TD Bank 2007 Annual Report Download - page 41

TD BANK FINANCIAL GROUP ANNUAL REPORT 2007 Management’s Discussion and Analysis 37TD BANK FINANCIAL GROUP ANNUAL REPORT 2007 Management’s Discussion and Analysis 37
BUSINESS HIGHLIGHTS
• Closed the acquisition of Interchange on January 1, 2007
and converted Interchange’s customers to TD Banknorth
systems in February 2007.
• Privatization transaction completed in April 2007 where
the Bank acquired 100% ownership interest in TD
Banknorth.
• Introduced our Earn-Smart Money Market deposit
product in February 2007, which grew to $2.8 billion.
• Replaced approximately $500 million of Trust Preferred
Securities with lower cost REIT Preferred Stock.
• Continued our focus on organic revenue growth and
controlling costs.
• Efficiency gains led to cost savings that will be
reinvested in future growth initiatives.
• Announced the acquisition of Commerce, subject to
approval from Commerce shareholders and U.S. and
Canadian regulatory authorities.
CHALLENGES IN 2007
• Retaining/growing core deposits.
• Loan write-offs and impaired loans continued to
increase from historically low levels in recent years.
•
Margin compression related to increased short-term rates.
• Strengthening of the Canadian dollar against the
U.S. dollar.
• Asset quality statistics deteriorated from historically
low level, resulting in higher provisions for credit losses,
but trends have stabilized.
INDUSTRY PROFILE
The personal and commercial banking industry in the U.S. is
very competitive in all areas of the business. TD Banknorth is
subject to vigorous competition from other banks and financial
institutions, including savings banks, finance companies, credit
unions and other providers of financial services, such as money
market mutual funds, brokerage firms, consumer finance com-
panies and insurance companies. TD Banknorth is one of the
largest financial institutions located in the northeastern U.S.,
but the competition includes banks and other financial institu-
tions with larger branch networks, a wider array of commercial
banking services and substantially greater resources. Keys to
profitability are attracting and retaining customer relationships
over the long-term, effective risk management, rational product
pricing, the use of technology to deliver products and services
for customers anytime/anywhere, growing fee-based businesses
and the effective control of operating expenses.
OVERALL BUSINESS STRATEGY
• Deliver superior customer service across all channels.
• Increase market recognition of the TD Banknorth brand.
• Focus on organic banking growth, particularly in core che-
quing accounts, commercial and small business loans, and
fee-based product groups.
• Maintain strong asset quality and expense discipline.
• Continue the acquisition strategy throughout New England and
other niche areas of the U.S. where it makes sense to do so.
REVIEW OF FINANCIAL PERFORMANCE
U.S. Personal and Commercial Banking reported net income and
adjusted net income was $320 million and $359 million, respec-
tively, for the current year compared with $236 million and
$255 million, respectively, in the prior year. Adjusted net
income in the current year excluded a $39 million after-tax
charge, being the Bank’s share of TD Banknorth’s restructuring,
privatization, and merger-related charges. Adjusted net income
in the prior year excluded the Bank’s $19 million share of a
$52 million loss before tax ($34 million after tax) on the sale of
$3 billion of investment securities as part of a balance sheet
restructuring. The $104 million increase in adjusted net income
related primarily to an increased ownership in TD Banknorth
from the privatization transaction that was completed in April
2007, when the Bank acquired 100% ownership interest in
TD Banknorth (the average ownership percentage increased
from 56% in 2006 to 72% in 2007), as well as the full year
effect of TD Banknorth’s acquisition of Hudson in January 2006,
and acquisition of Interchange in January 2007. In addition, the
segment now includes the banking operations from TD Bank
USA which provides banking services to customers of
TD Ameritrade. Prior period results have not been restated to
include the results from TD Bank USA as they were not signifi-
cant. The annualized return on invested capital was 4.6%.
Revenue was $1,948 million, an increase of $168 million, or
9%, from 2006. The increase was due primarily to acquisitions
of Interchange and Hudson, offset in part by margin compres-
sion and a stronger Canadian dollar. Margin on average earning
assets decreased from 3.97% in 2006 to 3.93% in 2007, due
primarily to competition for loans and deposits, a flat-yield
curve and low-cost deposits comprising a smaller share of
total deposits.
Provision for credit losses was $120 million in 2007 compared
with $40 million in 2006. Although asset quality remains solid,
impaired loans and loan write-offs increased during the year, due
largely to a weakening in the U.S. residential real estate markets.
Expenses were $1,221 million, an increase of $134 million
over 2006, due primarily to the added expenses of running the
two acquired banks and $78 million of restructuring, privatiza-
tion, and merger-related charges. The efficiency ratio for the
year was 62.7%, compared with 61.1% in 2006. The higher
efficiency ratio was primarily due to margin compression and
higher restructuring, privatization and merger-related costs. The
FTE staffing level was 7,985 at the end of 2007 compared with
8,835 at the end of 2006. Efficiency initiatives enabled us to
reduce FTE while maintaining service levels.
KEY PRODUCT GROUPS
Community Banking
Community Banking offers a broad range of banking services
and products to individuals, businesses and governments
through branches, telephone banking and internet banking
channels. Products and services include loans and loan-related
services for commercial real estate, commercial businesses,
residential real estate and consumers, as well as a full array
of deposit products to individuals, businesses and governments
including, chequing, savings, money-market, term investment,
merchant services and cash management products designed to
meet the needs of the customer.