TD Bank 2005 Annual Report Download - page 55

TD BANK FINANCIAL GROUP ANNUAL REPORT 2005 Management’s Discussion and Analysis 51
(millions of Canadian dollars) 2005 2004 2003
Tier 1 capital
Retained earnings $10,650 $ 9,540 $ 8,518
Foreign currency translation adjustments (696) (265) (130)
Common shares 5,872 3,373 3,179
Additional adjustment for dealer holding TD shares (29) (121) –
Qualifying preferred shares 895 1,310 1,535
Contributed surplus 40 20 9
Qualifying non-controlling interest in subsidiaries 1,632 ––
Capital Trust Securities 1,250 1,250 1,250
Less: goodwill and intangibles in excess of 5% limit (6,508) (2,467) ( 3,035)
Total Tier 1 capital 13,106 12,640 11,326
Tier 2 capital
Subordinated notes and debentures 5,138 5,644 5,887
General allowance for credit losses included in capital 1,137 878 947
Less: amortization of subordinated notes and debentures (39) (212) ( 241)
Total Tier 2 capital 6,236 6,310 6,593
Investment in regulated insurance subsidiaries (1,043) (819) (594)
Substantial investments in unconsolidated subsidiaries (1,072) (1,036) (325)
First loss protection (44) (189) (145)
Total regulatory capital $17,183 $16,906 $16,855
Regulatory capital ratios
Tier 1 capital 10.1% 12.6% 10.5%
Total capital 13.2 16.9 15.6
Assets to capital multiple119.9 17.1 15.2
Tangible common equity $9,567 $9,000 $ 7,417
Tangible common equity as a percentage of risk-weighted assets 7.4% 9.0% 6.9%
1Total assets plus off-balance sheet credit instruments such as letters of
credit and guarantees less investments in associated corporations and
goodwill and net intangibles divided by total regulatory capital.
THE BANK’S GOALS ARE TO:
•Provide enough capital to maintain the confidence of inves-
tors and depositors, while providing the Bank’s common
shareholders with a satisfactory return.
•Be an appropriately capitalized institution, as measured
internally, defined by regulatory authorities and compared
with the Bank’s peers.
•Achieve the lowest overall cost of capital consistent with
preserving the appropriate mix of capital elements to meet
target capitalization levels.
•Maintain strong ratings.
CAPITAL SOURCES
The Bank’s capital is primarily derived from common shareholders
and retained earnings. Other sources of capital include the
Bank’spreferred shareholders and holders of the Bank’s subordi-
nated debt.
CAPITAL MANAGEMENT
Group Risk Management manages capital for the Bank and is
responsible for acquiring, maintaining and retiring capital. The
Board of Directors oversees capital policy and management.
ECONOMIC CAPITAL
The Bank’sinternal measureof required capital is called
economic capital or invested capital. Economic capital comprises
risk based capital required to fund losses that could occur under
extremely adverse economic or operational conditions, and
investment capital that has been used to fund acquisitions or
investments in fixed assets.
The Bank uses internal models to determine how much risk
based capital is required for credit, market, operational and other
identified risks. Risk based capital differs from regulatory capital
because it applies to deposit products as well as asset products,
and it applies to operational and insurance risks as well as credit
and market risks. Regulatory capital is set by regulations estab-
lished by the Superintendent of Financial Institutions Canada.
Within the Bank’s measurement framework, our objective is to
hold risk based capital to cover unexpected losses to a high level
of confidence and ratings standard. Unlike rating agency and
regulatory capital measures, economic capital refers solely to
common equity capital. Since losses flow through the
Consolidated Statement of Operations, the Bank ensures it has
sufficient common equity to absorb worst case losses.
The Bank makes business decisions based on the return
on economic capital, while also ensuring that, in aggregate,
regulatory and rating agency requirements and capital available
arekept in balance.
REGULATORY CAPITAL
Tier 1 Capital
Tier 1 capital was $13.1 billion at October 31, 2005, up
from $12.6 billion last year. Foreign exchange adjustments
unfavourably affected retained earnings by $696 million as at
October 31, 2005. The Bank raised $2,499 million of common
stock including $1,988 million issued as part of the acquisition
of TD Banknorth and $380 million from the dividend reinvest-
ment plan. The Bank also redeemed $410 million of First
Preferred Shares, Series J, during the year with an additional
premium of $13 million. On November 1, 2005, the Bank raised
$425 million of First Preferred Shares, Series O. See Note 28 to
the Bank’s Consolidated Financial Statements for more details.
GROUP FINANCIAL CONDITION
Capital Position
CAPITAL STRUCTURE AND RATIOS
TABLE 29