TD Bank 2006 Annual Report Download - page 35

TD BANK FINANCIAL GROUP ANNUAL REPORT 2006 Management’s Discussion and Analysis 31
BUSINESS HIGHLIGHTS
•Reported net income was $236 million for the year.
Adjusted net income was $255 million for the year
resulting in a return on invested capital of 4.6%.
•Closed on the acquisition of Hudson on January 31, 2006
and converted Hudson’s customers to TD Banknorth’s sys-
tems in May 2006. At the time of acquisition, Hudson had
total loans of $6 billion and total deposits of $8 billion.
•Launched our “Bank Freely” marketing campaign in the
mid-Atlantic region to increase awareness of the TD
Banknorth brand.
•For 2006, total loans averaged $27 billion, total deposits
averaged $30 billion and the margin on average earning
assets was 3.97%.
CHALLENGES IN 2006
•Margin compression related to increasing short-term
interest rates and the continued flattening of the
yield curve.
•Retaining/growing core deposits.
•Slowing commercial loan growth.
•Loan write-off rates increasing from historically low
levels in recent years.
INDUSTRYPROFILE
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 institu-
tions, including savings banks, finance companies, credit unions
and other providers of financial services, such as money market
mutual funds, brokerage firms, consumer finance companies
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 institutions with
larger branch networks, awider array of commercial banking
services and substantially greater resources. Keys to profitability
areattracting 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 growth, particularly in core chequing
accounts, commercial and small business loans, and fee-based
product groups.
•Maintain strong asset quality and expense discipline.
•Over the long term, continue the acquisition strategy through-
out the New England area and other niche areas of the U.S.
REVIEW OF FINANCIAL PERFORMANCE
U.S. Personal and Commercial Banking reported net income and
adjusted net income of $236 million and $255 million,
respectively. The item of note, excluded from adjusted earnings,
was the Bank’s 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 designed to mitigate the interest
rate risk associated with the investment portfolio. Adjusted net
income increased $97 million from the prior year which included
only seven months of operating results. In addition to a full year
of operating results, the increase was due to the acquisition of
Hudson on January 31, 2006. The benefits of these two factors
were partially offset by margin compression, higher provisions for
credit losses, and higher merger and consolidation costs. The
annualized return on invested capital was 4.6% and the economic
loss was $239 million.
Reported revenues were $1,780 million, an increase of $776
million, or 77%, from 2005. Adjusted revenues were $1,832 mil-
lion, which excludes the $52 million before-tax loss ($34 million
after-tax) related to the balance sheet restructuring charge, an
increase of $828 million, or 82%, from 2005. The increase was
primarily due to the full year of results and the acquisition of
Hudson. Margin on average earning assets decreased from 4.11%
in 2005 to 3.97% in 2006 due primarily to competition for loans
and deposits, a flat yield curve and low-cost deposits comprising a
smaller share of total deposits. Competition for loans and deposits
has been high all year and growth rates have slowed.
Provision for credit losses was $40 million, up sharply from the
prior year. Although asset quality remains very strong, write-offs
increased during the year as net write-offs in the previous year
werevery low.
Expenses were$1.09 billion, an increase of $538 million over
the prior year due to the full year of results, the acquisition of
Hudson, and increased merger and consolidation costs. The aver-
age FTE staffing level was 8,483, compared with 7,284 last year
mainly due to the acquisition of Hudson. The efficiency ratio for
the year was 61.1%, compared with 54.7% in the prior year. The
higher efficiency ratio was primarily due to lower revenues as a
result of margin compression, increased advertising spending, and
higher merger and consolidation costs.
On April 13, 2006, TD Banknorth announced that it had
entered into a definitive agreement to acquire Interchange
Financial Services Corporation (Interchange) for approximately U.S.
$480 million in cash. Interchange has 30 bank branches in New
Jersey. The acquisition is anticipated to close in January 2007.