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: Fiscal year ended October 31, 2003, and the fourth quarter ended October 31, 2003.

Context: The Bank announced the successful execution of strategies to reposition the business for stable, sustainable earnings. Key operational updates include the acquisition of 57 branches from Laurentian Bank and the appointment of Bob Dorrance as Vice Chair, responsible for all wholesale banking operations.

Key Financial Metrics

Fiscal Year 2003 (vs. 2002)

• Revenue: $10,270 million (down from $10,411 million).
• Reported Diluted EPS: $1.51 (vs. loss of $0.25).
• Operating Cash Basis Diluted EPS: $2.26 (vs. $0.68).
• Reported Return on Common Equity: 8.7% (vs. -1.3%).
• Operating Cash Basis Return on Common Equity: 13.0% (vs. 3.6%).
• Total Assets: $274 billion.
• Tier 1 Capital Ratio: 10.5% (up from 8.1% in 2002).

Fourth Quarter 2003 (vs. Q4 2002)

• Reported Net Income: $501 million (vs. loss of $196 million).
• Operating Cash Basis Net Income: $613 million (vs. loss of $40 million).
• Reported Diluted EPS: $0.73 (vs. loss of $0.34).
• Operating Cash Basis Diluted EPS: $0.90 (vs. loss of $0.10).
• Reported Return on Total Common Equity: 16.7% (vs. -7.4%).
• Operating Cash Basis Return on Total Common Equity: 20.6% (vs. -2.1%).
• Provision for Credit Losses: Recovery of $83 million (vs. expense of $950 million).

Material Changes vs. Prior Period

• Turnaround in Profitability: The Bank moved from a reported loss in Q4 2002 to a net income of $501 million in Q4 2003, driven by significant releases in loan loss provisions and improved performance in core businesses.
• Provision Reversals: A general loan loss provision release of $157 million and a sectoral provision release of $40 million significantly boosted earnings.
• Non-Core Portfolio Reduction: Outstanding loan balances in the non-core portfolio decreased to $4.2 billion from $11.2 billion at the end of fiscal 2002.
• Expense Increases: Non-interest expenses increased due to variable compensation, systems write-offs, real estate downsizing, and legal provisions. However, the efficiency ratio for Personal and Commercial Banking improved to 58.2%.
• Capital Strength: Tier 1 capital increased by $1.5 billion (16%) and risk-weighted assets decreased by $12 billion (10%), improving the capital ratio to 10.5%.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• Strategic Goal: Management aims to derive 80% of total earnings from retail businesses (Personal and Commercial Banking and Wealth Management) with the balance from a disciplined wholesale approach.
• Margin Pressure: Personal and Commercial Banking faces margin compression due to the low interest rate environment and competitive pricing, though volume growth in lending and deposits remains strong.
• Wholesale Banking: The segment is positioned to deliver consistent earnings following the restructuring and reduction of the non-core portfolio.
• Wealth Management: Expected to contribute more to earnings as markets normalize and investor confidence rebounds, supported by strong asset growth in discount brokerage and mutual funds.

Risks and Contingencies

• Unusual Items: A $61 million pre-tax charge was recorded to address a previously unhedged non-trading U.S. dollar exposure from the Visa business. Additional charges of $29 million were recorded for systems write-offs and legal provisions.
• Market Risk: The Bank manages market risk using Value at Risk (VaR) models. Global VaR usage averaged $16.8 million for the quarter.
• Liquidity: The Bank maintains a surplus liquid asset position of $8.7 billion (up from $4.2 billion a year ago) to meet obligations under stress scenarios.
• Forward-Looking Statements: Results are subject to risks including credit, market, liquidity, interest rate, and operational risks, as well as legislative changes and global economic conditions.

Key Facts for Investor Verification

• Earnings Quality: Verify the sustainability of earnings given the significant impact of $197 million in pre-tax provision releases ($157M general + $40M sectoral) on Q4 results.
• Non-GAAP Measures: Note the distinction between "Reported" (GAAP) and "Operating Cash Basis" results; the latter excludes non-cash intangible amortization and special items, showing significantly higher profitability.
• Non-Core Portfolio: Confirm the continued reduction of the non-core loan portfolio ($4.2 billion) and the adequacy of the remaining $541 million sectoral reserve.
• Capital Position: Verify the Tier 1 capital ratio of 10.5% and the impact of recent preferred share redemptions and subordinated debt issuances on the capital structure.
• Dividend Policy: A quarterly dividend of $0.32 per common share was declared, with a change in the Dividend Reinvestment Plan discount from 2.5% to 1%.