TD

Business Context and Reporting Period

Company: The Toronto-Dominion Bank (TD Bank Financial Group)

Filing Type: Form 6-K (Report of Foreign Private Issuer)

Reporting Period: Fourth Quarter and Fiscal Year ended October 31, 2004

Business Overview: TD operates three primary segments: Personal and Commercial Banking (TD Canada Trust), Wealth Management (TD Waterhouse), and Wholesale Banking (TD Securities). The bank serves over 13 million customers globally and reported total assets of $311 billion as of October 31, 2004.

Key Financial Metrics

Annual Results (Fiscal 2004 vs. 2003)

• Revenue: $10,826 million (up from $10,040 million).
• Net Income (Reported): $2,310 million (up from $1,076 million).
• Diluted EPS (Reported): $3.39 (up from $1.51).
• Diluted EPS (Excluding Intangibles): $4.11 (up from $2.26).
• Return on Total Common Equity (Reported): 18.5% (up from 8.7%).
• Return on Invested Capital: 18.2% (up from 10.5%).

Fourth Quarter Results (Q4 2004 vs. Q4 2003)

• Net Income (Reported): $612 million (up from $501 million).
• Diluted EPS (Reported): $0.90 (up from $0.73).
• Net Income (Excluding Intangibles): $704 million (up from $613 million).
• Return on Total Common Equity (Reported): 19.1% (up from 16.7%).
• Efficiency Ratio (Reported): 73.4% (improved from 79.3%).

Balance Sheet and Liquidity

• Total Assets: $311.0 billion (up $37 billion from prior year).
• Tier 1 Capital Ratio: 12.6% (up from 10.5%).
• Surplus Liquid Assets (90-day): $18.8 billion (up from $8.7 billion).
• Deposits: Total deposits increased significantly, with wholesale deposits up $14 billion and personal non-term deposits up $6 billion.

Material Changes vs. Prior Period

• Earnings Growth: Reported net income more than doubled year-over-year, driven by strong performance across all three business segments and a significant release of sectoral credit provisions.
• Provision Reversal: The Corporate segment released the remaining $101 million after-tax ($155 million pre-tax) of sectoral provisions, resulting in a nil ending balance. This was a major contributor to the year's earnings.
• Acquisitions: Revenue growth in Personal and Commercial Banking was bolstered by the Liberty Mutual insurance acquisition and the acquisition of 57 Laurentian Bank branches.
• Trading Income: Trading income decreased by $53 million in the quarter due to weaker capital markets, specifically in equity and interest rate portfolios.
• Expense Management: Non-interest expenses before amortization decreased by $23 million in the quarter, primarily due to lower severance costs and variable compensation, partially offset by litigation reserves and acquisition-related costs.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• Strategy: Management confirmed that all three businesses are on strategy. The focus for 2005 includes attracting new customers, growing underrepresented businesses (insurance, small business), and managing expenses effectively.
• Expansion: The Bank is pursuing the acquisition of Banknorth Group, Inc., expecting regulatory and shareholder approval in early 2005 to deploy excess capital.
• Segment Outlook:
  • Personal and Commercial Banking: Revenue growth expected to slow from the current 8% rate, though margins are expected to remain stable. Earnings growth of 19% is not considered sustainable long-term.
  • Wealth Management: Focus on growing assets under management and administration, particularly in advice-based businesses.
  • Wholesale Banking: Expected to continue delivering a strong return on invested capital despite weaker capital markets.

Risks and Contingencies

• Forward-Looking Statements: Results are subject to risks including credit, market, liquidity, interest rate, and operational risks.
• Legal and Litigation: The Bank accrued $54 million in contingent litigation reserves due to the litigious environment, particularly regarding U.S. securities litigation.
• Market Conditions: Weaker capital markets impacted trading revenues. The strengthening of the Canadian dollar negatively impacted U.S. revenues in Wealth Management.
• Acquisition Integration: Risks associated with completing and integrating the Banknorth acquisition.

Investor Verification Checklist

• Provision Reversal Impact: Verify the sustainability of earnings given the $101 million after-tax release of sectoral provisions, which is a non-recurring item.
• Intangible Amortization: Review the reconciliation between reported earnings and earnings before amortization of intangibles, as the latter is a key management metric but not GAAP.
• Banknorth Acquisition: Monitor progress on regulatory and shareholder approval for the Banknorth deal, a key strategic growth initiative.
• Trading Volatility: Assess the impact of continued volatility in capital markets on Wholesale Banking revenues and trading income.
• Capital Ratios: Confirm the maintenance of the improved Tier 1 capital ratio of 12.6% amidst potential expansion and share repurchases.
• Litigation Reserves: Track the $54 million contingent litigation reserve for any material changes in legal proceedings.