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Toronto-Dominion. (TDB)

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Thursday 22 August, 2002

Toronto-Dominion.

3rd Quarter Results


    TD Bank Financial Group announces third quarter 2002 results

 

    Third Quarter Highlights

    - On an operating cash basis(1), diluted loss per share for the third

      quarter was $.46, compared with diluted earnings per share of $.79 in

      the same period last year. On a reported basis(2), diluted loss per

      share for the third quarter was $.67 compared with diluted earnings per

      share of $.51 for the same period last year.

    - On an operating cash basis, return on common equity for the quarter was

      (9.5)%, compared with 17.1% for the same quarter last year. On a

      reported basis, return on common equity for the quarter was (13.9)%,

      compared with 10.9% for the same quarter last year.

    - Operating cash basis net loss for the quarter was $271 million,

      compared with operating cash basis net income of $522 million for the

      same quarter last year. Reported net loss applicable to common shares

      was $428 million for the quarter, compared with reported net income of

      $321 million for the same quarter last year.

    (For financial results, which include both operating cash and reported

    earnings, please see table on page 6.)

 

    TORONTO, Aug. 22 /CNW/ - TD Bank Financial Group today announced results

for the third quarter of fiscal 2002, reporting an operating cash basis net

loss of $271 million or diluted loss per common share of $.46. This compares

with an operating cash basis net income of $522 million or diluted earnings

per common share of $.79 in the same quarter last year.

    'TD's third quarter results, while very disappointing, are reflective of

the difficult capital markets and our serious commitment to dealing with the

challenges in our corporate lending portfolio,' said TD Chairman and Chief

Executive Officer A. Charles Baillie.

    'Our revised strategy in TD Securities, coupled with encouraging earnings

performance from TD Canada Trust and the successful launch of our Canadian

integrated wealth management platform under the TD Waterhouse brand, should

form the foundation for improvement going forward,' he added.

 

    Sectoral Provisions

    During the quarter, TDBFG announced that it would take a $600 million

sectoral loan loss provision against potential problems in its performing

corporate telecommunication loan portfolio. TDBFG also announced it would take

a $250 million sectoral loan loss provision to address concerns in certain

performing corporate loans in its U.S. portfolio. TDBFG today indicated that

it would be taking a $20 million sectoral loan loss provision as part of its

previously announced guidance of $1.3 billion in loan loss provisions for

fiscal 2002, to address potential problems in its agricultural loan portfolio.

The move brings the total for sectoral loan loss provisions in the third

quarter to $870 million. With the $870 million in sectoral provisions, the

company's expected loan loss total for 2002 remains at the previously

announced $2.15 billion, of which $1.25 billion was recorded in the quarter.

    TDBFG's Tier 1 capital ratio is 7.7% as of July 31, 2002. TDBFG will

proceed to issue non-common Tier 1 capital in the fourth quarter and

anticipates a Tier 1 capital ratio of 8.0% by October 31, 2002.

 

 

    Business Segment Quarterly Highlights

 

    Personal and Commercial Banking

    Third quarter earnings at TD Canada Trust are up from both the second

quarter and from the previous year. At the same time, TD Canada Trust

continues to improve customer satisfaction levels. The Customer Satisfaction

Index (CSI) increased to 84.0% this quarter, above the pre-conversion level of

83.4% .

    Core chequing and savings account balances remain strong and the mortgage

business is showing stronger growth as a result of increased new mortgage

volume. Expenses have improved year-over-year with a reduction of 2% from the

same quarter last year. During the quarter, a 2% increase in revenues resulted

in a 2.2 percentage point improvement in the operating cash basis efficiency

ratio to 58.5%. Going forward, TD Canada Trust will remain focused on

initiatives that reduce expenses while enhancing the customer experience and

growing revenues.

 

    Wealth Management

    As a result of weak capital markets, assets under management declined to

$122 billion during the third quarter, down from $123 billion the previous

quarter. Domestically, TDBFG's wealth management platform remains focused on

increasing revenues. In July, TDBFG launched a new integrated approach to

wealth management in Canada bringing together financial planning, discount

brokerage and investment advice under the TD Waterhouse brand. Initial reports

show promising results for the key element of this strategy, with referral

flow from TD Canada Trust to the wealth management platform gaining momentum.

In particular, TDBFG's high net worth Private Client Group has seen a

consistent inflow of funds over the quarter, largely as a result of an

increase in referrals.

    Globally, TDBFG's emphasis lies in reducing the expenses of TD

Waterhouse, to reflect challenging market conditions. In addition, TDBFG

announced a joint venture during the quarter with The Royal Bank of Scotland

Group and its NatWest Stockbrokers subsidiary, allowing TD Waterhouse to

quickly add scale in its European operations. The joint venture will allow TD

Waterhouse U.K. to reduce its own cost structure, while also generating a

revenue stream from NatWest Stockbrokers. The move positions TD Waterhouse

well to extract greater efficiency from its U.K. platform in today's

environment of low trading volumes.

 

    Wholesale Bank

    TD Securities posted weak returns in the quarter amid continued difficult

market conditions characterized by reduced corporate activity and depressed

investor confidence. Quarterly results were severely impacted as TD Securities

significantly increased provisions for credit losses. As previously announced,

TD Securities will reduce the capital associated with the corporate lending

portfolio by approximately $750 million over the next three years and

significantly reduce its exposure to the higher risk areas of the

telecommunications sector. TD Securities will focus its lending activities on

providing credit to core accounts that generate total relationship returns in

excess of hurdle rates. Furthermore, TD Securities' recently formed Credit

Portfolio Management Group will help to actively manage credit risk.

    'While this quarter has been especially difficult for TD Bank Financial

Group, clear and decisive action was necessary to resolve the telecom issue

and put it behind us,' said Baillie. 'Going forward, our individual business

strategies reflect the reality that we must deliver sustained earnings growth

even in extremely challenging markets. I am confident TDBFG is poised for

stronger earnings performance.'

 

    This news release may contain forward-looking statements, including

    statements regarding the business and anticipated financial performance

    of TD. These statements are subject to a number of risks and

    uncertainties that may cause actual results to differ materially from

    those contemplated by the forward-looking statements. Some of the factors

    that could cause such differences include legislative or regulatory

    developments, competition, technological change, global capital market

    activity, interest rates, changes in government and economic policy,

    inflation and general economic conditions in geographic areas where TD

    operates. These and other factors should be considered carefully and

    undue reliance should not be placed on TD's forward-looking statements.

    TD does not undertake to update any forward-looking statements.

 

 

    Online investor presentation: Full financial statements and a

presentation to investors and analysts (available on August 22) are accessible

from the home page of the TD Bank Financial Group website www.td.com by

clicking on The Toronto-Dominion Bank 2002 3rd Quarter Results.

 

    Webcast of call: A live audio and video internet webcast of TD Bank

Financial Group's quarterly earnings conference call with investors and

analysts will take place on August 22, 2002 at 3:00 pm EDT. The call will be

webcast via the TD Bank Financial Group website at www.td.com. In addition,

recordings of the presentations will be archived on TDBFG's website following

the webcast and will be available for a period of at least one month.

 

    Quarterly earnings conference call: Instant replay of the teleconference

will be available from August 22 to September 22, 2002. Please call         

1-877-289-8525 toll free, or in Toronto (416) 640-1917, passcode 202357 (pound

key).

 

    Software required for webcast: A Netscape Navigator 4.5 or Microsoft

Internet Explorer 4.0 browser or better is required to access the webcast via

the internet. Real Player is also required to access the webcast. To download

Real Player, go to www.real.com.

 

 

    REVIEW OF OPERATING PERFORMANCE

    -------------------------------

 

    How the Bank Reports

    --------------------

 

    The Bank prepares its financial statements in accordance with Canadian

generally accepted accounting principles (GAAP), which are presented on pages

10 to 15 of the Bank's Third Quarter Report to Shareholders and are available

at www.td.com. The Bank refers to results prepared in accordance with GAAP as

the 'reported basis'.

    In addition to presenting the Bank's results on a reported basis, the

Bank also utilizes the 'operating cash basis' to assess each of its businesses

and to measure overall Bank performance against targeted goals. The definition

of operating cash basis begins with the reported GAAP results and then

excludes the impact of the special gain on the sale of the mutual fund record

keeping and custody business in the first and the third quarter 2002,

restructuring costs related to acquisitions and significant business

restructuring initiatives (TD Securities in the fourth quarter 2001, TD

Waterhouse in the third quarter 2001 and Newcrest in the first quarter 2001),

the effects of future tax rate reductions on future tax balances in the first

and the third quarter 2001, and the effect of real estate gains and general

allowance increases in the first and the second quarter 2001. The Bank views

these restructuring costs and special items as transactions that are not part

of the Bank's normal daily business operations and are therefore not

indicative of trends. In addition, the Bank also excludes non-cash charges

related to goodwill and identified intangible amortization from business

combinations. Consequently, the Bank believes that the operating cash basis

provides the reader with an understanding of the Bank's results that can be

consistently tracked from period to period.

    As explained, operating cash basis results are different from reported

results determined in accordance with GAAP. The term 'operating cash basis

results' is not a defined term under GAAP, and therefore may not be comparable

to similar terms used by other issuers. The table on the following page

provides a reconciliation between the Bank's operating cash basis results and

reported results.

    The Bank reiterated its intent to expense employee stock option awards,

commencing in 2003.

 

    Net Loss

    --------

 

    Operating cash basis net loss for the quarter was $271 million, compared

with operating cash basis net income of $522 million for the same quarter last

year. On an operating cash basis, basic loss per share was $.46 this quarter,

compared with basic earnings per share of $.80 in the same quarter last year

and diluted loss per share was $.46 compared with diluted earnings per share

of $.79 a year ago. Operating cash basis return on total common equity was

(9.5)% for the quarter as compared with 17.1% last year.

    Reported net loss applicable to common shares was $428 million for the

third quarter, compared with reported net income applicable to common shares

of $321 million in the same quarter last year. Reported basic and diluted loss

per share were $.67 in the quarter compared with reported basic and diluted

earnings per share of $.51 in the same quarter last year. Reported return on

total common equity was (13.9)% for the quarter as compared with 10.9% last

year.

 

 

    Reconciliation of Operating Cash Basis Results to Reported Results

    ------------------------------------------------------------------

 

 

                                    For the three months  For the nine months

                                    ended July 31               ended July 31

 

    (unaudited, millions of dollars)      2002      2001      2002      2001

 

    Net interest income (TEB)          $ 1,452   $ 1,147   $ 4,081   $ 3,295

    Provision for credit losses         (1,250)     (190)   (1,975)     (430)

    Other income                         1,016     1,534     3,835     4,809

    Non-interest expenses excluding

     non-cash goodwill/

     intangible amortization

     and restructuring costs            (1,641)   (1,726)   (5,119)   (5,190)

                                      ---------------------------------------

    Income (loss) before provision

     for (benefit of) income taxes

     and non-controlling interest

     in subsidiaries                      (423)      765       822     2,484

 

    Provision for (benefit of)

     income taxes (TEB)                   (158)      233       229       806

    Non-controlling interest                (6)      (10)      (25)      (41)

                                      ---------------------------------------

    Net income (loss) - operating

     cash basis                        $  (271)  $   522   $   568   $ 1,637

 

    Preferred dividends                    (21)      (20)      (63)      (61)

                                      ---------------------------------------

    Net income (loss) applicable

     to common shares

     - operating cash basis            $  (292)  $   502   $   505   $ 1,576

 

    Special increase in general

     provision, net of tax                   -         -         -      (208)

    Gain on sale of mutual fund

     record keeping and custody

     business, net of tax                   18         -        32         -

    Gain on sale of investment

     real estate, net of tax                 -         -         -       275

    Restructuring costs, net of tax          -       (30)        -       (62)

    Income tax expense from income

     tax rate changes                        -       (25)        -       (75)

                                      ---------------------------------------

    Net income (loss) applicable

     to common shares

     - cash basis                         (274)      447       537     1,506

 

    Non-cash goodwill amortization,

     net of tax                              -       (48)        -      (140)

    Non-cash intangible amortization,

     net of tax                           (154)      (78)     (478)     (269)

                                      ---------------------------------------

    Net income (loss) applicable

     to common shares


     - reported basis                  $  (428)  $   321   $    59   $ 1,097

                                      ---------------------------------------

                                      ---------------------------------------

 

    (dollars)

    Basic net income (loss) per

     common share

     - operating cash basis            $  (.46)  $   .80   $   .79   $  2.52

    Diluted net income (loss)

     per common share

     - operating cash basis               (.46)      .79       .78      2.49

    Basic net income (loss) per

     common share

     - reported basis                     (.67)      .51       .09      1.75

    Diluted net income (loss) per

     common share

     - reported basis                     (.67)      .51       .09      1.73

 

 

    Certain comparative amounts have been reclassified to conform with

    current year presentation.

 

 

    Net Interest Income

    -------------------

 

    Net interest income on a taxable equivalent basis (TEB) was $1,452

million this quarter, a year-over-year increase of $305 million. The increase

in net interest income was attributable to TD Canada Trust, where personal

loan volumes - excluding securitizations - increased by approximately

$4 billion from a year ago. The TD Canada Trust net interest margin increased

by 2 basis points to 3.40% as compared with a year ago. Net interest income

reported by TD Securities increased by $190 million as compared with the same

quarter a year ago, primarily relating to a higher level of interest income

from trading activities. Net interest income reported by TD Wealth Management

remained unchanged at $109 million as compared with a year ago.

 

    Other Income

    ------------

 

    Other income was $1,016 million, a decrease of $518 million or 34% from

the same quarter last year, after excluding special gains from the sale of the

Bank's custody business in the current quarter. During the quarter, the Bank

completed the sale of its custody business for a pre-tax gain of $22 million.

The Bank has excluded this special gain in analyzing its performance given

that the sale of the custody business is not a recurring event. Reported other

income was $1,038 million for the current quarter, a decrease of $496 million

from the same quarter last year.

    While trading income reported in other income decreased by $446 million,

trading related income generated by TD Securities - which is the total of

trading income reported in other income and the net interest income on trading

positions reported in net interest income - was $218 million for the quarter,

a decrease of $214 million or 50% as compared with a year ago. The decrease in

trading related income reflected widespread corporate credit downgrades and a

significant slowdown in corporate activity. The net investment securities

losses amounted to $8 million in the current quarter as compared with net

investment securities gains of $26 million in the same quarter last year. The

market value surplus over book value of our equity investment securities

portfolio was $186 million at the end of the quarter, compared with

$330 million at October 31, 2001. Underwriting fees decreased by $15 million

or 23% as compared with a year ago, reflecting reduced debt underwriting

activities. Revenues from mergers and acquisitions decreased by $13 million or

42% and equity sales and trading revenues decreased by $7 million or 29% as

compared with a year ago, as a result of weaker capital markets in the third

quarter of 2002. Somewhat offsetting the decline in other income was a year-

over-year increase in corporate credit fees of $18 million or 38% and a year-

over-year increase in insurance revenues of $6 million or 7%.

 

    Non-Interest Expenses

    ---------------------

 

    Total operating cash expenses decreased by $85 million from a year ago to

$1,641 million, primarily as a result of lower compensation expenses.

Operating cash expenses exclude non-cash goodwill and purchase-related

intangible amortization and restructuring costs related to acquisitions and

significant business restructuring initiatives. During the third quarter 2001,

the Bank recorded a pre-tax restructuring charge of $54 million related to

business restructuring initiatives at TD Waterhouse. On a reported basis,

expenses decreased by $260 million from a year ago to $1,882 million. In the

third quarter 2002, the impact of non-cash goodwill and purchase-related

intangible amortization on the Bank's reported expenses was $241 million

compared with $362 million in the same quarter a year ago. Beginning in fiscal

2002, the Bank discontinued the amortization of goodwill as a result of the

adoption of a new accounting standard on goodwill and intangible assets.

    On an operating cash basis, the Bank's overall efficiency ratio weakened

to 66.5% in the current quarter from 64.4% the same quarter a year ago. The

Bank's consolidated efficiency ratio is impacted by shifts in its business

mix. The efficiency ratio is viewed as a more relevant measure for TD Canada

Trust, which had an efficiency ratio of 58.5% this quarter as compared with

60.7% a year ago, after excluding non-cash items and funding costs for the

acquisition of Canada Trust.

    The Bank's operating cash effective tax rate, on a taxable equivalent

basis, was 37.4% for the quarter compared to 30.4% in the same quarter a year

ago. The increase in the effective tax rate reflected a shift in the Bank's

business mix.

 

 

    Managing Risk and Balance Sheet

    -------------------------------

 

    Credit Risk and Provision for Credit Losses

 

    During the quarter, the Bank expensed $1,250 million through the

provision for credit losses compared with $190 million in the same quarter

last year. Of the $1,250 million in provision for credit losses for the third

quarter 2002, $870 million related to sectoral allowances and the remaining

$380 million related to specific provisions on impaired loans. The

$870 million of sectoral allowances consisted of $600 million that related to

potential problems in the performing corporate telecommunication loan

portfolio, $250 million related to concerns in certain performing loans in the

U.S. portfolio, and $20 million related to the performing agricultural

portfolio in Western Canada.

    The estimate for the 2002 full-year provision for credit losses is

$2,150 million, up from the $620 million recorded last year (excluding special

additions to general allowances in the first and second quarter 2001 amounting

to $300 million in total). The estimated full-year provision for credit losses

is $850 million higher than the Bank's estimate in the second quarter due to

the sectoral loan loss provisions noted above.

    The total allowance for credit losses (specific, general and sectoral

allowances) exceeded gross impaired loans by $799 million at the end of the

quarter, compared with a $53 million excess at October 31, 2001. The Bank's

total accumulated general allowance for credit losses amounted to $1,193

million at quarter end, relatively unchanged from October 31, 2001. General

allowances are maintained at a level adequate to absorb all credit-related

losses not yet identified in the Bank's portfolio relating to both loans and

off-balance sheet instruments and qualify as Tier 2 capital - to an amount

equal to 87.5 basis points of risk-weighted assets - under guidelines issued

by the Office of the Superintendent of Financial Institutions.

 

    Market Risk

 

    The Bank manages market risk in its trading books by using several key

controls. The Bank's market risk policy sets out detailed limits for each

trading business, including Value at Risk (VaR), stress test, stop loss, and

limits on profit and loss sensitivity to various market factors. There have

been no material changes in the policy during the quarter. Policy controls are

augmented by active oversight by independent market risk staff and frequent

management reporting. VaR is a statistical loss threshold which should not be

exceeded on average more than once in 100 days. It is also the basis for

regulatory capital for market risk. The table below presents average and end-

of-quarter VaR usage, as well as year-to-date and fiscal 2001 averages. The

Bank backtests its VaR by comparing it to daily net trading revenue. During

the third quarter of fiscal 2002, daily net trading revenues were positive for

78% of the trading days. Losses never exceeded the Bank's statistically

predicted VaR for the total of our trading related businesses.

 

 

    Value at Risk Usage

    -------------------------------------------------------------------------

                   For the three  For the three  For the nine  For the twelve

                    months ended   months ended  months ended    months ended

    -------------------------------------------------------------------------

    (millions             July 31,      July 31,      July 31,       Oct. 31,

    of dollars)              2002          2002          2002           2001

                                      - Average     - Average      - Average

    -------------------------------------------------------------------------

    Interest Rate Risk   $  (12.4)    $   (13.6)    $   (14.2)     $   (16.3)

    -------------------------------------------------------------------------

    Equity Risk             (10.2)         (9.7)        (12.2)         (11.3)

    -------------------------------------------------------------------------

    Foreign Exchange Risk    (2.4)         (2.6)         (2.6)          (1.9)

    -------------------------------------------------------------------------

    Commodity Risk            (.7)          (.7)          (.4)           (.3)

    -------------------------------------------------------------------------

    Diversification Effect     7.9           7.7           9.8          10.6

    -------------------------------------------------------------------------

    Global Value at Risk    (17.8)        (18.9)        (19.6)         (19.2)

    -------------------------------------------------------------------------

 

    Liquidity Risk

 

    The Bank holds a sufficient amount of liquidity to fund its obligations

as they come due as measured under normal operating conditions as well as

under a stress test scenario. The Bank ensures that it has enough funds

available to meet its obligations by managing its cash flows and holding

highly liquid assets in Canadian and U.S. dollars as well as other foreign

currencies that can be readily converted into cash. The Bank manages liquidity

on a global basis, ensuring the prudent management of liquidity risk in all of

its operations. In addition to a large base of stable retail and commercial

deposits, the Bank has an active wholesale funding program including asset

securitization. This funding is highly diversified as to source, type,

currency and geographical location. As of July 31, 2002, the Bank met all of

its policy requirements.

 

    Balance Sheet

 

    Total assets were $310 billion at the end of the third quarter,

$22 billion or 8% higher than as at October 31, 2001. Higher securities

volumes from securities purchased under resale agreements contributed

$8 billion of the increase in total assets. Personal loans, including

securitizations, increased by $2 billion, primarily attributable to a solid

performance in the personal loan portfolio at TD Canada Trust. At the end of

the third quarter, residential mortgages, including securitizations, increased

by $2 billion from year end to amount to $68 billion.

    Personal non-term deposits grew by $5 billion from October 31, 2001 to

reach $51 billion, with TD Canada Trust accounting for the majority of this

increase. Personal term deposits remained unchanged at $49 billion, while

wholesale deposits and securities sold under repurchase agreements increased

by $14 billion as compared with year end.

 

    Capital

 

    As at July 31, 2002, the Bank's Tier 1 capital ratio was 7.7% compared

with 8.4% at October 31, 2001. Risk-weighted assets increased during the

period ended July 31, 2002 by an amount of $3 billion, as compared with year

end. However, Tier 1 capital declined from $10.6 billion as at year end to

$10 billion. The reduction in Tier 1 capital results from the impact of

acquiring the 11% minority interest in the TD Waterhouse Group, Inc. common

shares, partially funded by the $400 million common share issuance in the

first quarter, and the Stafford and LETCO acquisitions. In the fourth quarter

2002, the Bank intends to issue non-common Tier 1 capital in the range of

$250 million to $500 million.

 

    (1) Operating cash basis and reported results referenced in this news

    release are explained in detail on page 5 under the 'How the Bank

    Reports' section. The Third Quarter Report to Shareholders, which will be

    posted on the Bank's website, www.td.com, on August 22, 2002, consists of

    both operating cash and reported results.

    (2) Reported results are prepared in accordance with Canadian generally

    accepted accounting principles (GAAP).

  

    /For further information: Dan Marinangeli, Executive Vice President and

Chief Financial Officer, (416) 982-8002; Scott Lamb, Vice President, Investor

Relations, (416) 982-5075/

    (TD. TD)

 

 

 

 

 

 

 

 


                                                     

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