged for
invested capital 9.3% 9.3% 9.4% 9.3% 9.4%
-------------------------------------------------------------------------
Charge for invested
capital $(679) $(590) $(567) $(1,279) $(1,127)
-------------------------------------------------------------------------
Net income available
to common shareholders
- reported $841 $962 $872 $1,803 $1,787
Items of note affecting
net income, net of
income taxes 121 90 116 211 204
-------------------------------------------------------------------------
Net income available to
common shareholders -
adjusted $962 $1,052 $988 $2,014 $1,991
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Economic profit $283 $462 $421 $735 $864
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Return on invested
capital 13.2% 16.6% 16.4% 14.6% 16.6%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Significant Events in 2008
Acquisition of Commerce Bancorp, Inc.
On March 31, 2008, the Bank acquired 100% of the outstanding shares of
Commerce Bancorp, Inc. (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 $6.1 billion and intangible
assets of $1.9 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, together with TD Banknorth, is referred to as "TD Commerce
Bank" in this document. TD Commerce Bank 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 April 30, 2008.
The fiscal periods of Commerce and the Bank are not co-terminus.
Commerce's fiscal quarter ends March 31 while the Bank's second quarter ends
April 30. As a result, Commerce's results for the three months ended each
calendar quarter will be consolidated 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 do 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 TD Commerce Bank events for the quarter
ended April 30, 2008.
The projected adjusted 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 adjusted results for 2008 are equal to the first quarter
2008 annualized plus 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 adjusted
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.org
(EDGAR filers section).
FINANCIAL RESULTS OVERVIEW
-------------------------------------------------------------------------
Performance Summary
An overview of the Bank's performance on an adjusted basis for the second
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 are explained under the "How the Bank Reports"
section.
- Adjusted diluted earnings per share for the first six months of 2008
were up 1% 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 first six months of
2008 was 2.61%, down from 2.74% in the first half of 2007.
- Total shareholder return for the twelve months ended April 30, 2008
was 1%, above the peer average of -17%.
Net Income
Year-over-year comparison
-------------------------
Reported net income for the current quarter was $852 million, down
$27 million, or 3%, compared with the second quarter last year. Adjusted net
income was $973 million, a decline of $22 million or 2%. The decrease in
adjusted net income was primarily due to a decline in Wholesale Banking
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 negatively impacted by a 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
impact of the TD Banknorth privatization. Canadian Personal and Commercial
Banking delivered earnings growth driven largely by good volume growth across
most banking products.
Prior quarter comparison
------------------------
Reported net income decreased $118 million, or 12%, compared with the
prior quarter. Adjusted net income for the second quarter decreased by
$87 million or 8%. The lower reported result was primarily due to the current
quarter restructuring and integration charges of $30 million after tax related
to the Commerce acquisition and lower gains on credit default swaps (CDS)
hedging the corporate loan book. Both of these items were reported as items of
note this quarter. The Wholesale Banking segment was the primary contributor
to decreased adjusted net income due to difficult capital market conditions
resulting in lower trading revenue and lower securities gains. Canadian
Personal and Commercial Banking earnings were down modestly, largely due to
the impact of less days this quarter. The Corporate segment loss declined by
$30 million due largely to the impact of various tax items.
Year-to-date comparison
-----------------------
On a year-to-date basis, reported net income of $1,822 million increased
$22 million, or 1%, compared with the same period last year. Adjusted net
income of $2,033 million increased $29 million or 1%. The increase in adjusted
net income was primarily driven by higher U.S. Personal and Commercial Banking
net income due to increased ownership associated with the privatization of TD
Banknorth and growth from Canadian Personal and Commercial Banking income.
Wealth Management delivered higher earnings due to growth in TD Ameritrade's
underlying earnings, partially offset by weaker results in Canadian Wealth
Management. These increases were partially offset by lower Wholesale Banking
earnings due to a challenging operating environment for the capital markets
businesses.
Net Interest Income
Year-over-year comparison
-------------------------
Net interest income for the quarter was $1,858 million, an increase of
$196 million, or 12%, compared with the second quarter last year. The growth
was driven by the Canadian Personal and Commercial Banking and Wholesale
Banking segments with partial offsets in U.S. Personal and Commercial Banking
and the Corporate segment. Canadian Personal and Commercial Banking increased
primarily due to volume growth across most banking products, partially offset
by a 9 basis point (bps) decline in margin on average earning assets to 2.96%.
Wholesale Banking net interest income increased primarily due to higher
trading-related net interest income, which was partially offset by lower
trading revenue in Wholesale Banking included in other income. U.S. Personal
and Commercial Banking net interest income declined, primarily due to the
strengthening of the Canadian dollar and a 16 bps compression in net interest
margin to 3.73%.
Prior quarter comparison
------------------------
Net interest income increased by $70 million, or 4%, compared with the
previous quarter. The increase was driven primarily by Wholesale Banking with
a partial offset in the Corporate segment while other operating segments had
minor decreases due to the lower number of days in the quarter. The increase
in Wholesale Banking was primarily due to higher trading-related net interest
income which was largely offset by lower trading revenue included in other
income.
Year-to-date comparison
-----------------------
On a year-to-date basis, net interest income of $3,646 million increased
$313 million, or 9%, compared with the same period last year. The growth was
driven primarily by the Canadian Personal and Commercial Banking and Wholesale
Banking segments with U.S. Personal and Commercial Banking providing a partial
offset. Canadian Personal and Commercial Banking net interest income increased
primarily due to volume growth in real-estate secured lending, deposits and
credit cards, which was partially offset by a 7 bps decline in margin on
average earning assets to 2.97%. Wholesale Banking net interest income
increased largely due to higher trading-related net interest income. However,
the increase in trading-related net interest income was largely offset by
lower trading revenue in Wholesale Banking included in other income. U.S.
Personal and Commercial Banking net interest income declined primarily due to
the strengthening of the Canadian dollar and the impact of an 11 bps
compression in net interest margin.
Other Income
Year-over-year comparison
-------------------------
Reported other income for the second quarter was $1,530 million, down
$352 million, or 19%, compared with the second quarter of last year. On an
adjusted basis, other income was $1,529 million, lower by $342 million or 18%.
The decrease in adjusted other income was driven by a $384 million decline in
Wholesale Banking due to lower trading revenue, and underwriting and advisory
fees as the capital markets businesses were impacted by difficult market
conditions. Wealth Management other income also declined from the prior year
due to lower commissions in discount brokerage as a result of pricing changes
introduced last year. Canadian Personal and Commercial Banking other income
increased driven by higher personal deposit and card services fee growth.
Prior quarter comparison
------------------------
Reported other income decreased $286 million, or 16%, compared with the
prior quarter. Adjusted other income was $262 million, or 15%, below the prior
quarter. The decline in adjusted other income was due to a $302 million
decrease in Wholesale Banking resulting from weaker foreign exchange and
interest rate and credit trading revenue, lower securities gains and a decline
in underwriting and advisory fees. The U.S. Personal and Commercial Banking
segment provided a partial offset with marginally higher other income.
Year-to-date comparison
-----------------------
Reported other income of $3,346 million decreased $370 million, or 10%,
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 hedging the corporate loan book. Year-to-date adjusted other
income was down $393 million, or 11%, from the previous year. The decrease in
adjusted other income was due to a decrease of $400 million in Wholesale
Banking driven by weak trading revenue and lower underwriting and advisory
fees. Wealth Management and Corporate segments experienced marginal declines
in other income. Canadian Personal and Commercial Banking reported higher
other income, largely driven by higher fee income, primarily from personal
deposit and credit card growth.
Provision for Credit Losses
Year-over-year comparison
-------------------------
During the quarter, the Bank recorded a provision for credit losses of
$232 million, an increase of $60 million compared with the second quarter last
year, primarily due to higher specific provisions in the Canadian Personal and
Commerial Banking segments and higher general provisions in the U.S. Personal
and Commercial Banking segment.
Prior quarter comparison
------------------------
Provision for credit losses for the second quarter was down $23 million
from $255 million in the prior quarter. The decrease was primarily due to a
$46 million decrease in specific provisions in the Wholesale Banking segment,
which was partially offset by increases in the Canadian and U.S. Personal and
Commercial Banking segments of $19 million and $20 million, respectively.
Year-to-date comparison
-----------------------
On a year-to-date basis, provision for credit losses increased
$152 million, from $335 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 six
For the three months ended months ended
------------------------------ -------------------
(millions of Apr. 30 Jan. 31 Apr. 30 Apr. 30 Apr. 30
Canadian dollars, 2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Net new specifics
(net of reversals) $244 $267 $221 $511 $405
Recoveries (33) (32) (37) (65) (68)
-------------------------------------------------------------------------
Provision for credit
losses - specifics 211 235 184 446 337
Change in general allowance
VFC 16 15 11 31 22
TD Banknorth 5 4 (23) 9 (24)
Other - 1 - 1 -
-------------------------------------------------------------------------
Total $232 $255 $172 $487 $335
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Non-Interest Expenses and Efficiency Ratio
Year-over-year comparison
-------------------------
Reported non-interest expenses for the second quarter were
$2,206 million, down $91 million, or 4%, compared with the second quarter last
year. The current quarter reported expenses included $48 million of
restructuring and integration charges attributable to the Commerce acquisition
while the prior period included $86 million in charges related to the
privatization of TD Banknorth and to the transfer of functions from TD Bank
USA to TD Banknorth. These items were recognized as items of note. Adjusted
non-interest expenses of $2,041 million were down $58 million, or 3%, compared
with the second quarter last year due to reductions in U.S. Personal and
Commercial Banking and Wholesale Banking, partially offset by growth in
Canadian Personal and Commercial Banking. U.S. Personal and Commercial Banking
non-interest expenses declined primarily due to the strengthening Canadian
dollar and cost control initiatives. Wholesale Banking expenses were down
primarily due to lower variable compensation. Canadian Personal and Commercial
Banking reported higher year-over-year expenses, primarily driven by
investments in new branches and longer hours.
The reported efficiency ratio was 65.1%, compared with 64.8% in the
second quarter last year. The Bank's adjusted efficiency ratio was 60.3%,
compared to 59.4% in the same period last year.
Prior quarter comparison
------------------------
Reported non-interest expenses of $2,206 million were down $22 million,
or 1%, compared with the prior quarter. Reported non-interest expenses this
quarter included $48 million of restructuring and integration charges
attributable to the Commerce acquisition recognized as an item of note. Total
adjusted non-interest expenses were $2,041 million, down $66 million or 3%.
The decrease was a result of lower expenses in the Corporate segment and
Wholesale Banking. Corporate segment experienced favourable tax items this
quarter. Wholesale Banking expenses declined, driven by lower incentive
compensation.
The reported efficiency ratio was 65.1%, compared with 61.8% in the prior
quarter. The Bank's adjusted efficiency ratio was 60.3% compared with 58.8% in
the prior quarter.
Year-to-date comparison
-----------------------
On a year-to-date basis, reported non-interest expenses of $4,434 million
were down $84 million, or 2%, compared with the same period last year. The
current year-to-date reported expenses included $48 million of restructuring
and integration charges attributable to the Commerce acquisition while the
prior year-to-date period included $86 million in charges related to the
privatization of TD Banknorth and to the transfer of functions from TD Bank
USA to TD Banknorth. Total adjusted non-interest expenses were $4,148 million,
down $54 million, or 1%, due to declines in U.S. Personal and Commercial
Banking and Wholesale Banking, partially offset by growth in Canadian Personal
and Commercial Banking. U.S. Personal and Commercial Banking accounted for the
greatest portion of the year-to-date decline, primarily due to the
strengthening of the Canadian dollar and the impact of cost control
initiatives. Wholesale Banking expenses decreased primarily due to lower
incentive compensation. 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.
The reported efficiency ratio improved to 63.4%, compared with 64.1% in
the same period last year. The Bank's adjusted efficiency ratio improved to
59.5%, from 59.6% 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 effective tax rate was 16.8% for the second quarter, compared
with 21.8% in the second quarter last year, and 21.0% in the prior quarter. On
a year-to-date basis, the Bank's effective tax rate was 19.1%, compared with
20.6% in the same period last year. The period over period decrease is
primarily attributable to a recognition of future tax benefits in the current
quarter.
Taxes(1)
-------------------------------------------------------------------------
For the three months ended
----------------------------------------------
(millions of Apr. 30 Jan. 31 Apr. 30
Canadian dollars) 2008 2008 2007
-------------------------------------------------------------------------
Income taxes at Canadian
statutory income tax rate $310 32.7% $367 32.8% $374 34.8%
Increase (decrease)
resulting from:
Dividends received (79) (8.3) (87) (7.7) (67) (6.2)
Rate differentials on
international operations (69) (7.3) (84) (7.5) (65) (6.0)
Other - net (2) (0.3) 39 3.4 (8) (0.8)
-------------------------------------------------------------------------
Provision for income taxes
and effective income
tax rate - reported $160 16.8% $235 21.0% $234 21.8%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
---------------------------------------------------------
For the six months ended
------------------------------
(millions of Apr. 30 Apr. 30
Canadian dollars) 2008 2007
---------------------------------------------------------
Income taxes at Canadian
statutory income tax rate $677 32.7% $766 34.9%
Increase (decrease)
resulting from:
Dividends received (166) (8.0) (170) (7.8)
Rate differentials on
international operations (153) (7.4) (147) (6.7)
Other - net 37 1.8 3 0.2
---------------------------------------------------------
Provision for income taxes
and effective income
tax rate - reported $395 19.1% $452 20.6%
---------------------------------------------------------
---------------------------------------------------------
(1) Certain comparative amounts have been reclassified to conform to the
presentation adopted in the current period.
Reconciliation of Non-GAAP Provision for Income Taxes
-------------------------------------------------------------------------
For the six
For the three months ended months ended
----------------------------- -------------------
(millions of Apr. 30 Jan. 31 Apr. 30 Apr. 30 Apr. 30
Canadian dollars) 2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Provision for income
taxes - reported $160 $235 $234 $395 $452
Increase (decrease)
resulting from items
of note:
Amortization of
intangibles 42 63 40 105 83
TD Banknorth
restructuring,
privatization and
merger-related charges - - 28 - 28
Restructuring and
integration charges
relating to the Commerce
acquisition 18 - - 18 -
Change in fair value of
credit default swaps
hedging the corporate
loan book, net of
provision for
credit losses - (13) (4) (13) (1)
Other tax items - (20) - (20) -
Provision for insurance
claims - 10 - 10 -
-------------------------------------------------------------------------
Tax effect
- items of note 60 40 64 100 110
-------------------------------------------------------------------------
Provision for income
taxes - adjusted $220 $275 $298 $495 $562
-------------------------------------------------------------------------
-------------------------------------------------------------------------
HOW OUR BUSINESSES PERFORMED
For management reporting purposes, the Bank's operations and activities
are organized around the following operating business segments: Canadian
Personal and Commercial Banking, Wealth Management, including TD Ameritrade,
U.S. Personal and Commercial Banking, and Wholesale Banking. The Bank's other
activities are grouped into the Corporate segment. Results of each business
segment reflect revenue, expenses, assets and liabilities generated by the
business in that segment. The Bank measures and evaluates the performance of
each segment based on adjusted results where applicable, and for those
segments the Bank notes that the measure is adjusted. Amortization of
intangible expense is included in the Corporate segment. Accordingly, net
income for the operating business segments is presented before amortization of
intangibles, as well as any other items of note not attributed to the
operating segments. For further details, see the "How the Bank Reports"
section, the "Business Focus" section in the 2007 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 $107 million, compared with $99 million in the
second quarter last year, and $135 million in the prior quarter. On a year-to-
date basis, the TEB adjustment was $242 million, compared with $256 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
$582 million, an increase of $42 million, or 8%, compared with the second
quarter last year, and a decrease of $16 million, or 3%, compared with the
prior quarter. The annualized return on invested capital was 29%, up from the
27% in the second quarter last year and relatively flat with the prior
quarter.
Net income for the six months ended April 30, 2008 was $1,180 million, an
increase of $96 million, or 9%, compared with the same period last year. The
return on invested capital, on a year-to-date basis, was 29%, compared to 27%
in same period last year.
Revenue for the quarter was $2,134 million, which grew by $148 million,
or 7%, compared with the second quarter last year, due to good volume growth
across most banking products, particularly in real-estate secured lending,
deposits and credit cards. Revenue decreased by $13 million, or 1%, compared
with the prior quarter, due mainly to fewer calendar days in the current
quarter. On a year-to-date basis, revenue was $4,281 million, which increased
by $285 million, or 7%, compared with the same period last year, for reasons
similar to the comparison of this quarter to the second quarter last year.
Higher fee income, primarily from personal deposit and credit card growth,
also contributed to the year-over-year growth. Margin on average earning
assets for the quarter decreased by 9 bps to 2.96%, compared with the second
quarter last year due to portfolio mix, continued higher funding costs and
ongoing price competition in high-yield savings and term deposits. Margin on
average earning assets decreased 2 bps compared with the prior quarter on the
continued price competition in deposits and on changing portfolio mix. On a
year-to-date basis, margin on average earning assets decreased by 7 bps to
2.97%, compared with the same period last year.
Compared with the second quarter last year, real-estate secured lending
volume (including securitizations) grew by $14.7 billion, or 11%, personal
deposit volume grew by $6.5 billion, or 6%, and consumer loans volume grew by
$1.7 billion or 7%. Business deposits volume increased by $3.4 billion, or 9%,
and business loans and acceptances volume grew by $2.7 billion or 14%. Gross
originated insurance premiums grew by $54 million or 9%. As at February 2008,
personal deposit market share was 20.8% and personal lending market share was
19.8%. Small business lending (credit limits of less than $250,000) market
share as at December 31, 2007 was 18.5%.
Provision for credit losses for the quarter was $191 million, which
increased by $48 million, or 34%, compared with the second quarter last year.
Personal banking provision for credit losses of $175 million was $36 million
higher than the second quarter last year, primarily due to higher personal
lending and credit card volumes. Business banking provision for credit losses
was $16 million for the quarter, compared with $4 million in the second
quarter last year. Annualized provision for credit losses as a percentage of
credit volume was 0.39%, an increase of 7 bps, compared with the second
quarter last year, primarily from a change in asset mix. Provision for credit
losses increased by $19 million, or 11%, compared with the prior quarter.
Personal banking provisions increased $9 million, or 5%, compared with the
prior quarter, primarily due to higher volumes. Business banking provisions
increased by $10 million, compared with the prior quarter, mainly due to
reversals and recoveries in the prior quarter. On a year-to-date basis,
provision for credit losses was $363 million, which increased by $82 million,
or 29%, compared with the same period last year. Personal banking provisions
of $341 million increased $74 million, or 28%, compared with the same period
last year, primarily due to reasons listed above for the quarter, while
business banking provisions amounted to $22 million, compared with $14 million
in the same period last year.
Non-interest expenses for the quarter were $1,095 million, which
increased by $62 million, or 6%, compared with the second quarter last year.
On a year-to-date basis, non-interest expenses were $2,191 million, which
increased by $99 million, or 5%, 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 decreased by $1 million compared with the
prior quarter, mainly due to fewer calendar days in the current quarter and
lower business volume-related costs. The average full time equivalent (FTE)
staffing levels increased by 1,582, or 5%, compared with the second quarter
last year. On a year-to-date basis, FTE staffing levels increased by 1,530, or
5%, compared with the same period last year. The growth was primarily from
increases in branch sales and service personnel, as well as continued growth
in the insurance business. FTE staffing levels decreased by 176, or 1%,
compared with the prior quarter, primarily due to fewer seasonal part-time
staff. The efficiency ratio for the current quarter improved to 51.3%,
compared with 52.0%, in the second quarter last year and was relatively flat
compared with the prior quarter ratio of 51.0%. On a year-to-date basis, the
efficiency ratio improved to 51.2%, compared with 52.4% in the same period
last year.
The outlook for the rate of year-over-year revenue growth is expected to
be relatively stable for the balance of the year although margins continue to
be vulnerable to higher funding costs and volume growth is susceptible to an
economic downturn. Over time, we believe that revenue growth will continue to
benefit from increasing our leading position in branch hours and new branch
openings. Provisions for credit losses on both personal and business banking
loans, in aggregate, are expected to grow, in line with the underlying volume
growth and increase if economic conditions continue to worsen. The business
lending provision should increase as well, as the expectation is that prior
net recoveries in business loans will not continue. Expenses will continue to
be closely managed to ensure spending supports long-term earnings growth.
Wealth Management
Wealth Management's net income for the second quarter was $182 million,
which represented a decrease of $15 million, or 8%, compared with the second
quarter last year, and a decrease of $34 million, or 16%, compared with the
prior quarter. The annualized return on invested capital for the quarter was
19% compared with 22% in the second quarter last year and 23% in the prior
quarter. Canadian Wealth Management's net income was $115 million, which
represented a decrease of $19 million, or 14%, compared with the second
quarter last year, and a decrease of $13 million, or 10%, compared to the
prior quarter. The Bank's investment in TD Ameritrade generated net income of
$67 million, an increase of $4 million, or 6%, compared with the second
quarter last year and a decrease of $21 million, or 24%, compared with the
prior quarter. Strong core earnings growth was partially offset by the impact
of the stronger Canadian dollar. For the second quarter ended March 31, 2008,
TD Ameritrade delivered net income of US$187 million, up 33% from the same
period last year and 22% below the prior quarter.
Net income for the six months ended April 30, 2008 was $398 million, an
increase of $15 million, or 4%, 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 $155 million of net income
compared with $127 million in the same period last year. On a year-to-date
basis, the return on invested capital was 21%, flat from the same period last
year.
Revenue for the quarter was $558 million, which decreased by $36 million,
or 6%, compared with the second quarter last year, primarily due to lower
commissions in discount brokerage as a result of pricing changes introduced
last year and lower new issue and trading revenues in full-service brokerage.
Offsetting the decline was higher trade volumes in discount brokerage and
increased net interest income, primarily due to growth in client cash deposits
and margin loans. Revenue decreased by $12 million, or 2%, compared with the
prior quarter, primarily due to a combination of lower trading revenues, new
issues and net interest income. On a year-to-date basis, revenue was $1,128
million, which decreased $17 million, or 1%, compared with the same period
last year, primarily due to lower commissions in discount brokerage and
current market conditions impacting new issues and trading revenues in full-
service brokerage, partially offset by higher trade volumes in discount
brokerage and the new mutual fund administration fee.
Expenses for the quarter were $387 million, which decreased by $6
million, or 2%, compared with the second quarter last year, primarily due to
lower variable compensation associated with lower revenues. Expenses increased
by $8 million, or 2%, compared with the prior quarter, primarily due to timing
of compensation-related expenses. On a year-to-date basis, expenses were $766
million, which increased by $9 million, or 1%, compared with the same period
last year, mainly due to higher volume-related payments to sellers of the
Bank's mutual funds, the new mutual fund administration fee and the continued
investment in growing the sales force in our advice-based businesses and
related support staff.
Assets under management of $174 billion at April 30, 2008 increased $14
billion, or 9%, from October 31, 2007, due to addition of net new client
assets and the additional mutual fund assets from TD Ameritrade, partially
offset by the impact of market-related declines. Assets under administration
totalled $187 billion at the end of the quarter, increasing by $2 billion, or
1% from October 31, 2007, primarily due to addition of net new client assets,
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 six
For the three months ended months ended
----------------------------- -------------------
(millions of Apr. 30 Jan. 31 Apr. 30 Apr. 30 Apr. 30
Canadian dollars) 2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Canadian Wealth $115 $128 134 $243 256
TD Ameritrade $67 88 63 $155 127
-------------------------------------------------------------------------
Net income $182 $216 197 $398 383
-------------------------------------------------------------------------
-------------------------------------------------------------------------
U.S. Personal and Commercial Banking
The acquisition of Commerce closed on March 31, 2008. The Bank's
consolidated balance sheet as at April 30, 2008 included the Commerce assets
and liabilities. As this segment reports results on a one-month lag, Commerce
results of operations will be included starting next quarter.
U.S. Personal and Commercial Banking's reported net income for the
quarter was $100 million, compared with $23 million in the second quarter last
year, and $127 million in the prior quarter. Adjusted net income for the
quarter was $130 million, compared with $62 million in the second quarter last
year and $127 million in the prior quarter. Adjusted net income for the
quarter excludes a $30 million after-tax charge for restructuring and
integration costs related to the Commerce acquisition while adjusted net
income for the second quarter last year excluded a $39 million after-tax
charge being the Bank's share of TD Banknorth's restructuring, privatization
and merger-related charges. There were no items of note affecting earnings in
the first quarter of 2008. Much of the increase in adjusted net income over
the second quarter of last year related to the increased ownership percentage
in TD Banknorth from the privatization transaction that was completed in April
2007. The annualized return on invested capital was 5.9%, compared with 3.8%
in the second quarter last year and 5.7% in the prior quarter.
Reported net income for the six months ended April 30, 2008 was $227
million, compared with $87 million in the same period last year. On a year-to-
date basis, adjusted net income was $257 million, compared with adjusted net
income of $126 million in the same period last year; much of this increase was
due to the increased ownership percentage. On a year-to-date basis, the return
on invested capital was 5.8%, compared with 4.0% in the same period last year.
Revenue for the quarter was $475 million which declined by $29 million,
or 6%, compared with the second quarter last year, primarily due to a stronger
Canadian dollar relative to the U.S. dollar. Revenue in U.S. dollars increased
8% as higher fee income and a gain recorded in connection with the Visa
initial public offering (IPO) more than offset a reduction in net interest
income. Revenue increased by $23 million, or 5%, compared with the prior
quarter, primarily due to the gain on the Visa IPO. On a year-to-date basis,
revenue declined $63 million, or 6%, compared with the same period last year,
primarily due to the stronger Canadian dollar. On a year-to-date basis,
revenue in U.S. dollars increased by 7%, primarily due to growth in fee
income, revenue from the January 2007 acquisition of Interchange, and the Visa
gain. Net interest income was adversely affected by strong competition for
deposits. Margin on average earning assets declined by 16 bps from 3.89% to
3.73%, compared with the second quarter last year, and decreased 15 bps
compared with the prior quarter. On a year-to-date basis, the margin on
average earning assets decreased by 11 bps from 3.92% to 3.81%, compared with
the same period last year.
Provision for credit losses for the quarter was $46 million which
increased by $11 million, or 31%, compared with the second quarter last year,
and by $20 million, or 77%, compared with the prior quarter. The increased
provision for credit losses was due to increased net write-offs, including a
$12 million change in methodology related to small business loans. Net
impaired loans increased by $60 million compared with the second quarter last
year, and by $89 million compared with the prior quarter, primarily due to the
inclusion of $97 million of net impaired loans from Commerce at March 31,
2008. However, net impaired loans as a percentage of total loans and leases
declined to 0.61%, compared with 0.72% as at the end of the prior quarter and
0.57% as at the end of the second quarter last year.
Reported non-interest expenses for the quarter were $294 million, a
decline of $90 million, or 23%, from the second quarter last year and an
increase of $56 million, or 24%, over the prior quarter. On an adjusted basis,
non-interest expenses declined by $60 million, or 20%, compared with the
second quarter last year, primarily due to strengthening of the Canadian
dollar and cost control initiatives, while non-interest expenses increased
slightly from the prior quarter. On a year-to-date basis, adjusted non-
interest expenses were $484 million which declined by $121 million, or 20%,
compared with the same period last year. The average FTE staffing level was
8,099, compared with 8,701 in the prior year and 8,019 in the prior quarter;
the decline from the prior year levels were due to improved efficiency and
branch closings. The efficiency ratio improved year over year and quarter over
quarter on a reported and adjusted basis.
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. Although the banking market in the U.S. is expected to remain
challenging, and there is uncertainty related to the continuing effects of the
ongoing market issues related to subprime real estate lending and related
issues, we expect to be able to achieve our previously communicated target of
at least $750 million for the 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.org (EDGAR filers section).
Wholesale Banking
Wholesale Banking reported net income for the quarter of $93 million, a
decrease of $124 million, or 57%, compared with the second quarter last year,
and a decrease of $70 million, or 43%, compared with the prior quarter. The
annualized return on invested capital was 11% in the current quarter, compared
with 34% in the second quarter last year and 21% in the prior quarter.
Net income for the six months ended April 30, 2008 was $256 million, down
$158 million, or 38%, while the return on invested capital was 16%, compared
with 32% 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 $428
million, compared with $642 million in the second quarter last year and $608
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 second quarter last year,
primarily due to weaker interest rate and credit trading revenue, and lower
underwriting, partially offset by stronger foreign exchange trading revenue.
Interest rate and credit trading revenue declined due to weaker credit
markets, lower liquidity and a breakdown in traditional pricing relationships
between bonds and credit default swaps (CDS). Foreign exchange trading
generated strong revenue, mainly driven by interest rates volatilty. Capital
markets revenue decreased from the prior quarter, primarily due to lower
foreign exchange, interest rate and credit trading revenue, partially offset
by stronger equity trading revenue. The equity investment portfolio posted
lower securities gains this quarter compared with the second quarter last year
and the prior quarter. Corporate lending revenue was in line with the second
quarter last year and the prior quarter. On a year-to-date basis, revenue was
$1,036 million, a decrease of $241 million, or 19%, compared with the same
period last year, primarily due to lower trading revenue, partially offset by
higher securities gains.
Provision for credit losses was comprised of allowances for credit losses
and accrual costs for credit protection. Provision for credit losses was $10
million in the quarter, compared with $12 million in the second quarter last
year and $56 million in the prior quarter. The prior quarter included specific
allowance of $43 million related to two credit exposures in the merchant
banking portfolio. On a year-to-date basis, provision for credit losses was
$66 million, an increase of $30 million compared with the same period last
year. Wholesale Banking continues to proactively manage its credit risk and
currently holds $2.5 billion in notional CDS protection.
Expenses for the quarter were $291 million, a decrease of $38 million, or
12%, compared with the second quarter last year, primarily due to lower
variable compensation. Expenses decreased $30 million, or 9%, from the prior
quarter, mainly due to lower variable compensation related to lower net
income. On a year-to-date basis, expenses were $612 million, a decrease of $49
million, or 7%, compared with the same period last year. The efficiency ratio
for the quarter was 68%, compared with 51% in the second quarter last year and
53% in the prior quarter. On a year-to-date basis, the efficiency ratio was
59%, compared with 52% in the same period last year.
Overall, Wholesale Banking had a weak quarter driven by lower trading
revenue, weaker capital markets activity and a lower contribution from the
equity investment portfolio. We expect the operating environment to remain
challenging which may lead to continued lower capital market activity and
lower trading revenues relative to the prior year. Key priorities remain:
solidifying our position as a top three dealer in Canada, seeking
opportunities to grow proprietary trading in scalable and liquid markets,
maintaining a superior rate of return on invested capital and enhancing the
efficiency ratio through improved cost control.
Corporate
Corporate segment's reported net loss was $105 million for the quarter,
compared with a reported net loss of $98 million in the second quarter last
year and a reported net loss of $134 million in the prior quarter. The
adjusted net loss for the quarter was $14 million, compared with an adjusted
net loss of $21 million in the same quarter last year and an adjusted net loss
of $44 million in the previous quarter. Compared with last year, on an
adjusted basis, the net loss improved by $7 million, primarily as a result of
favourable tax items, which were partially offset by costs related to
increased corporate financing activity. The current quarter adjusted net loss
improved by $30 million from the prior quarter, also due to similar factors as
above, combined with higher net securitization gains and the impact of
unfavourable tax items in the prior quarter.
The Corporate segment's reported net loss was $239 million for the six
months ended April 30, 2008. On an adjusted basis, the year-to-date net loss
was $58 million or $55 million higher than last year, mainly due to 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 certain 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 six
For the three months ended months ended
----------------------------- -------------------
(millions of Apr. 30 Jan. 31 Apr. 30 Apr. 30 Apr. 30
Canadian dollars) 2008 2008 2007 2008 2007
-------------------------------------------------------------------------
Corporate segment
net income - reported $(105) $(134) $(98) $(239) $(168)
-------------------------------------------------------------------------
Items of note affecting
net income, net of
income taxes:
Amortization of
intangibles 92 75 80 167 163
TD Banknorth
restructuring,
privatization and
merger-related charges - - 4 - 4
Change in fair value of
credit default swaps
hedging the corporate
loan book, net of
provision for credit
losses (1) (25) (7) (26) (2)
Other tax items -
restatement of
future tax asset - 20 - 20 -
Provision for
insurance claims - 20 - 20 -
-------------------------------------------------------------------------
Total items of note 91 90 77 181 165
-------------------------------------------------------------------------
Corporate segment
net income - adjusted $(14) $(44) $(21) $(58) $(3)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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
-------------------------------------------------------------------------
Mar. 31, Sept. 30,
(millions of U.S. dollars) 2008 2007
-------------------------------------------------------------------------
Assets
Receivables from brokers, dealers and
clearing organizations $5,033 $6,750
Receivables from clients, net of allowance
for doubtful accounts 7,529 7,728
Other assets 5,173 3,614
-------------------------------------------------------------------------
Total assets 17,735 18,092
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities
Payable to brokers, dealers and clearing organizations 6,644 8,387
Payable to clients 5,059 5,314
Other liabilities 3,479 2,236
-------------------------------------------------------------------------
Total liabilities 15,182 15,937
-------------------------------------------------------------------------
Stockholders' equity $2,553 $2,155
-------------------------------------------------------------------------
Total liabilities and stockholders' equity $17,735 $18,092
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------------------------------------
For the three For the six
months ended months ended
------------------- -------------------
(millions of U.S. dollars, Mar. 31 Mar. 31 Mar. 31 Mar. 31
except per share amounts) 2008 2007 2008 2007
-------------------------------------------------------------------------
Revenues
Net interest revenue $138 $137 $287 $276
Fee-based and other revenue 485 388 978 784
-------------------------------------------------------------------------
Net revenue 623 525 1,265 1,060
-------------------------------------------------------------------------
Expenses
Employee compensation and benefits 132 109 238 207
Other 191 191 371 390
-------------------------------------------------------------------------
Total expenses 323 300 609 597
-------------------------------------------------------------------------
Other income 0 5 1 6
-------------------------------------------------------------------------
Pre-tax income 300 230 657 469
Provision for income taxes 113 89 229 182
-------------------------------------------------------------------------
Net income(1) 187 141 428 287
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per share - basic $0.31 $0.24 $0.72 $0.48
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earning per share - diluted $0.31 $0.23 $0.71 $0.47
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 $504 billion as at April 30, 2008, $82 billion higher
than at October 31, 2007 of which $57 billion related to the acquisition of
Commerce this quarter. The table below shows the impact of Commerce. Excluding
the Commerce impact, total assets increased $24.4 billion compared to October
31, 2007. The net increase was composed primarily of a $15 billion increase in
loans, a $5 billion increase in securities purchased under reverse repurchase
agreements and a $4 billion increase in other assets. Residential mortgage
loans increased $6 billion, mainly due to Canadian Personal and Commercial
Banking volume growth. Consumer and personal loans were $4 billion higher with
the increase arising from volume growth in Canadian Personal and Commercial
Banking. Business and government loans were up $5 billion, primarily due to
volume growth in U.S. Personal and Commercial Banking and Wholesale Banking.
Securities purchased under reverse repurchase agreements increased $4 billion
in Wholesale Banking and $2 billion in U.S. Personal and Commercial Banking as
the business experienced higher client demand. Other assets increased
$4 billion, primarily due to the combination of higher customer liabilities
under acceptances in Canadian Commercial and Personal Banking and Wholesale
Banking, driven by higher business volumes and a $2 billion increase in
trading derivatives, primarily in Wholesale Banking due to market movement.
Excluding Commerce, total deposits were $302 billion at the end of the
second quarter, an increase of $26 billion from October 31, 2007. Personal
deposits increased $10 billion, largely due to increased volumes in Canadian
Personal and Commercial Banking and U.S. Personal and Commercial Banking.
Business and government deposits were up $10 billion, driven primarily by
higher Canadian Personal and Commercial Banking and Corporate segment
balances. Wholesale Banking trading deposits were also up $7 billion.
Acceptances increased $2 billion, primarily in Canadian Personal and
Commercial Banking and Wholesale Banking due to higher business volumes.
Obligations related to securities sold under repurchase agreements decreased
by $2 billion due to Wholesale Banking-related activity. Other liabilities
decreased $5 billion, primarily due to lower Wholesale Banking broker payables
and a lower net future tax liability. Subordinated notes and debentures
increased $3 billion due to the $0.5 billion medium term note issuance in
April 2008 and the $2.5 billion issuance of medium term notes in the first
quarter. Preferred stock increased $0.7 billion due to issuances in the first
and second quarters of this year.
The table below presents the impact of the acquisition of Commerce on the
Bank's consolidated balance sheet as at April 30, 2008:
Impact of Commerce on the Bank's Consolidated Balance Sheet
-------------------------------------------------------------------------
TDBFG
Consoli-
dated, TDBFG TDBFG
excluding Commerce Consoli- Consoli-
Commerce impact(1) dated dated
(April (March (April (October
(millions of Canadian dollars) 30, 2008) 31, 2008) 30, 2008) 31, 2007)
-------------------------------------------------------------------------
Assets
Cash and cash equivalents $17,711 $408 $18,119 $16,536
Securities 122,670 25,167 147,837 123,036
Loans, net of allowance
for credit losses 190,393 18,034 208,427 175,915
Goodwill 8,099 6,114 14,213 7,918
Other intangibles (gross) 1,891 1,882 3,773 2,104
Other 105,749 5,503 111,252 96,615
-------------------------------------------------------------------------
Total assets $446,513 $57,108 $503,621 $422,124
-------------------------------------------------------------------------
Liabilities
Deposits $302,252 $47,271 $349,523 $276,393
Other 105,648 3,427 109,075 112,905
Subordinated notes and
debentures, liability
for preferred shares,
capital trust securities
and non-controlling
interests in subsidiaries 14,428 - 14,428 11,422
-------------------------------------------------------------------------
Total liabilities 422,328 50,698 473,026 400,720
-------------------------------------------------------------------------
Shareholders' equity
Common shares 6,671 6,147 12,818 6,577
Contributed surplus 120 263 383 119
Preferred shares, retained
earnings and accumulated
other comprehensive income 17,394 - 17,394 14,708
-------------------------------------------------------------------------
Total shareholders' equity 24,185 6,410 30,595 21,404
-------------------------------------------------------------------------
Total liabilities and
shareholders' equity $446,513 $57,108 $503,621 $422,124
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Commerce impact includes the Commerce assets and liabilities acquired
(shown in Note 20 to the Interim Consolidated Financial Statements
for the quarter ended April 30, 2008) and the purchase consideration
for the Commerce acquisition. Cash portion of the purchase
consideration is included in other liabilities.
CREDIT PORTFOLIO QUALITY
Gross impaired loans were $909 million at April 30, 2008, $340 million
higher than at October 31, 2007, largely due to the addition of impaired loans
in the Canadian Personal and Commercial Banking and $97 million due to the
acquisition of Commerce. No allowance was initially recognized upon
acquisition as these loans are measured at fair value.
Net impaired loans as at April 30, 2008, after deducting specific
allowances, totalled $654 million, compared with $366 million as at October
31, 2007.
The total allowance for credit losses of $1,369 million as at April 30,
2008 comprised total specific allowances of $255 million and a general
allowance of $1,114 million. Specific allowances increased by $52 million from
$203 million as at October 31, 2007. The general allowance for credit losses
as at April 30, 2008 was up by $22 million, compared with October 31, 2007,
mainly due to the increase related to VFC. 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
-----------------------------
Apr. 30 Oct. 31 Apr. 30
(millions of Canadian dollars) 2008 2007 2007
-------------------------------------------------------------------------
Balance at beginning of period $818 $590 $511
Additions 575 387 461
Return to performing status, repaid or sold (234) (188) (158)
Write-offs (258) (202) (207)
Foreign exchange and other adjustments 8 (18) (4)
-------------------------------------------------------------------------
Balance at end of period $909 $569 $603
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Allowance for Credit Losses(1)
-------------------------------------------------------------------------
As at
-----------------------------
Apr. 30 Oct. 31 Apr. 30
(millions of Canadian dollars) 2008 2007 2007
-------------------------------------------------------------------------
Specific allowance $255 $203 $231
General allowance 1,114 1,092 1,147
-------------------------------------------------------------------------
Total allowance for credit losses $1,369 $1,295 $1,378
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Impaired loans net of specific allowance $654 $366 $372
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 0.49% 0.30% 0.41%
-------------------------------------------------------------------------
(1) Certain comparative amounts have been restated to conform to the
presentation adopted in the current period.
Non-prime Loans
As at April 30, 2008, the Bank's wholly-owned subsidiary, VFC Inc., had
approximately $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 April 30, 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 April 30, 2008,
represent the fair value of Commerce assets at March 31, 2008.
As at April 30, 2008, due to its acquisition of Commerce, the Bank had
$3.7 billion (October 31, 2007: nil) gross exposure to Alt-A mortgages in
residential mortgage-backed securities (RMBS) collateralized primarily by
fixed-rate mortgages with no rate reset features. These securities are hedged
for market risk in the context of the overall balance sheet, however, they may
expose the Bank to credit risk. 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. These securities have public debt
ratings of AAA and are accounted for as available-for-sale-securities. The
following table discloses the fair value of the securities by vintage year:
Alt-A Securities Exposure by Vintage Year
-------------------------------------------------------------------------
As at
---------
Apr. 30
(millions of Canadian dollars) 2008
-------------------------------------------------------------------------
2003 $452
2004 825
2005 1,054
2006 553
2007 864
-------------------------------------------------------------------------
Total Alt-A securities $3,748
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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
Apr. 30, Jan. 31,
(millions of Canadian dollars) 2008 2008
-------------------------------------------------------------------------
Risk-weighted assets (RWA) for:
Credit risk 147,617 $121,460
Market risk 7,140 4,088
Operational risk 23,878 20,352
-------------------------------------------------------------------------
Total RWA 178,635 $145,900
-------------------------------------------------------------------------
-------------------------------------------------------------------------
RWA increased $32.7 billion over the prior quarter. Of this increase,
$29.3 billion was due to the Commerce acquisition which produced $26.0 billion
of credit risk RWA and $3.3 billion of operational risk RWA. The Commerce
acquisition had no impact on market risk RWA.
OSFI's target Tier 1 and Total capital ratios for Canadian banks are 7%
and 10%, respectively. As at April 30, 2008, the Bank's Tier 1 capital ratio
was 9.1% and the Total capital ratio was 12.7%, 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 Class A First
Preferred Shares, Series R. Also during the quarter, the Bank issued $500
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 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 April 30, 2008. These sections, which are
included non-continuously below, are shaded on pages 21 to 27 of the fully
formatted version of this second 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 April 30, 2008
----------------------------------
(millions of Canadian dollars) Standardized AIRB Total
-------------------------------------------------------------------------
Residential secured $7,849 $124,927 $132,776
Qualifying revolving retail - 41,019 41,019
Other retail 15,375 20,040 35,415
Corporate 45,019 99,646 144,665
Sovereign 724 42,261 42,985
Bank 6,841 84,982 91,823
-------------------------------------------------------------------------
Gross credit risk exposures $75,808 $412,875 $488,683
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at January 31, 2008
----------------------------------
(millions of Canadian dollars) Standardized AIRB Total
-------------------------------------------------------------------------
Residential secured $4,071 $117,856 $121,927
Qualifying revolving retail - 40,353 40,353
Other retail 11,903 19,589 31,492
Corporate 24,305 98,039 122,344
Sovereign 1,276 34,440 35,716
Bank 1,299 92,347 93,646
-------------------------------------------------------------------------
Gross credit risk exposures $42,854 $402,624 $445,478
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Gross credit risk exposures exclude equity and securitization
exposures.
Gross credit risk exposures increased $43.2 billion over the prior
quarter. Of this increase, $30.3 billion was due to the Commerce acquisition
and is included under the Standardized approach.
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, and certain small businesses), sovereign
(governments, central banks and certain public sector entities), and bank
(regulated deposit-taking institutions and securities firms).
For the retail portfolio (individuals and certain 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 degree
of likelihood that the borrower will not be able to meet its scheduled
repayments; second, exposure at default (EAD) - the total amount we are
exposed to at the time of default; and third, loss given default (LGD) - the
amount of the loss when a borrower defaults on a loan, 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 within
the Wholesale Banking segment is included on page 24 of the fully formatted
version of this second quarter 2008 Report to Shareholders, which can be found
on TD's website at www.td.com/investor/earnings.jsp.
Value-at-Risk Usage
-------------------------------------------------------------------------
For the quarter ended
---------------------------------------------------
(millions of April 30, 2008 Jan 31, April
Canadian dollars) -------------------------------- 2008 30,
As at Average High Low Average 2007
Average
-------------------------------------------------------------------------
Interest rate and
credit spread risk $23.6 $26.3 $31.6 $19.0 $15.8 $7.0
Equity risk 11.1 10.2 14.5 4.5 5.3 10.3
Foreign exchange risk 2.2 2.4 6.7 1.0 2.5 2.0
Commodity risk 1.7 1.6 3.0 0.7 1.0 1.6
Debt specific risk 35.0 31.2 41.7 19.8 19.1 13.1
Diversification
effect(1) (30.3) (29.8) n/m(2) n/m(2) (19.9) (17.4)
-------------------------------------------------------------------------
Total Value-at-Risk $43.3 $41.9 $54.1 $27.0 $23.8 $16.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------
For the six
months ended
-----------------
(millions of April April
Canadian dollars) 30, 30,
2008 2007
Average Average
-------------------------------------
Interest rate and
credit spread risk $21.1 $7.3
Equity risk 7.7 8.7
Foreign exchange risk 2.5 2.0
Commodity risk 1.3 1.6
Debt specific risk 25.2 13.6
Diversification
effect(1) (24.9) (16.1)
-------------------------------------
Total Value-at-Risk $32.9 $17.1
-------------------------------------
-------------------------------------
(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 26 of the fully
formatted version of this second quarter 2008 Report to Shareholders, which
can be found on TD's website at www.td.com/investor/earnings.jsp.
The Bank uses derivative financial instruments, wholesale instruments and
other capital market alternatives and, less frequently, product pricing
strategies to manage interest rate risk. As at April 30, 2008, an immediate
and sustained 100 bps increase in interest rates would have increased the
economic value of shareholders' equity by $51.4 million after tax. An
immediate and sustained 100 bps decrease in interest rates would have reduced
the economic value of shareholders' equity by $124 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
-------------------------------------------------------------------------
As at As at
(millions of Canadian dollars) April 30, 2008 Jan 31, 2008
-------------------------------------------------------------------------
100 bps 100 bps 100 bps 100 bps
Currency increase decrease increase decrease
-------------------------------------------------------------------------
Canadian dollar $16.1 $(53.4) $(3.9) $(30.1)
U.S. dollar 35.3 (70.6) 3.7 (27.4)
-------------------------------------------------------------------------
Managing Non-trading Foreign Exchange Risk
Foreign exchange risk refers to losses that could result from changes in
foreign-currency exchange rates. Assets and liabilities that are denominated
in foreign currencies have foreign exchange risk.
We are exposed to non-trading foreign exchange risk from our investments
in foreign operations, and when our foreign currency assets are greater or
less than our liabilities in that currency, they create a foreign currency
open position. An adverse change in foreign exchange rates can impact our
reported net income and equity, and also our capital ratios. Our objective is
to minimize these impacts.
Minimizing the impact of an adverse foreign exchange rate change on
reported equity will cause some variability in capital ratios, due to the
amount of 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.
- TD Commerce 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 April 30, 2008, our consolidated surplus
liquid asset position up to 90 days was $5.7 billion, compared with a surplus
liquid-asset position of $7.8 billion on January 31, 2008. 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 dollars) As at April 30, 2008
-------------------------------------------------------------------------
Significant Significant
unconsolidated QSPEs unconsolidated SPEs
-----------------------------------------
Carrying Carrying
Securi- value of Securi- value of
tized retained tized retained
assets interests assets interests
-------------------------------------------------------------------------
Residential mortgage loans $- $- $20,497 $322
Personal loans 8,500 88 - -
Credit card loans 800 3 - -
Commercial mortgage loans 155 5 - -
-------------------------------------------------------------------------
$9,455 $96 $20,497 $322
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(millions of Canadian dollars) As at October 31, 2007
-------------------------------------------------------------------------
Significant Significant
unconsolidated QSPEs unconsolidated SPEs
-----------------------------------------
Carrying Carrying
Securi- value of Securi- value of
tized retained tized 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 April 30, 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 April 30, 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 $88 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 April 30, 2008, the maximum potential
exposure to loss was $3 million (October 31, 2007 - $6 million) through
retained interests.
Commercial mortgage loans
As at April 30, 2008, the Bank's maximum potential exposure to loss was
$5 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 $12.4 billion (October 31, 2007 - $12.7 billion) as
at April 30, 2008. Further, the Bank has committed to an additional
$2.4 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 April 30, 2008, the Bank also provided deal-specific credit
enhancement in the amount of $73 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 Outstanding Exposures Securitized by the Bank-Sponsored Third
Party-originated Assets(3)
-------------------------------------------------------------------------
(millions of
Canadian dollars) As at April 30, 2008 As at October 31, 2007
-------------------------------------------------------------------------
Signi- Ratings profile of Signi- Ratings profile of
ficant SPE asset class ficant SPE asset class
unconsol- ------------------ unconsol- -------------------
idated idated
SPEs AAA AA+ to AA- SPEs AAA AA+ to AA-
-------------------------------------------------------------------------
Residential
mortgage
loans $3,337 $3,284 $53 $3,046 $2,998 $48
Credit card
loans 507 507 - 486 486 -
Automobile
loans and
leases 5,207 5,203 4 5,593 5,589 4
Equipment
loans and
leases 644 643 1 701 700 1
Trade
receivables 2,749 2,722 27 2,833 2,805 28
-------------------------------------------------------------------------
$12,444 $12,359 $85 $12,659 $12,578 $81
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(3) Certain comparative amounts have been restated and reclassified to
conform to the presentation adopted in the current period.
Liquidity Facilities to Third Party-sponsored Conduits
The Bank has exposure to the U.S. arising from providing liquidity
facilities of $453 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 April 30, 2008, the Bank provided
approximately $1.9 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 April 30, 2008, the Bank's net exposure to the U.S. banks after taking into
account collateral and CDS was approximately $900 million (October 31, 2007 -
$1.5 billion). As at April 30, 2008, the Bank's maximum total exposure to loss
before considering guarantees, recourse, collateral and CDS was approximately
$1.9 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
April 30, 2008, these VIEs had assets totalling more than $9.6 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). As at April 30, 2008, the Bank had approximately $583 million
(October 31, 2007 - $ 677 million) of run-off notional exposure where the Bank
purchased credit protection via CDOs which it originated. In addition, as at
April 30, 2008, the Bank had approximately $2.4 billion (October 31, 2007 -
$2.1 billion) of gross notional exposure where the Bank sold credit protection
via CDOs, of which $1.6 billion (October 31, 2007 - $1.5 billion) was hedged
on a back-to-back basis by buying credit protection on the same CDOs, which
resulted in a net position of $0.8 billion (October 31, 2007 - $0.6 billion).
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 back-to-back hedges 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 as part
of a trading portfolio 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. 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. 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, 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 April 30, 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. 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
-------------------------------------------------
(millions of 2008
Canadian dollars) Apr. 30 Jan. 31 Oct. 31 July 31 Apr. 30
-------------------------------------------------------------------------
Net interest income $1,858 $1,788 $1,808 $1,783 $1,662
Other income 1,530 1,816 1,742 1,899 1,882
-------------------------------------------------------------------------
Total revenue 3,388 3,604 3,550 3,682 3,544
Provision for (reversal
of) credit losses (232) (255) (139) (171) (172)
Non-interest expenses (2,206) (2,228) (2,241) (2,216) (2,297)
Provision for income
taxes (160) (235) (153) (248) (234)
Non-controlling
interests (9) (8) (8) (13) (27)
Equity in net income of
an associated company,
net of income taxes 71 92 85 69 65
-------------------------------------------------------------------------
Net income - reported 852 970 1,094 1,103 879
Items of note affecting
net income, net of
income taxes:
Amortization of
intangibles 92 75 99 91 80
Gain relating to
restructuring of
Visa - - (135) - -
TD Banknorth
restructuring,
privatization and
merger-related
charges - - - - 43
Restructuring and
integration charges
relating to the
Commerce acquisition 30 - - - -
Change in fair value
of credit default
swaps hedging the
corporate loan book,
net of provision for
credit losses (1) (25) 2 (30) (7)
Other tax items - 20 - - -
Provision for
insurance claims - 20 - - -
Initial set up of
specific allowance
for credit card and
overdraft loans - - - - -
General allowance
release - - (39) - -
-------------------------------------------------------------------------
Total adjustments
for items of note,
net of income taxes 121 90 (73) 61 116
-------------------------------------------------------------------------
Net income - adjusted 973 1,060 1,021 1,164 995
Preferred dividends (11) (8) (5) (2) (7)
-------------------------------------------------------------------------
Net income available to
common shareholders -
adjusted $962 $1,052 $1,016 $1,162 $988
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(Canadian dollars)
-------------------------------------------------------------------------
Basic earnings per
share
- reported $1.12 $1.34 $1.52 $1.53 $1.21
- adjusted 1.33 1.46 1.42 1.61 1.37
Diluted earnings per
share
- reported 1.12 1.33 1.50 1.51 1.20
- adjusted 1.32 1.45 1.40 1.60 1.36
Return on common
shareholders' equity 13.4% 18.0% 20.8% 21.0% 17.1%
-------------------------------------------------------------------------
-----------------------------------------------------
For the three months ended
-----------------------------
(millions of 2007 2006
Canadian dollars) Jan. 31 Oct. 31 July 31
-----------------------------------------------------
Net interest income $1,671 $1,714 $1,623
Other income 1,834 1,604 1,688
-----------------------------------------------------
Total revenue 3,505 3,318 3,311
Provision for (reversal
of) credit losses (163) (170) (109)
Non-interest expenses (2,221) (2,211) (2,170)
Provision for income
taxes (218) (175) (235)
Non-controlling
interests (47) (48) (52)
Equity in net income of
an associated company,
net of income taxes 65 48 51
-----------------------------------------------------
Net income - reported 921 762 796
Items of note affecting
net income, net of
income taxes:
Amortization of
intangibles 83 87 61
Gain relating to
restructuring of
Visa - - -
TD Banknorth
restructuring,
privatization and
merger-related
charges - - -
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 5 8 5
Other tax items - - 24
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 88 113 90
-----------------------------------------------------
Net income - adjusted 1,009 875 886
Preferred dividends (6) (5) (6)
-----------------------------------------------------
Net income available to
common shareholders -
adjusted $1,003 $870 $880
-----------------------------------------------------
-----------------------------------------------------
(Canadian dollars)
-----------------------------------------------------
Basic earnings per
share
- reported $1.27 $1.05 $1.10
- adjusted 1.40 1.21 1.22
Diluted earnings per
share
- reported 1.26 1.04 1.09
- adjusted 1.38 1.20 1.21
Return on common
shareholders' equity 18.2% 15.7% 16.8%
-----------------------------------------------------
(1) Certain comparative amounts have been restated to conform to the
presentation adopted in the current period.
ACCOUNTING POLICIES AND ESTIMATES
The Bank's unaudited Interim Consolidated Financial Statements, as
presented on pages 32 to 46 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
-------------------
April 30 Oct. 31
(millions of Canadian dollars) 2008 2007
-------------------------------------------------------------------------
ASSETS
Cash and due from banks $2,520 $1,790
Interest-bearing deposits with banks 15,599 14,746
-------------------------------------------------------------------------
18,119 16,536
-------------------------------------------------------------------------
Securities
Trading 83,084 77,637
Designated as trading under the fair value option 2,043 2,012
Available-for-sale 53,929 35,650
Held-to-maturity 8,781 7,737
-------------------------------------------------------------------------
147,837 123,036
-------------------------------------------------------------------------
Securities purchased under reverse repurchase
agreements 33,067 27,648
-------------------------------------------------------------------------
Loans
Residential mortgages 67,137 58,485
Consumer installment and other personal 75,114 67,532
Credit card 6,166 5,700
Business and government 60,661 44,258
Business and government designated as trading under
the fair value option 718 1,235
-------------------------------------------------------------------------
209,796 177,210
Allowance for credit losses (Note 4) (1,369) (1,295)
-------------------------------------------------------------------------
Loans, net of allowance for credit losses 208,427 175,915
-------------------------------------------------------------------------
Other
Customers' liability under acceptances 10,848 9,279
Investment in TD Ameritrade 4,829 4,515
Trading derivatives 37,602 36,052
Goodwill 14,213 7,918
Other intangibles 3,773 2,104
Land, buildings and equipment 3,715 1,822
Other assets 21,191 17,299
-------------------------------------------------------------------------
96,171 78,989
-------------------------------------------------------------------------
Total assets $503,621 $422,124
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
-------------------------------------------------------------------------
Deposits
Personal $185,490 $147,561
Banks 8,773 10,162
Business and government 102,704 73,322
Trading 52,556 45,348
-------------------------------------------------------------------------
349,523 276,393
-------------------------------------------------------------------------
Other
Acceptances 10,848 9,279
Obligations related to securities sold short 23,546 24,195
Obligations related to securities sold under
repurchase agreements 14,850 16,574
Trading derivatives 37,730 39,028
Other liabilities 22,101 23,829
-------------------------------------------------------------------------
109,075 112,905
-------------------------------------------------------------------------
Subordinated notes and debentures (Note 6) 12,466 9,449
-------------------------------------------------------------------------
Liabilities for preferred shares and capital
trust securities (Note 7) 1,428 1,449
-------------------------------------------------------------------------
Non-controlling interests in subsidiaries 534 524
-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common shares (millions of shares issued and
outstanding: April 30, 2008 - 802.9 and Oct. 31,
2007 - 717.8) (Note 8) 12,818 6,577
Preferred shares (millions of shares issued and
outstanding: April 30, 2008 - 45.0 and Oct. 31,
2007 - 17.0) (Note 8) 1,125 425
Contributed surplus 383 119
Retained earnings 16,864 15,954
Accumulated other comprehensive income (loss)
(Note 10) (595) (1,671)
-------------------------------------------------------------------------
30,595 21,404
-------------------------------------------------------------------------
Total liabilities and shareholders' equity $503,621 $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 six
months ended months ended
---------------------------------------
April 30 April 30 April 30 April 30
(millions of Canadian dollars) 2008 2007 2008 2007
-------------------------------------------------------------------------
Interest income
Loans $3,240 $3,117 $6,636 $6,191
Securities
Dividends 242 189 502 462
Interest 929 919 1,904 1,905
Deposits with banks 159 111 273 158
-------------------------------------------------------------------------
4,570 4,336 9,315 8,716
-------------------------------------------------------------------------
Interest expense
Deposits 2,056 1,989 4,310 4,037
Subordinated notes and debentures 159 124 317 232
Preferred shares and capital trust
securities 23 32 46 62
Other liabilities 474 529 996 1,052
-------------------------------------------------------------------------
2,712 2,674 5,669 5,383
-------------------------------------------------------------------------
Net interest income 1,858 1,662 3,646 3,333
-------------------------------------------------------------------------
Other income
Investment and securities services 544 619 1,123 1,199
Credit fees 108 103 209 199
Net securities gains 110 102 262 172
Trading (loss) income (104) 192 56 408
Income (loss) from financial
instruments designated as trading
under the fair value option 5 5 (44) (4)
Service charges 258 244 518 493
Loan securitizations (Note 5) 91 97 167 231
Card services 116 107 235 216
Insurance, net of claims 250 251 436 505
Trust fees 36 38 70 69
Other 116 124 314 228
-------------------------------------------------------------------------
1,530 1,882 3,346 3,716
-------------------------------------------------------------------------
Total revenue 3,388 3,544 6,992 7,049
-------------------------------------------------------------------------
Provision for credit losses (Note 4) 232 172 487 335
-------------------------------------------------------------------------
Non-interest expenses
Salaries and employee benefits 1,137 1,169 2,308 2,326
Occupancy, including depreciation 188 185 369 360
Equipment, including depreciation 148 153 292 297
Amortization of other intangibles 117 112 239 230
Restructuring costs (Note 13) 48 67 48 67
Marketing and business development 102 111 212 224
Brokerage-related fees 63 57 122 111
Professional and advisory services 118 108 229 234
Communications 48 49 95 98
Other 237 286 520 571
-------------------------------------------------------------------------
2,206 2,297 4,434 4,518
-------------------------------------------------------------------------
Income before provision for income
taxes, non-controlling interests
in subsidiaries and equity in net
income of an associated company 950 1,075 2,071 2,196
Provision for income taxes 160 234 395 452
Non-controlling interests in
subsidiaries, net of income taxes 9 27 17 74
Equity in net income of an associated
company, net of income taxes 71 65 163 130
-------------------------------------------------------------------------
Net income 852 879 1,822 1,800
Preferred dividends 11 7 19 13
-------------------------------------------------------------------------
Net income available to common
shareholders $841 $872 $1,803 $1,787
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average number of common shares
outstanding (millions) (Note 14)
Basic 747.7 719.1 732.9 718.7
Diluted 753.7 725.9 739.0 725.4
Earnings per share (in dollars)
(Note 14)
Basic $1.12 $1.21 $2.46 $2.49
Diluted 1.12 1.20 2.44 2.46
Dividends per share (in dollars) 0.59 0.53 1.16 1.01
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 six
months ended months ended
---------------------------------------
April 30 April 30 April 30 April 30
(millions of Canadian dollars) 2008 2007 2008 2007
-------------------------------------------------------------------------
Common shares (Note 8)
Balance at beginning of period $6,632 $6,417 $6,577 $6,334
Proceeds from shares issued on
exercise of options 29 19 71 53
Shares issued as a result of
dividend reinvestment plan 22 21 43 40
Impact of shares (acquired) sold
for trading purposes(1) (12) (2) (20) 28
Shares issued on acquisition of
Commerce 6,147 - 6,147 -
-------------------------------------------------------------------------
Balance at end of period 12,818 6,455 12,818 6,455
-------------------------------------------------------------------------
Preferred shares (Note 8)
Balance at beginning of period 875 425 425 425
Share issues 250 - 700 -
-------------------------------------------------------------------------
Balance at end of period 1,125 425 1,125 425
-------------------------------------------------------------------------
Contributed surplus
Balance at beginning of period 121 68 119 66
Stock options (Note 11) (1) 4 1 6
Conversion of TD Banknorth stock
options on privatization (Note 11) - 52 - 52
Conversion of Commerce stock
options on acquisition (Note 11) 263 - 263 -
-------------------------------------------------------------------------
Balance at end of period 383 124 383 124
-------------------------------------------------------------------------
Retained earnings
Balance at beginning of period 16,499 14,375 15,954 13,725
Transition adjustment on adoption
of Financial Instruments standards - - - 80
Net income 852 879 1,822 1,800
Common dividends (473) (382) (883) (727)
Preferred dividends (11) (7) (19) (13)
Other (3) - (10) -
-------------------------------------------------------------------------
Balance at end of period 16,864 14,865 16,864 14,865
-------------------------------------------------------------------------
Accumulated other comprehensive
income (loss), net of income
taxes (Note 10)
Balance at beginning of period (1,187) (268) (1,671) (918)
Transition adjustment on adoption
of Financial Instruments standards - - - 426
Other comprehensive income for
the period 592 174 1,076 398
-------------------------------------------------------------------------
Balance at end of period (595) (94) (595) (94)
-------------------------------------------------------------------------
Total shareholders' equity $30,595 $21,775 $30,595 $21,775
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 six
months ended months ended
---------------------------------------
April 30 April 30 April 30 April 30
(millions of Canadian dollars) 2008 2007 2008 2007
-------------------------------------------------------------------------
Net income $852 $879 $1,822 $1,800
Other comprehensive income (loss),
net of income taxes
Change in unrealized gains and
(losses) on available-for-sale
securities, net of hedging
activities(a) (69) 63 272 112
Reclassification to earnings in
respect of available-for-sale
securities(b) (13) (2) (41) (27)
Change in foreign currency
translation gains and (losses)
on investments in subsidiaries,
net of hedging activities(c),(d) 470 97 239 420
Change in gains and (losses) on
derivative instruments designated
as cash flow hedges(e) 235 13 643 (114)
Reclassification to earnings of
(gains) and losses on cash flow
hedges(f) (31) 3 (37) 7
-------------------------------------------------------------------------
Other comprehensive income for
the period 592 174 1,076 398
-------------------------------------------------------------------------
Comprehensive income for the period $1,444 $1,053 $2,898 $2,198
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(a) Net of income tax benefit of $96 million and income tax expense of
$113 million for the three and six months ended April 30, 2008
respectively.
(b) Net of income tax expense of $6 million and $16 million for the three
and six months ended April 30, 2008 respectively.
(c) Net of income tax benefit of $14 million for the three months ended
April 30, 2008 (three months ended April 30, 2007 - tax expense of
$331 million). Net of income tax benefit of $295 million for the six
months ended April 30, 2008 (six months ended April 30, 2007 - tax
expense of $52 million).
(d) Includes $(39) million for the three months ended April 30, 2008
(three months ended April 30, 2007 - $681 million) of after-tax gains
(losses) arising from hedges of the Bank's investment in foreign
operations. Includes $(671) million for the six months ended April
30, 2008 (six months ended April 30, 2007 - $112 million) of after-
tax gains (losses) arising from hedges of the Bank's investment in
foreign operations.
(e) Net of income tax expense of $108 million and $275 million for the
three and six months ended April 30, 2008 respectively.
(f) Net of income tax expense of $13 million and $16 million for the
three and six months ended April 30, 2008 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 six
months ended months ended
---------------------------------------
April 30 April 30 April 30 April 30
(millions of Canadian dollars) 2008 2007 2008 2007
-------------------------------------------------------------------------
Cash flows from (used in)
operating activities
Net income $852 $879 $1,822 $1,800
Adjustments to determine net cash
flows from (used in) operating
activities:
Provision for credit losses 232 172 487 335
Restructuring costs 48 67 48 67
Depreciation 85 93 167 175
Amortization of other intangibles 117 112 239 230
Stock options 6 4 11 8
Net securities gains (110) (102) (262) (172)
Net gain on securitizations
(Note 5) (38) (37) (61) (84)
Equity in net income of an
associated company (71) (65) (163) (130)
Non-controlling interests 9 27 17 74
Future income taxes (335) 189 (53) 359
Changes in operating assets and
liabilities:
Current income taxes payable (514) 252 (1,512) (106)
Interest receivable and payable (162) 65 (114) 137
Trading securities (3,342) 9,032 672 6,527
Unrealized gains and amounts
receivable on derivative
contracts (1,682) (698) (1,550) 276
Unrealized losses and amounts
payable on derivative contracts 1,421 821 (1,298) (194)
Other 3,248 (451) (1,505) (3,189)
-------------------------------------------------------------------------
Net cash used in operating
activities (236) 10,360 (3,055) 6,113
-------------------------------------------------------------------------
Cash flows from (used in)
financing activities
Change in deposits 16,569 474 25,859 7,923
Securities sold under repurchase
agreements (2,667) (9,275) (1,724) (7,333)
Securities sold short (2,251) (1,087) (649) (1,970)
Issue of subordinated notes and
debentures 500 - 3,000 2,274
Liability for preferred shares
and capital trust securities (21) (3) (21) 3
Translation adjustment on
subordinated notes and debentures
issued in a foreign currency and
other 27 1 17 36
Common shares issued on exercise
of options 22 19 61 51
Common shares (acquired) sold
in Wholesale Banking (12) (2) (20) 28
Dividends paid in cash on common
shares (451) (361) (840) (687)
Issuance of preferred shares 247 - 690 -
Dividends paid on preferred shares (11) (7) (19) (13)
-------------------------------------------------------------------------
Net cash from financing activities 11,952 (10,241) 26,354 312
-------------------------------------------------------------------------
Cash flows from (used in)
investing activities
Interest-bearing deposits with
banks (2,500) (1,072) (853) (1,033)
Activity in available-for-sale
and held-to-maturity securities:
Purchases (29,180) (22,332) (38,430) (70,562)
Proceeds from maturities 3,348 23,430 6,697 63,908
Proceeds from sales 26,328 2,469 31,689 7,009
Activity in lending activities:
Origination and acquisitions (31,920) (33,165) (69,614) (72,661)
Proceeds from maturities 21,548 22,949 51,348 57,613
Proceeds from sales 292 1,190 453 1,788
Proceeds from loan
securitizations (Note 5) 1,524 3,268 3,414 6,331
Land, buildings and equipment (85) (121) (162) (218)
Securities purchased under
reverse repurchase agreements 1,167 6,923 (5,419) 5,527
Acquisitions and dispositions less
cash and cash equivalents acquired
(Note 20) (1,759) (3,713) (1,759) (4,139)
-------------------------------------------------------------------------
Net cash used in investing
activities (11,237) (174) (22,636) (6,437)
-------------------------------------------------------------------------
Effect of exchange rate changes
on cash and cash equivalents 5 (64) 67 (13)
-------------------------------------------------------------------------
Net increase in cash and cash
equivalents 484 (119) 730 (25)
Cash and cash equivalents at
beginning of period 2,036 2,113 1,790 2,019
-------------------------------------------------------------------------
Cash and cash equivalents at
end of period, represented by
cash and due from banks $2,520 $1,994 $2,520 $1,994
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplementary disclosure of
cash flow information
Amount of interest paid during
the period $2,607 $2,793 $5,600 $5,265
Amount of income taxes paid
during the period 496 275 1,532 673
-------------------------------------------------------------------------
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 27 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 which it considers adequate to absorb all
credit-related losses in a portfolio of instruments which are both on and
off the Consolidated Balance Sheet. Assets in the portfolio which are
included on the Interim Consolidated Balance Sheet are deposits with
banks, loans other than loans designated as trading under the fair value
option, mortgages and acceptances. Items which are not recorded on the
Interim Consolidated Balance Sheet include certain guarantees, letters of
credit and undrawn lines of credit. The allowance, including the
allowance for acceptances and off-balance sheet items, is deducted from
loans in the Consolidated Balance Sheet. The change in the Bank's
allowance for credit losses for the six months ended April 30 is shown in
the table below.
Allowance for Credit Losses
-------------------------------------------------------------------------
April 30, 2008 April 30, 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 446 41 487 337 (2) 335
Write-offs (470) - (470) (361) - (361)
Recoveries 65 - 65 68 - 68
Other(2) 11 (19) (8) 11 (6) 5
-------------------------------------------------------------------------
Allowance for
credit losses
at end of
period $255 $1,114 $1,369 $231 $1,147 $1,378
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 April 30, 2008
-------------------------------------------------------------------------
(millions of 1-30 31-60 61-89 90 days
Canadian dollars) days days days or more Total
-------------------------------------------------------------------------
Residential mortgages $752 $263 $48 $- $1,063
Consumer installment and
other personal loans 3,112 514 113 - 3,739
Credit cards 314 59 32 - 405
Business and government 1,970 229 67 - 2,266
-------------------------------------------------------------------------
Total $6,148 $1065 $260 $- $7,473
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at April 30, 2008, the fair value of financial collateral held against
loans that were past due but not impaired was $48.1 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 six months ended
April 30, 2008, that would otherwise be impaired, was $7.4 million.
As at April 30, 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 $23.5 billion. The fair value of financial assets accepted
as collateral that has been sold or repledged (excluding cash collateral)
was $5.85 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 six months ended April 30.
In most cases, the Bank retained responsibility for servicing the assets
securitized.
Securitization Activity
-------------------------------------------------------------------------
For the three months ended
April 30, 2008
----------------------------------------------------
Residential Credit Commercial
(millions of mortgage Personal card mortgage
Canadian dollars) loans loans loans loans Total
-------------------------------------------------------------------------
Gross proceeds $2,024 $1,291 $800 $- $4,115
Retained interests 50 14 6 - 70
Cash flows received on
retained interests 51 25 15 1 92
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three months ended
----------------------------------------------------
April 30, 2007
-------------------------------------------------------------------------
Residential Credit Commercial
(millions of mortgage Personal card mortgage
Canadian dollars) loans loans loans loans Total
-------------------------------------------------------------------------
Gross proceeds $3,090 $1,528 $800 $218 $5,636
Retained interests 74 23 7 - 104
Cash flows received on
retained interests 49 25 15 1 90
-------------------------------------------------------------------------
Securitization Activity
-------------------------------------------------------------------------
For the six months ended
----------------------------------------------------
April 30, 2008
-------------------------------------------------------------------------
Residential Credit Commercial
(millions of mortgage Personal card mortgage
Canadian dollars) loans loans loans loans Total
-------------------------------------------------------------------------
Gross proceeds $3,914 $2,744 $1,600 $- $8,258
Retained interests 99 26 12 - 137
Cash flows received on
retained interests 109 52 29 1 191
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the six months ended
----------------------------------------------------
April 30, 2007
-------------------------------------------------------------------------
Residential Credit Commercial
(millions of mortgage Personal card mortgage
Canadian dollars) loans loans loans loans Total
-------------------------------------------------------------------------
Gross proceeds $5,423 $3,924 $1,600 $218 $11,165
Retained interests 122 55 15 - 192
Cash flows received on
retained interests 90 53 32 1 176
-------------------------------------------------------------------------
The following tables summarize the impact of securitizations on the
Bank's Interim Consolidated Statement of Income for the three and six
months ended April 30.
Securitization Gains and Income on Retained Interests
-------------------------------------------------------------------------
For the three months ended
----------------------------------------------------
April 30, 2008
-------------------------------------------------------------------------
Residential Credit Commercial
(millions of mortgage Personal card mortgage
Canadian dollars) loans loans loans loans Total
-------------------------------------------------------------------------
Gain on sale $18 $14 $6 - $38
Income on retained
interests(1) 22 6 25 - 53
-------------------------------------------------------------------------
Total $40 $20 $31 - $91
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three months ended
----------------------------------------------------
April 30, 2007
-------------------------------------------------------------------------
Residential Credit Commercial
(millions of mortgage Personal card mortgage
Canadian dollars) loans loans loans loans Total
-------------------------------------------------------------------------
Gain on sale $4 $23 $7 $3 $37
Income on retained
interests(1) 32 8 20 - 60
-------------------------------------------------------------------------
Total $36 $31 $27 $3 $97
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Securitization Gains and Income on Retained Interests
-------------------------------------------------------------------------
For the six months ended
----------------------------------------------------
April 30, 2008
Residential Credit Commercial
(millions of mortgage Personal card mortgage
Canadian dollars) loans loans loans loans Total
-------------------------------------------------------------------------
Gain on sale $23 $26 $12 - $61
Income on retained
interests(1) 46 13 47 - 106
-------------------------------------------------------------------------
Total $69 $39 $59 - $167
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the six months ended
----------------------------------------------------
April 30, 2007
-------------------------------------------------------------------------
Residential Credit Commercial
(millions of mortgage Personal card mortgage
Canadian dollars) loans loans loans loans Total
-------------------------------------------------------------------------
Gain on sale $11 $57 $14 $2 $84
Income on retained
interests(1) 77 21 49 - 147
-------------------------------------------------------------------------
Total $88 $78 $63 $2 $231
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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
(millions of mortgage Personal card mortgage
Canadian dollars) loans loans loans loans
-------------------------------------------------------------------------
Prepayment rate(1) 18.5% 6.1% 43.5% 8.7%
Excess spread(2) 0.9 1.1 7.1 1.0
Discount rate 5.2 5.9 6.1 7.5
Expected credit losses(3) - - 2.4 0.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2007
----------------------------------------------------
Residential Credit Commercial
(millions of mortgage Personal card mortgage
Canadian dollars) loans loans loans loans
-------------------------------------------------------------------------
Prepayment rate(1) 20.0% 6.3% 42.7% 9.0%
Excess spread(2) 0.8 1.1 7.0 1.0
Discount rate 6.4 6.0 6.1 6.4
Expected credit losses(3) - - 2.1 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 April 30, 2008, there were maturities of
previously securitized loans and receivables of $2,591 million (three
months ended April 30, 2007 - $2,368 million). Proceeds from new
securitizations were $1,524 million for the three months ended April 30,
2008 (three months ended April 30, 2007 - $3,268 million). During the six
months ended April 30, 2008, there were maturities of previously
securitized loans and receivables of $4,844 million (six months ended
April 30, 2007 - $4,834 million). Proceeds from new securitizations were
$3,414 million for the six months ended April 30, 2008 (six months ended
April 30, 2007 - $6,331 million).
Note 6: SUBORDINATED NOTES AND DEBENTURES
-------------------------------------------------------------------------
Medium Term Notes
On November 1, 2007, the Bank issued $2.5 billion of medium term notes
constituting subordinated indebtedness pursuant to its medium term note
program. The medium term notes will pay a coupon of 5.382% until November
1, 2012 and the bankers' acceptance rate plus 1.00% thereafter until
maturity on November 1, 2017. The notes are redeemable at the Bank's
option at par on November 1, 2012. The Bank has included the issue as
Tier 2B regulatory capital.
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. The Bank has included the issue as Tier 2B
regulatory capital.
Note 7: LIABILITIES FOR PREFERRED SHARES AND CAPITAL TRUST SECURITIES
-------------------------------------------------------------------------
The Bank's liabilities for preferred shares and capital trust securities
are as follows:
Liabilities
-------------------------------------------------------------------------
April 30, 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 878 899
-------------------------------------------------------------------------
Total Capital Trust Securities 878 899
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total preferred shares and Capital Trust Securities $1,428 $1,449
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) TD Capital Trust II Securities - Series 2012-1 are issued by TD
Capital Trust II (Trust II), whose voting securities are 100% owned
by the Bank. Trust II is a variable interest entity. As the Bank is
not the primary beneficiary of Trust II, the Bank does not
consolidate it. The senior deposit note of $350 million that was
issued to Trust II is reflected in deposits on the Consolidated
Balance Sheet. For regulatory purposes, the $350 million issued by
Trust II is considered as part of the Bank's available capital.
Note 8: SHARE CAPITAL
-------------------------------------------------------------------------
Common Shares
The Bank is authorized by the shareholders to issue an unlimited number
of common shares, without par value, for unlimited consideration. The
common shares are not redeemable or convertible. Dividends are typically
declared by the Board of Directors of the Bank on a quarterly basis and
the amount may vary from quarter to quarter.
Shares Issued and Outstanding
-------------------------------------------------------------------------
For the six months ended
----------------------------------------
April 30, 2008 April 30, 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 1.4 71 1.5 53
Issued as a result of dividend
reinvestment plan 0.6 43 0.6 40
Impact of shares (acquired) sold
for trading purposes(1) (0.2) (20) 0.4 28
Issued on the acquisition of
Commerce 83.3 6,147 - -
-------------------------------------------------------------------------
Balance at end of period - common 802.9 $12,818 719.9 $6,455
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Preferred (Class A - Series O, P,
Q and R):
Balance at beginning of period 17.0 $425 17.0 $425
Issued during the period 28.0 700 - -
-------------------------------------------------------------------------
Balance at end of period - preferred 45.0 $1,125 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 qualify
as Tier 1 capital of the Bank.
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.
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 qualify
as Tier 1 capital of the Bank.
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.
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 qualify
as Tier 1 capital of the Bank.
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.
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 April 30, 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 April 30, 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 six months ended April 30, 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:
-------------------------------------------------------------------------
April 30, Oct. 31,
2008(1) 2007(1)
(millions of Canadian dollars) (Basel II) (Basel I)
-------------------------------------------------------------------------
Tier 1 capital $16,262 $15,645
Tier 1 capital ratio(2) 9.1% 10.3%
Total capital(3) $22,696 $19,794
Total capital ratio(4) 12.7% 13.0%
Assets-to-capital multiple(5) 19.2 19.7
-------------------------------------------------------------------------
(1) The Bank's capital positions were calculated based on Basel II as at
April 30, 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) includes the after-tax
change in unrealized gains and losses on available-for-sale securities,
cash flow hedging activities and foreign currency translation
adjustments.
Accumulated Other Comprehensive Income (Loss), Net of Income Taxes
-------------------------------------------------------------------------
As at As at
April 30, April 30,
(millions of Canadian dollars) 2008 2007
-------------------------------------------------------------------------
Unrealized gain on available-for-sale securities, net
of hedging activities $624 $372
Unrealized foreign currency translation losses on
investments in subsidiaries, net of hedging activities (1,834) (498)
Gains on derivatives designated as cash flow hedges 615 32
-------------------------------------------------------------------------
Accumulated other comprehensive income (loss) balance
as at April 30 $(595) $(94)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Note 11: STOCK BASED COMPENSATION
-------------------------------------------------------------------------
The following table summarizes the compensation expense recognized by the
Bank for stock option awards for the three and six months ended April 30.
For the three For the six
months ended months ended
-------------------------------------------------------------------------
April 30 April 30 April 30 April 30
(millions of Canadian dollars) 2008 2007 2008 2007
-------------------------------------------------------------------------
TD Bank $6 $4 $11 $8
TD Banknorth - 2 - 4
-------------------------------------------------------------------------
During the three months ended April 30, 2008 and April 30, 2007, there
were no options granted by the Bank.
During the six months ended April 30, 2008, 2.0 million (six months ended
April 30, 2007 - 1.5 million) options were granted by TD Bank with a
weighted average fair value of $10.80 per option (six months ended
April 30, 2007 - $11.46 per option). During the six months ended
April 30, 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 six months ended
-------------------------
April 30 April 30
TD Bank 2008 2007
-------------------------------------------------------------------------
Risk-free interest rate 3.8% 3.9%
Expected option life 5.5 years 5.2 years
Expected volatility 15.9% 19.5%
Expected dividend yield 2.85% 2.92%
-------------------------------------------------------------------------
For the six months ended
-------------------------
April 30 April 30
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, 19.5 million Commerce stock
options were converted into 10.8 million TD Bank stock options based on
their intrinsic value on the exchange date. The fair value of the
converted options was $263 million on the exchange date and is recorded
in contributed surplus and was part of the purchase consideration.
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 six
months ended months ended
---------------------------------------
April 30 April 30 April 30 April 30
(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 $37 $33
Interest cost on projected
benefit obligation 33 28 63 56
Actual return on plan assets 110 (107) 107 (194)
Plan amendments - 7 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) (148) 73 (183) 126
Actuarial losses(2) 5 2 5 5
Plan amendments(3) 2 (5) (2) (3)
-------------------------------------------------------------------------
Total $23 $14 $34 $30
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) For the three months ended April 30, 2008, includes expected return
on plan assets of $38 million (three months ended April 30, 2007 -
$34 million) less actual return on plan assets of $(110) million
(three months ended April 30, 2007 - $107 million). For the six
months ended April 30, 2008, includes expected return on plan assets
of $76 million (six months ended April 30, 2007 - $68 million) less
actual return on plan assets of $(107) million (six months ended
April 30, 2007 - $194 million).
(2) For the three months ended April 30, 2008, includes loss recognized
of $5 million (three months ended April 30, 2007 - $2 million) less
actuarial losses on projected benefit obligation of nil (three months
ended April 30, 2007 - nil). For the six months ended April 30, 2008,
includes loss recognized of $5 million (six months ended April 30,
2007 - $5 million) less actuarial losses on projected benefit
obligation of nil (six months ended April 30, 2007 - nil).
(3) For the three months ended April 30, 2008, includes amortization of
costs for plan amendments of $2 million (three months ended April 30,
2007 - $2 million) less actual cost amendments of nil (three months
ended April 30, 2007 - $7 million). For the six months ended
April 30, 2008, includes amortization of costs for plan amendments of
$5 million (six months ended April 30, 2007 - $4 million) less actual
cost amendments of $7 million (six months ended April 30, 2007 -
$7 million).
Other Pension Plans' Expense
-------------------------------------------------------------------------
For the three For the six
months ended months ended
---------------------------------------
April 30 April 30 April 30 April 30
(millions of Canadian dollars) 2008 2007 2008 2007
-------------------------------------------------------------------------
CT defined benefit pension plan $1 $1 $2 $2
TD Banknorth defined benefit
pension plans 1 1 - 3
Supplemental employee retirement plans 8 8 16 17
-------------------------------------------------------------------------
Total $10 $10 $18 $22
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Principal Non-Pension Post-Retirement Benefit Plan Expense
-------------------------------------------------------------------------
For the three For the six
months ended months ended
---------------------------------------
April 30 April 30 April 30 April 30
(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 $6 $6
Interest cost on projected
benefit obligation 5 6 11 11
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 2 2 3 3
Plan amendments (2) (2) (3) (3)
-------------------------------------------------------------------------
Total $8 $9 $17 $17
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 six
months ended months ended
---------------------------------------
April 30 April 30 April 30 April 30
(millions of Canadian dollars) 2008 2007 2008 2007
-------------------------------------------------------------------------
Principal pension plan $18 $15 $37 $32
CT defined benefit pension plan - 1 - 2
TD Banknorth defined benefit pension
plan - - - 47
Supplemental employee retirement plans 3 3 7 6
Non-pension post-retirement benefit
plan 2 2 4 4
-------------------------------------------------------------------------
Total $23 $21 $48 $91
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at April 30, 2008, the Bank expects to contribute an additional
$51 million to its principal pension plan, nil to its CT defined benefit
pension plan, $41 million to its TD Banknorth defined benefit pension
plan, $7 million to its supplemental employee retirement plans and
$4 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 during the three months ended
April 30, 2008, the Bank incurred $48 million of 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.
In the normal course of the Bank's financial reporting, TD Commerce Bank
is consolidated on a one month lag basis. However, $48 million before-tax
restructuring and integration costs incurred in April 2008 were included
in the Bank's results for the three months ended April 30, 2008 because
they represent material TD Commerce Bank events for the three months
ended April 30, 2008.
Note 14: EARNINGS PER SHARE
-------------------------------------------------------------------------
The Bank's basic and diluted earnings per share at April 30 are as
follows:
Basic and Diluted Earnings per Share
-------------------------------------------------------------------------
For the three For the six
months ended months ended
---------------------------------------
April 30 April 30 April 30 April 30
2008 2007 2008 2007
-------------------------------------------------------------------------
Basic Earnings per Share
Net income available to common
shares ($ millions) $841 $872 $1,803 $1,787
Average number of common shares
outstanding (millions) 747.7 719.1 732.9 718.7
Basic earnings per share ($) $1.12 $1.21 $2.46 $2.49
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Diluted Earnings per Share
Net income available to common
shares ($ millions) $841 $872 $1,803 $1,787
Average number of common shares
outstanding (millions) 747.7 719.1 732.9 718.7
Stock options potentially
exercisable as determined under
the treasury stock method(1) 6.0 6.8 6.1 6.7
-------------------------------------------------------------------------
Average number of common shares
outstanding - diluted (millions) 753.7 725.9 739.0 725.4
-------------------------------------------------------------------------
Diluted earnings per share ($) $1.12 $1.20 $2.44 $2.46
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) For the six months ended April 30, 2008, the computation of diluted
earnings per share excluded weighted-average options outstanding of
2,823 thousand with a weighted-average exercise price of $70.05 as
the options' exercise prices were greater than the average market
price of the Bank's common shares. For the six months ended April 30,
2007, the computation of diluted earnings per share excluded
weighted-average options outstanding of 176 with a weighted-average
exercise price of $69.69 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 six months ended
April 30 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 Management Banking(1)
-------------------------------------------------------------------------
April April April April April April
30 30 30 30 30 30
For the three months ended 2008 2007 2008 2007 2008 2007
-------------------------------------------------------------------------
Net interest income $1,402 $1,298 $82 $78 $309 $351
Other income 732 688 476 516 166 153
-------------------------------------------------------------------------
Total revenue 2,134 1,986 558 594 475 504
Provision for (reversal
of) credit losses 191 143 - - 46 35
Non-interest expenses 1,095 1,033 387 393 294 384
-------------------------------------------------------------------------
Income (loss) before
provision for (benefit
of) income taxes 848 810 171 201 135 85
Provision for (benefit of)
income taxes 266 270 56 67 35 31
Non-controlling interests
in subsidiaries, net
of income taxes - - - - - 31
Equity in net income of
an associated company,
net of income taxes - - 67 63 - -
-------------------------------------------------------------------------
Net income (loss) $582 $540 $182 $197 $100 $23
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total assets
(billions of Canadian
dollars)
- balance sheet $159.9 $140.7 $15.6 $14.8 $120.7 $47.9
- securitized 42.0 48.0 - - - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(millions of Wholesale
Canadian dollars) Banking(2) Corporate(2) Total
-------------------------------------------------------------------------
April April April April April April
30 30 30 30 30 30
For the three months ended 2008 2007 2008 2007 2008 2007
-------------------------------------------------------------------------
Net interest income $314 $144 $(249) $(209) $1,858 $1,662
Other income 114 498 42 27 1,530 1,882
-------------------------------------------------------------------------
Total revenue 428 642 (207) (182) 3,388 3,544
Provision for (reversal
of) credit losses 10 12 (15) (18) 232 172
Non-interest expenses 291 329 139 158 2,206 2,297
-------------------------------------------------------------------------
Income (loss) before
provision for (benefit
of) income taxes 127 301 (331) (322) 950 1,075
Provision for (benefit of)
income taxes 34 84 (231) (218) 160 234
Non-controlling interests
in subsidiaries, net
of income taxes - - 9 (4) 9 27
Equity in net income of
an associated company,
net of income taxes - - 4 2 71 65
-------------------------------------------------------------------------
Net income (loss) $93 $217 $(105) $(98) $852 $879
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total assets
(billions of Canadian
dollars)
- balance sheet $186.5 $157.5 $20.9 $35.8 $503.6 $396.7
- securitized 3.0 - (15.0) (16.5) 30.0 31.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Results by Business Segment
-------------------------------------------------------------------------
U.S.
Canadian Personal Personal and
(millions of and Commercial Wealth Commercial
Canadian dollars) Banking Management Banking(1)
-------------------------------------------------------------------------
April April April April April April
30 30 30 30 30 30
For the six months ended 2008 2007 2008 2007 2008 2007
-------------------------------------------------------------------------
Net interest income $2,816 $2,605 $170 $155 $621 $692
Other income 1,465 1,391 958 990 306 298
-------------------------------------------------------------------------
Total revenue 4,281 3,996 1,128 1,145 927 990
Provision for (reversal
of) credit losses 363 281 - - 72 52
Non-interest expenses 2,191 2,092 766 757 532 683
-------------------------------------------------------------------------
Income (loss) before
provision for (benefit
of) income taxes 1,727 1,623 362 388 323 255
Provision for (benefit
of) income taxes 547 539 119 132 96 86
Non-controlling interests
in subsidiaries, net of
income taxes - - - - - 82
Equity in net income of
an associated company,
net of income taxes - - 155 127 - -
-------------------------------------------------------------------------
Net income (loss) $1,180 $1,084 $398 $383 $227 $87
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(millions of Wholesale
Canadian dollars) Banking(2) Corporate(2) Total
-------------------------------------------------------------------------
April April April April April April
30 30 30 30 30 30
For the six months ended 2008 2007 2008 2007 2008 2007
-------------------------------------------------------------------------
Net interest income $506 $347 $(467) $(466) $3,646 $3,333
Other income 530 930 87 107 3,346 3,716
-------------------------------------------------------------------------
Total revenue 1,036 1,277 (380) (359) 6,992 7,049
Provision for (reversal
of) credit losses 66 36 (14) (34) 487 335
Non-interest expenses 612 661 333 325 4,434 4,518
-------------------------------------------------------------------------
Income (loss) before
provision for (benefit
of) income taxes 358 580 (699) (650) 2,071 2,196
Provision for (benefit
of) income taxes 102 166 (469) (471) 395 452
Non-controlling interests
in subsidiaries, net of
income taxes - - 17 (8) 17 74
Equity in net income of
an associated company,
net of income taxes - - 8 3 163 130
-------------------------------------------------------------------------
Net income (loss) $256 $414 $(239) $(168) $1,822 $1,800
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) 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 restated as the impact is not material.
(2) The taxable equivalent basis (TEB) increase to net interest income
and provision for income taxes reflected in the Wholesale Banking
segment results is reversed in the Corporate segment.
Note 16: DERIVATIVES
-------------------------------------------------------------------------
Hedge accounting results were as follows:
Hedge Accounting Results
-------------------------------------------------------------------------
For the three For the six
months ended months ended
---------------------------------------
April 30 April 30 April 30 April 30
(millions of Canadian dollars) 2008 2007 2008 2007
-------------------------------------------------------------------------
Fair value hedges
Gain (loss) arising from hedge
ineffectiveness $1.7 $(0.2) $8.6 $(0.6)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash flow hedges
Gain arising from hedge
ineffectiveness $1.7 $3.0 $1.4 $3.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Portions of derivative gains (losses) that were excluded from the
assessment of hedge effectiveness for fair value and cash flow hedging
activities are included in the Consolidated Statement of Income and are
not significant for the three and six months ended April 30, 2008.
During the three and six months ended April 30, 2008, there were no firm
commitments that no longer qualified as hedges.
Over the next twelve months, the Bank expects approximately $200 million
in net gains reported in other comprehensive income as at April 30, 2008
to be reclassified to net income. The maximum length of time over which
the Bank is hedging its exposure to the variability in future cash flows
from anticipated transactions is 18 years. During the three and six
months ended April 30, 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 April 30, 2008, the
total contingent litigation reserve for Enron-related claims was
approximately $416 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 27 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 Bancorp, Inc. (Commerce) for total consideration of
$8,508 million, 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. Because the transaction
closed on March 31, 2008, due to the one month lag, the results of
Commerce for the period from March 31, 2008 to April 30, 2008 have not
been consolidated with the Bank's results for the quarter ended April 30,
2008. In the future, Commerce's results for each calendar quarter will be
consolidated with the Bank's results for the fiscal quarter. Commerce,
together with TD Banknorth, is referred to as "TD Commerce Bank" in these
Interim Consolidated Financial Statements and 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.
Fair value of assets acquired
-------------------------------------------------------------------------
(millions of Canadian dollars)
-------------------------------------------------------------------------
Cash and cash equivalents $408
Securities 25,167
Loans 18,034
Intangibles
Core deposit intangibles 1,504
Other identifiable intangibles 378
Land, buildings and equipment 1,898
Future income tax assets 329
Other assets 3,276
-------------------------------------------------------------------------
50,994
-------------------------------------------------------------------------
Less: liabilities assumed
Deposits 47,271
Obligations related to securities sold under repurchase
agreements 105
Accrued restructuring costs 149
Other liabilities 1,075
-------------------------------------------------------------------------
48,600
-------------------------------------------------------------------------
Fair value of identifiable net assets acquired 2,394
Goodwill 6,114
-------------------------------------------------------------------------
Total purchase consideration $8,508
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Goodwill and indefinite life intangibles arising from the acquisition are
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.
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 July 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
On-line Investor Presentation: Full quarterly report and a presentation
to investors and analysts (available on May 28, 2008) are accessible on
the TD Bank Financial Group website, www.td.com/investor/index.jsp.
Quarterly Earnings Conference Call: a replay of the teleconference is
available from May 28, 2008 to June 28, 2008.
Please call 1-877-289-8525 toll free, in Toronto (416) 640-1917,
passcode 21270577 (pound key).
Webcast of Call: A live audio and video internet webcast of TD Bank
Financial Group's quarterly earnings conference call with investors and
analysts is scheduled on May 28, 2008 at 3:30 p.m. ET. The call is
webcast via the TD Bank Financial Group website at www.td.com/investor.
In addition, recordings of the presentations are archived on TD's website
and will be available for replay for a period of approximately one month.
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; 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$503.6
billion in assets as of April 30, 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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