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TD Bank Financial Group (TDBFG) today announced its financial results for the fourth quarter ended October 31, 2008. Overall results for the quarter reflected solid earnings contributions from TDBFG's retail businesses in both Canada and the United States, while illiquid and volatile markets affected the performance of Wholesale Banking. TDBFG today also released its 2008 audited Consolidated Financial Statements and Management's Discussion and Analysis.
"On the whole, we're proud of what we've accomplished in 2008. Our retail businesses are performing very well and, even though TD Securities had a tough year and a particularly tough fourth quarter, we're pleased that its strategic positioning has protected our investors from the worst of the current turmoil," said Ed Clark, TD Bank Financial Group President and Chief Executive Officer.
"In this environment, our strategy has been the right one, and we remain conservatively positioned with over 90% of our earnings coming from retail businesses. This has allowed us to generate adjusted earnings of $3.8 billion in 2008 during the most challenging financial times we've ever seen. Our Canadian and U.S. retail operations delivered very strong results and we're well into a successful integration at TD Bank, America's Most Convenient Bank."
FOURTH QUARTER BUSINESS SEGMENT PERFORMANCE
Canadian Personal and Commercial Banking
Canadian Personal and Commercial Banking generated net income of $600 million in the quarter, an increase of 5% from the same period last year. Broad-based volume growth in banking products and insurance drove a 6% year- over-year increase in revenue. Strength in personal deposits, business banking and life insurance led earnings growth in the quarter.
TD Canada Trust (TDCT) opened 11 new branches during the quarter and achieved its target of opening 30 new branches for the year, increasing sales capacity and customer growth across its personal, small business and commercial banking businesses. In 2008, TDCT was ranked first for overall quality of customer service among Canada's five major banks for the fourth year in a row by the independent market research firm Synovate. TDCT was also ranked first in overall customer satisfaction for the third consecutive year by J.D. Power and Associates.
"Canadian Personal and Commercial Banking reported record earnings for 2008, following up on a tremendous 2007. Just as impressive, TD Canada Trust reinforced its reputation as the leader in customer service excellence," said Clark.
"Looking forward, while we expect revenue growth to step down in 2009, we will continue to invest in our future success by maintaining our longer hours while adding more branches and customer-facing employees."
Wealth Management
Wealth Management, including TDBFG's equity share in TD Ameritrade, produced $170 million in earnings in the fourth quarter. Global Wealth Management, which excludes TD Ameritrade, generated net income of $110 million, down 8% from the same period last year. In Canada, very strong volumes in discount brokerage were offset by decreases in revenue from mutual funds, investment management and advice channels. TD Ameritrade's fourth quarter contributed $60 million in net income to the Wealth Management segment, down 20% from the same period last year, primarily due to a one-time expense related to supporting client assets in the Reserve Primary Fund.
"In these difficult markets, Wealth Management continued to perform well on a relative basis this quarter," said Clark. "While the impact of declining capital markets is unavoidable, we've continued to invest in our businesses for future growth, meeting our target of adding 130 new client-facing advisors in 2008."
U.S. Personal and Commercial Banking
U.S. Personal and Commercial Banking generated adjusted net income of $276 million in the fourth quarter, an increase of 123% from the same period last year, primarily due to the addition of Commerce earnings, which were included for the first time in the third quarter of 2008. The fourth quarter saw good loan growth while overall asset quality remained better than the industry as a whole. A major highlight at the end of the quarter was the successful re-branding of over 575 Commerce and TD Banknorth locations in the Mid-Atlantic, metro Washington, D.C. and Florida markets to TD Bank, America's Most Convenient Bank. This convenience brand was endorsed again this quarter with another first-place ranking in customer satisfaction from J.D. Power and Associates.
"On a full-year basis, our U.S. Personal and Commercial Banking operations delivered $806 million in adjusted earnings, well ahead of our $750 million target for the year. This is terrific performance in a challenging environment," said Clark. "On top of that, our organic growth plans are on track, with 29 new branches added in 2008, and the Commerce integration passed a crucial test with the successful launch of our new brand, TD Bank, America's Most Convenient Bank. This huge re-branding was executed with speed and precision, a clear display of the operational excellence of our employees," Clark added.
"Looking at next year, while we can't outrun a recession, our U.S. retail operations are demonstrating that they can perform and grow even in what many are calling the toughest operating environment for financial services in U.S. history."
Wholesale Banking
As previously announced, Wholesale Banking reported a net loss for the quarter of $228 million, a decrease of $385 million compared with the fourth quarter of last year, primarily due to mark-to-market losses in the credit trading business. On a full year basis, Wholesale reported net income of $65 million for 2008, reflecting weak capital markets and broad-based deterioration in market conditions stemming from the global credit and liquidity crisis.
"Although TD Securities had a tough year and a particularly tough fourth quarter, even with the credit trading losses in the fourth quarter, they still earned a 5% return since the start of the global financial turmoil," said Clark.
"We have been repositioning TD Securities for the last five years, aggressively working to lower its risk profile. We're focused on continuing this work, evaluating each business and removing any risk we're not comfortable with," Clark added. "At the same time, we're going to continue strengthening wholesale's franchise operations - supporting our clients and solidifying our position as a top 3 dealer in Canada."
Corporate
As previously announced, TDBFG's Corporate segment reported an adjusted net loss of $153 million for the quarter, compared with a net loss of $26 million in the same period last year and a net loss of $40 million in the third quarter of 2008. The loss in the Corporate segment was largely due to illiquid markets, which contributed to losses on securitization and negative carry on some investments, where TDBFG chose to have lower yielding, safer investments, given uncertain times.
Conclusion
"As the economy slows, understandably there's concern from governments and the public that banks may restrict credit. What's clear from our reporting today is that TD continues to supply credit to its customers and clients," said Clark. "We have included details on our overall lending, as well as a specific look at commercial lending, and both underscore this point. Our personal and commercial lending in Canada has continued to grow through each quarter of 2008, despite a general slowdown in credit growth. In fact, the growth rate of our small business and commercial lending has not only increased, the rate at which it's increasing has also moved up, from a growth rate of 7-10% to 14-15% in recent quarters, well above the average growth rates for these areas of lending."
"While the lack of visibility on the economic environment calls for caution, we have a strategy and competitive position that will help us weather the storm, and I know our teams are focused on delivering growth despite significant headwinds. We're building the first truly North American bank, one that's focused on franchise earnings and maintaining a business mix that supports our lower risk profile," added Clark.
"Throughout what has been a very tough year in financial services, I'm extremely proud of our dedicated team of 74,000 employees, who have continued to deliver outstanding customer service across all our businesses. It's their passion that continues to drive our success," Clark concluded.
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 2009 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 2009 for the Bank are set out in the 2008 Annual Report under the heading "Economic Summary and Outlook" and for each of our business segments, under the heading "Business Outlook and Focus for 2009", 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 2008 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 existing and the introduction of new monetary and economic policies 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; defaults by other financial institutions in Canada, the U.S. and other countries; the accuracy and completeness of information the Bank receives on customers and counterparties; the development and introduction of new products and services in markets; developing new distribution channels and realizing increased revenue from these channels; the Bank's ability to execute its strategies, including its integration, growth and acquisition strategies and those of its subsidiaries, particularly in the U.S.; changes in accounting policies (including future accounting changes) and methods the Bank uses to report its financial condition, including uncertainties associated with critical accounting assumptions and estimates; changes to our credit ratings; global capital market activity; increased funding costs for credit due to market illiquidity and increased competition for funding; 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 64 of the Bank's 2008 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. 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.
ANALYSIS OF OPERATING PERFORMANCE
This analysis of operating performance is presented to enable readers to assess material changes in the operational results of TD Bank Financial Group (the Bank) for the quarter ended October 31, 2008, compared with the corresponding periods. This analysis should be read in conjunction with our unaudited consolidated financial results included in this Press Release and with our 2008 Consolidated Financial Statements. This analysis is dated December 3, 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 with the presentation adopted in the current period. Additional information relating to the Bank is on the Bank's website http://www.td.com, as well as on SEDAR at http://www.sedar.com and on the U.S. Securities and Exchange Commission's (SEC's) website at http://www.sec.gov (EDGAR filers section).
<< FINANCIAL HIGHLIGHTS(1) ------------------------------------------------------------------------- For the twelve For the three months ended months ended (millions of ----------------------------- ------------------- Canadian dollars, Oct. 31 July 31 Oct.31 Oct. 31 Oct. 31 except as noted) 2008 2008 2007 2008 2007 ------------------------------------------------------------------------- Results of operations Total revenue $3,640 $4,037 $3,550 $14,669 $14,281 Provision for credit losses 288 288 139 1,063 645 Non-interest expenses 2,367 2,701 2,241 9,502 8,975 Net income - reported(2) 1,014 997 1,094 3,833 3,997 Net income - adjusted(2) 665 1,115 1,021 3,813 4,189 Economic profit(3) (150) 321 430 932 1,876 Return on common equity - reported 13.3% 13.4% 20.8% 14.4% 19.3% Return on invested capital(3) 7.5% 13.1% 16.3% 12.4% 17.1% ------------------------------------------------------------------------- Financial position Total assets $563,214 $508,839 $422,124 $563,214 $422,124 Total risk-weighted assets(4) 211,750 184,674 152,519 211,750 152,519 Total shareholders' equity 31,674 31,293 21,404 31,674 21,404 ------------------------------------------------------------------------- Financial ratios - reported (per cent) Efficiency ratio 65.0% 66.9% 63.1% 64.8% 62.8% Tier 1 capital to risk-weighted assets 9.8 9.5 10.3 9.8 10.3 Provision for credit losses as a % of net average loans 0.52 0.54 0.30 0.54 0.37 ------------------------------------------------------------------------- Common share information - reported (Canadian dollars) Per share Basic earnings $1.23 $1.22 $1.52 $4.90 $5.53 Diluted earnings 1.22 1.21 1.50 4.87 5.48 Dividends 0.61 0.59 0.57 2.36 2.11 Book value 36.78 36.75 29.23 36.78 29.23 Closing share price 56.92 62.29 71.35 56.92 71.35 Shares outstanding (millions) Average basic 808.0 804.0 717.3 769.6 718.6 Average diluted 812.8 811.0 724.4 775.7 725.5 End of period 810.1 807.3 717.8 810.1 717.8 Market capitalization (billions of Canadian dollars) $46.1 $50.3 $51.2 $46.1 $51.2 Dividend yield 4.1% 3.7% 3.0% 3.8% 3.0% Dividend payout ratio 49.7 48.5 37.6 49.0 38.1 Price to earnings multiple 11.7 12.1 13.0 11.7 13.0 ------------------------------------------------------------------------- Common share information - adjusted (Canadian dollars) Per share Basic earnings $0.79 $1.37 $1.42 $4.92 $5.80 Diluted earnings 0.79 1.35 1.40 4.88 5.75 Dividend payout ratio 76.8% 43.3% 40.3% 49.3% 36.4% Price to earnings multiple 11.6 11.3 12.4 11.6 12.4 ------------------------------------------------------------------------- (1) Certain comparative amounts have been restated and reclassified to conform to the presentation adopted in the current period. (2) Reported and adjusted results are explained under the "How the Bank Reports" section, which includes a reconciliation between reported and adjusted results. (3) 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. (4) The Bank adopted the "International Convergence of Capital Measurement and Capital Standards - A Revised Framework" (Basel II), issued by the Basel Committee on Banking Supervision for calculating risk-weighted assets (RWA) and regulatory capital starting November 1, 2007. Prior period numbers are based on the Basel I Capital Accord (Basel I). >>
HOW WE PERFORMED
How the Bank Reports
The Bank prepares its consolidated financial statements in accordance with GAAP and refers to results prepared in accordance with GAAP as "reported" results. The Bank also utilizes non-GAAP financial measures referred to as "adjusted" results to assess each of its businesses and to measure overall Bank performance. To arrive at adjusted results, the Bank removes "items of note", net of income taxes, from reported results. The items of note relate to items which management does not believe are indicative of underlying business performance. The Bank believes that adjusted results provide the reader with a better understanding of how management views the Bank's performance. The items of note are listed in the table on the following page. As explained, adjusted results are different from reported results determined in accordance with GAAP. Adjusted results, items of note and related terms used in this document are not defined terms under GAAP, and, therefore, may not be comparable to similar terms used by other issuers.
The following tables provide reconciliation between the Bank's reported and adjusted results.
<< Operating results - reported(1) ------------------------------------------------------------------------- For the twelve For the three months ended months ended ----------------------------- ------------------- (millions of Oct. 31 July 31 Oct. 31 Oct. 31 Oct. 31 Canadian dollars) 2008 2008 2007 2008 2007 ------------------------------------------------------------------------- Net interest income $2,449 $2,437 $1,808 $8,532 $6,924 Other income 1,191 1,600 1,742 6,137 7,357 ------------------------------------------------------------------------- Total revenue 3,640 4,037 3,550 14,669 14,281 Provision for credit losses (288) (288) (139) (1,063) (645) Non-interest expenses (2,367) (2,701) (2,241) (9,502) (8,975) ------------------------------------------------------------------------- Income before provision for income taxes, non-controlling interests in subsidiaries and equity in net income of associated company 985 1,048 1,170 4,104 4,661 Provision for income taxes (20) (122) (153) (537) (853) Non-controlling interests, net of tax (18) (8) (8) (43) (95) Equity in net income of associated company, net of tax 67 79 85 309 284 ------------------------------------------------------------------------- Net income - reported 1,014 997 1,094 3,833 3,997 Preferred dividends (23) (17) (5) (59) (20) ------------------------------------------------------------------------- Net income available to common shareholders - reported $991 $980 $1,089 $3,774 $3,977 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Certain comparative amounts have been restated to conform with the presentation adopted in the current quarter. Reconciliation of non-GAAP measures(1) Adjusted net income to reported results ------------------------------------------------------------------------- Operating results For the twelve - adjusted For the three months ended months ended ----------------------------- ------------------- (millions of Oct. 31 July 31 Oct. 31 Oct. 31 Oct. 31 Canadian dollars) 2008 2008 2007 2008 2007 ------------------------------------------------------------------------- Net interest income $2,449 $2,437 $1,808 $8,532 $6,924 Other income(2) 954 1,566 1,582 5,840 7,148 ------------------------------------------------------------------------- Total revenues 3,403 4,003 3,390 14,372 14,072 Provision for credit losses(3) (288) (288) (199) (1,046) (705) Non-interest expenses(4) (2,632) (2,512) (2,103) (9,291) (8,390) ------------------------------------------------------------------------- Income before provision for income taxes, non-controlling interests in subsidiaries and equity in net income of associated company 483 1,203 1,088 4,035 4,977 Provision for income taxes(5) 116 (175) (156) (554) (1,000) Non-controlling interests, net of tax(6) (18) (8) (8) (43) (119) Equity in net income of associated company, net of tax(7) 84 95 97 375 331 ------------------------------------------------------------------------- Net income - adjusted 665 1,115 1,021 3,813 4,189 Preferred dividends (23) (17) (5) (59) (20) ------------------------------------------------------------------------- Net income available to common shareholders - adjusted $642 $1,098 $1,016 $3,754 $4,169 ------------------------------------------------------------------------- Items of note affecting net income, net of income taxes Amortization of intangibles $(126) $(111) $(99) $(404) $(353) Reversal of Enron litigation reserve(8) 323 - - 323 - Change in fair value of derivatives hedging the reclassified available-for-sale debt securities portfolio(9) 118 - - 118 - Gain relating to restructuring of Visa(10) - - 135 - 135 TD Banknorth restructuring, privatization and merger related charges(11) - - - - (43) Restructuring and integration charges relating to the Commerce acquisition(12) (25) (15) - (70) - Change in fair value of credit default swaps hedging the corporate loan book, net of provision for credit losses(13) 59 22 (2) 107 30 General allowance release - - 39 - 39 Other tax items(14) - (14) - (34) - Provision for insurance claims(15) - - - (20) - ------------------------------------------------------------------------- Total items of note 349 (118) 73 20 (192) ------------------------------------------------------------------------- Net income available to common shareholders - reported $991 $980 $1,089 $3,774 $3,977 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Reconciliation of reported earnings per share (EPS) to adjusted EPS(16) (unaudited) ------------------------------------------------------------------------- For the twelve For the three months ended months ended ----------------------------- ------------------- Oct. 31 July 31 Oct. 31 Oct. 31 Oct. 31 (Canadian dollars) 2008 2008 2007 2008 2007 ------------------------------------------------------------------------- Diluted - reported $1.22 $1.21 $1.50 $4.87 $5.48 Items of note affecting income (as above) (0.43) 0.14 (0.10) (0.03) 0.27 Items of note affecting EPS only(17) - - - 0.04 - ------------------------------------------------------------------------- Diluted - adjusted $0.79 $1.35 $1.40 $4.88 $5.75 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Basic - reported $1.23 $1.22 $1.52 $4.90 $5.53 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 1. Certain comparative amounts have been restated and reclassified to conform to the presentation adopted in the current period. 2. Adjusted other income excludes the following items of note: fourth quarter 2008 - $96 million gain due to change in fair value of credit default swaps (CDS) hedging the corporate loan book; $141 million gain due to change in derivatives hedging the reclassified available-for-sale debt securities portfolio, as explained in footnote 9; third quarter 2008 - $34 million gain due to change in fair value of CDS hedging the corporate loan book; second quarter 2008 - $1 million gain due to change in fair value of CDS hedging the corporate loan book; first quarter 2008 - $55 million gain due to change in fair value of CDS hedging the corporate loan book; $30 million provision for insurance claims, as explained in footnote 15; fourth quarter 2007 - $3 million loss due to change in fair value of CDS hedging the corporate loan book; $163 million gain relating to restructuring of Visa, as explained in footnote 10; third quarter 2007 - $46 million gain due to change in fair value of CDS hedging the corporate loan book; second quarter 2007 - $11 million gain due to change in fair value of CDS hedging the corporate loan book; first quarter 2007 - $8 million loss 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; fourth quarter 2007 - $60 million general allowance release. 4. Adjusted non-interest expenses excludes the following items of note: fourth quarter 2008 - $172 million amortization of intangibles; $40 million restructuring and integration charges related to the Commerce acquisition, as explained in footnote 12; $477 million positive adjustment related to the reversal of Enron litigation reserve, as explained in footnote 8; third quarter 2008 - $166 million amortization of intangibles; $23 million restructuring and integration charges relating to the Commerce acquisition; second quarter 2008 - $117 million amortization of intangibles; $48 million restructuring and integration charges relating to the Commerce acquisition; first quarter 2008 - $122 million amortization of intangibles; fourth quarter 2007 - $138 million amortization of intangibles; third quarter 2007 - $131 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 11; first quarter 2007 - $118 million amortization of intangibles. 5. For reconciliation between reported and adjusted provision for income taxes, see the table below. 6. Adjusted non-controlling interests excludes the following items of note: third quarter 2007 - $1 million amortization of intangibles; second quarter 2007 - $4 million amortization of intangibles; $15 million due to TD Banknorth restructuring, privatization and merger-related charges; first quarter 2007 - $4 million amortization of intangibles. 7. Adjusted equity in net income of an associated company excludes the following items of note: fourth quarter 2008 - $17 million amortization of intangibles; third quarter 2008 - $16 million amortization of intangibles; second quarter 2008 - $17 million amortization of intangibles; first quarter 2008 - $16 million amortization of intangibles; fourth quarter 2007 - $12 million amortization of intangibles; third quarter 2007 - $11 million amortization of intangibles; second quarter 2007 - $12 million amortization of intangibles; first quarter 2007 - $12 million amortization of intangibles. 8. The Enron contingent liability for which the Bank established a reserve was re-evaluated in light of the favourable evolution of case law in similar securities class actions following the U.S. Supreme Court's ruling in Stoneridge Partners, LLC v. Scientific-Atlanta, Inc. During the fourth quarter of 2008, the Bank recorded an after- tax positive adjustment of $323 million ($477 million before tax), reflecting the substantial reversal of the reserve. For details, see Note 28 to the 2008 Consolidated Financial Statements. 9. Effective August 1, 2008, as a result of recent deterioration in markets and severe dislocation in the credit market, the Bank changed its trading strategy with respect to certain trading debt securities. The Bank no longer intends to actively trade in these debt securities. Accordingly, the Bank reclassified certain debt securities from trading to available-for-sale category in accordance with the Amendments to the Canadian Institute of Chartered Accountants (CICA) Handbook Section 3855, Financial Instruments - Recognition and Measurement. As part of the Bank's trading strategy, these debt securities are economically hedged, primarily with CDS and interest rate swap contracts. These derivatives are not eligible for reclassification and are recorded on a fair value basis with changes in fair value recorded in the period's earnings. Management believes that this asymmetry in the accounting treatment between derivatives and the reclassified debt securities results in volatility in earnings from period to period that is not indicative of the economics of the underlying business performance in Wholesale Banking. As a result, the derivatives are accounted for on an accrual basis in Wholesale Banking and the gains and losses related to the derivatives in excess of the accrued amounts are reported in the Corporate segment and disclosed as an item of note. Adjusted results of the Bank exclude the gains and losses of the derivatives in excess of the accrued amount. 10. As part of the global restructuring of Visa USA Inc., Visa Canada Association and Visa International Service Association, which closed on October 3, 2007 (restructuring date), the Bank received shares of the new global entity (Visa Inc.) in exchange for the Bank's membership interest in Visa Canada Association. As required by the applicable accounting standards, the shares the Bank received in Visa Inc. were measured at fair value and an estimated gain of $135 million after tax was recognized in the Corporate segment, based on results of an independent valuation of the shares. The gain may be subject to further adjustment based on the finalization of the Bank's ownership percentage in Visa Inc. 11. The TD Banknorth restructuring, privatization and merger-related charges include the following: $31 million restructuring charge, which primarily consisted of employee severance costs, the costs of amending certain executive employment and award agreements and write- down of long-lived assets due to impairment, included in U.S. Personal and Commercial Banking; $4 million restructuring charge related to the transfer of functions from TD Bank USA, N.A. (TD Bank USA) to TD Banknorth, included in the Corporate segment; $5 million privatization charges, which primarily consisted of legal and investment banking fees, included in U.S. Personal and Commercial Banking; and $3 million merger-related charges related to conversion and customer notices in connection with the integration of Hudson and Interchange with TD Banknorth, included in U.S. Personal and Commercial Banking. In the Interim Consolidated Statement of Income, the restructuring, privatization and merger-related charges are included in non-interest expenses. 12. 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. 13. The Bank purchases CDS to hedge the credit risk in Wholesale Banking's corporate lending portfolio. These CDS do not qualify for hedge accounting treatment and are measured at fair value with changes in fair value recognized in current period's earnings. The related loans are accounted for at amortized cost. Management believes that this asymmetry in the accounting treatment between CDS and loans would result in periodic profit and loss volatility which is not indicative of the economics of the corporate loan portfolio or the underlying business performance in Wholesale Banking. As a result, the CDS are accounted for on an accrual basis in Wholesale Banking and the gains and losses on the CDS, in excess of the accrued cost, are reported in the Corporate segment. Adjusted results exclude the gains and losses on the CDS in excess of the accrued cost. Previously, this item was described as "Hedging impact due to AcG- 13". As part of the adoption of the new financial instruments standards, the guidance under Accounting Guideline 13: Hedging Relationships (AcG-13) was replaced by CICA Section 3865, Hedges. 14. Third quarter 2008 - As a result of the Commerce acquisition, the combined overall tax rate for the U.S. Personal and Commercial Banking segment declined, resulting in a negative impact on future income tax assets of $14 million related to non-intangible future income tax assets. First quarter 2008 - The negative impact of the scheduled reductions in the income tax rate, resulting in a decrease of $20 million in the net future income tax assets. 15. The provision for insurance claims relates to a court decision in Alberta. The Alberta government's legislation effectively capping minor injury insurance claims was challenged and held to be unconstitutional in early calendar 2008. 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. 16. 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. 17. The diluted EPS figures do not include Commerce earnings for the month of April 2008 due to a one month lag between fiscal quarter ends, while share issuance on close resulted in a one-time negative earnings impact of 4 cents per share. Reconciliation of non-GAAP provision for income taxes ------------------------------------------------------------------------- For the twelve For the three months ended months ended ----------------------------- ------------------- Oct. 31 July 31 Oct. 31 Oct. 31 Oct. 31 2008 2008 2007 2008 2007 ------------------------------------------------------------------------- Provision for income taxes - reported $20 $122 $153 $537 $853 ------------------------------------------------------------------------- Increase (decrease) resulting from items of note: Amortization of intangibles 63 71 51 239 184 Reversal of Enron litigation reserve (154) - - (154) - Change in fair value of derivatives hedging the reclassified available-for-sale debt securities portfolio (23) - - (23) - Gain relating to restructuring of Visa - - (28) - (28) TD Banknorth restructuring privatization and merger related charges - - - - 28 Restructuring and integration charges relating to the Commerce acquisition 15 8 - 41 - Change in fair value of credit default swaps hedging the corporate loan book, net of provision for credit losses (37) (12) 1 (62) (16) Other tax items - (14) - (34) - General allowance release - - (21) - (21) Provision for insurance claims - - - 10 - ------------------------------------------------------------------------- Tax effect - items of note (136) 53 3 17 147 ------------------------------------------------------------------------- Provision for income taxes - adjusted $(116) $175 $156 $554 $1,000 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Effective income tax rate - adjusted (24.0)% 14.5% 14.3% 13.7% 20.1% ------------------------------------------------------------------------- ------------------------------------------------------------------------- >>
Economic Profit and Return on Invested Capital
The Bank utilizes economic profit as a tool to measure shareholder value creation. Economic profit is adjusted net income available to common shareholders less a charge for average invested capital. Average invested capital is equal to average common equity for the period plus the average cumulative after-tax goodwill and intangible assets amortized as of the reporting date. The rate used in the charge for capital is the equity cost of capital calculated using the capital asset pricing model. The charge represents an assumed minimum return required by common shareholders on the Bank's invested capital. The Bank's goal is to achieve positive and growing economic profit.
Return on invested capital (ROIC) is adjusted net income available to common shareholders divided by average invested capital. ROIC is a variation of the economic profit measure that is useful in comparison to the equity cost of capital. Both ROIC and the cost of capital are percentage rates, while economic profit is a dollar measure. When ROIC exceeds the equity cost of capital, economic profit is positive. The Bank's goal is to maximize economic profit by achieving ROIC that exceeds the equity cost of capital.
Economic profit and ROIC are non-GAAP financial measures and 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 twelve For the three months ended months ended ----------------------------- ------------------- Oct. 31 July 31 Oct. 31 Oct. 31 Oct. 31 2008 2008 2007 2008 2007 ------------------------------------------------------------------------- Average common equity $29,615 $29,065 $20,808 $26,213 $20,572 Average cumulative goodwill/intangible assets amortized, net of income taxes 4,269 4,171 3,941 4,136 3,825 ------------------------------------------------------------------------- Average invested capital $33,884 $33,236 $24,749 $30,349 $24,397 Rate charged for invested capital 9.3% 9.3% 9.4% 9.3% 9.4% ------------------------------------------------------------------------- Charge for invested capital $(792) $(777) $(586) $(2,822) $(2,293) ------------------------------------------------------------------------- Net income available to common shareholders - reported $991 $980 $1,089 $3,774 $3,977 Items of note impacting income, net of income taxes (349) 118 (73) (20) 192 ------------------------------------------------------------------------- Net income available to common shareholders - adjusted $642 $1,098 $1,016 $3,754 $4,169 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Economic profit $(150) $321 $430 $932 $1,876 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Return on invested capital 7.5% 13.1% 16.3% 12.4% 17.1% ------------------------------------------------------------------------- ------------------------------------------------------------------------- >>
Significant Events
Enron
The Bank is a party to certain legal actions regarding Enron, principally the securities class action. As at July 31, 2008, the Bank's total contingent litigation reserve for Enron-related claims was approximately $497 million (US$413 million). The Bank re-evaluated the reserve in light of the favourable evolution of case law in similar securities class actions following the U.S. Supreme Court's ruling in Stoneridge Partners, LLC v. Scientific-Atlanta, Inc. During the fourth quarter of 2008, the Bank recorded an after-tax positive adjustment of $323 million (pre-tax $477 million), reflecting the substantial reversal of the reserve. Due to the pending nature of the securities class action and other Enron-related claims to which the Bank is a party, the Bank retained $20 million (US$17 million) of the reserve. Given the uncertainties of the timing and outcome of securities litigation, the Bank will continue to assess evolving case law as it relates to the Bank's Enron reserve to determine whether the reserve should be further reduced. The Bank will continue to defend itself vigorously in these cases and work to resolve them in the best interest of its shareholders. For details, see Note 28 to the 2008 Consolidated Financial Statements.
Deterioration in Markets and Severe Dislocation in Credit Market
During the fourth quarter of 2008, as a result of recent deterioration in markets and severe dislocation in the credit market, the Bank changed its trading strategy with respect to certain trading debt securities. These debt securities were previously recorded at fair value with changes in fair value, as well as any gains or losses realized on disposal, recognized in trading income. Since the Bank no longer intends to actively trade in these debt securities, the Bank reclassified these debt securities from trading to the available-for-sale category effective August 1, 2008 in accordance with the Amendments to CICA Section 3855, Financial Instruments - Recognition and Measurement.
The fair value of the reclassified debt securities was $7,355 million, as at October 31, 2008. In the fourth quarter of 2008, net interest income of $110 million after tax was recorded relating to the reclassified debt securities. The change in fair value of $561 million after tax for these securities was recorded in other comprehensive income. Had the Bank not reclassified these debt securities on August 1, 2008, the change in the fair value of these debt securities would have been included as part of trading income, the impact of which would have resulted in a reduction of net income of $561 million in the fourth quarter of 2008, and a reduction in adjusted net income of $443 million after taking into account the change in the fair value of derivatives hedging the reclassified debt securities portfolio.
For further details, see Note 2 to the 2008 Consolidated Financial Statements.
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, including TD Canada Trust and TD Insurance; Wealth Management, including TD Ameritrade; U.S. Personal and Commercial Banking, including TD Banknorth and Commerce; and Wholesale Banking. The Bank's other activities are grouped into the Corporate segment. Effective the third quarter of 2008, U.S. insurance and credit card businesses were transferred to the Canadian Personal and Commercial Banking segment, and the U.S. Wealth Management businesses to the Wealth Management segment for management reporting purposes to align with how these businesses are being managed on a North American basis. Prior periods have not been reclassified as the impact was not material. Results of each business segment reflect revenue, expenses, assets and liabilities generated by the business in that segment. The Bank measures and evaluates the performance of each segment based on adjusted results where applicable, and for those segments the Bank notes that the measure is adjusted. Amortization of intangible expense is included in the Corporate segment. Accordingly, net income for the operating business segments is presented before amortization of intangibles, as well as any other items of note not attributed to the operating segments. For further details, see the "How the Bank Reports" section, the "Business Focus" section in the 2008 Management's Discussion and Analysis and Note 31 to the 2008 Consolidated Financial Statements. For information concerning the Bank's measures of economic profit and return on invested capital, which are non-GAAP measures, see page 7. Segmented information also appears in Appendix A on page 17.
Net interest income within Wholesale Banking is calculated on a taxable equivalent basis (TEB), which means that the value of non-taxable or tax- exempt income, including dividends, is adjusted to its equivalent before-tax value. Using TEB allows the Bank to measure income from all securities and loans consistently and makes for a more meaningful comparison of net interest income with similar institutions. The TEB adjustment reflected in Wholesale Banking is eliminated in the Corporate segment. The TEB adjustment for the quarter was $142 million, compared with $247 million in the fourth quarter last year, and $129 million in the prior quarter. On a full year basis, the TEB adjustment was $513 million, compared with $664 million in the last year.
As noted in Note 4 to the 2008 Consolidated Financial Statements, the Bank securitizes retail loans and receivables held by Canadian Personal and Commercial Banking in transactions that are accounted for as sales. For the purpose of segmented reporting, Canadian Personal and Commercial Banking accounts for the transactions as though they are financing arrangements. Accordingly, the interest income earned on the assets sold net of the funding costs incurred by the purchaser trusts is recorded in net interest income and the provision for credit losses related to these assets is charged to provision for (reversal of) credit losses. This accounting is reversed in the Corporate segment and the gain recognized on sale which is in compliance with appropriate accounting standards together with income earned on the retained interests net of credit losses incurred are included in other income.
Canadian Personal and Commercial Banking
Canadian Personal and Commercial Banking net income for the quarter was $600 million, an increase of $28 million, or 5%, compared with the fourth quarter last year, and a decrease of $44 million, or 7%, compared with the prior quarter. The annualized return on invested capital for the quarter was 29%, compared with 27% in the fourth quarter last year and 31% in the prior quarter.
Revenue grew by $131 million, or 6%, compared with the fourth quarter last year, primarily due to volume growth across most banking products, particularly in real-estate secured lending, deposits and personal lending. The inclusion of revenue from the U.S. businesses contributed to the growth as well. Revenue increased by $21 million, or 1%, compared with the prior quarter due mainly to volume growth in real-estate secured lending and personal lending. Margin on average earning assets decreased by 14 basis points (bps) from 3.03% compared with the fourth quarter last year due to higher funding costs, price competition in high yield savings and term deposits, and customer preference towards lower margin products. Margin on average earning assets decreased 9 bps compared with the prior quarter.
Compared with the fourth quarter last year, real-estate secured lending volume (including securitizations) grew by $15.9 billion or 11.1%; personal deposit volume grew by $12.6 billion or 12.2%; and consumer loan volume grew by $2.7 billion or 11.6%. Business deposits volume increased by $4.7 billion, or 12.0% and business loans and acceptances volume grew by $2.7 billion or 13.6%. Gross originated domestic insurance premiums grew by $62 million or 10%. As at August 2008, personal deposit market share was 21.2% and personal lending market share was 19.9% consistent with last quarter's market share. Small business lending (credit limits of less than $250,000) market share as at June 30, 2008 was 18.2%.
Provision for credit losses (PCL) for the quarter was $209 million, which increased by $33 million, or 19%, compared with the fourth quarter last year. Personal banking PCL of $198 million was $30 million higher than the fourth quarter last year, primarily due to credit quality challenges and higher bankruptcies, and higher personal lending and credit card volumes. Business banking PCL was $11 million for the quarter, compared with $8 million in the fourth quarter last year. Annualized PCL as a percentage of credit volume was 0.40%, an increase of 3 bps, compared with the fourth quarter last year. PCL increased by $15 million, or 8%, compared with the prior quarter. Personal banking provisions increased $19 million, or 11%, compared with the prior quarter primarily due to higher bankruptcies and delinquencies. Business banking provisions decreased slightly by $4 million, compared with the prior quarter.
Non-interest expenses increased by $88 million, or 8%, compared with the fourth quarter last year. Primary drivers of the expense growth were investments in new branches, higher employee compensation, inclusion of U.S. businesses and provisions related to the termination of the Truncation and Electronic Cheque Presentment (TECP) initiative by the Canadian Payments Association. Non-interest expenses increased by $73 million, or 6%, compared with the prior quarter, mainly due to higher seasonal business related costs and provisions related to the TECP initiative. The average full time equivalent (FTE) staffing levels increased by 1,426, or 5%, compared with the fourth quarter last year, mainly as a result of increases in branch network, insurance and the inclusion of personnel in U.S. businesses. The average FTE increased by 61, or 0.2%, compared with the prior
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