TD TrenDevice Spa

Impact of Commerce on the Bank's Consolidated Balance Sheet ------------------------------------------------------------------------- TDBFG Consoli- dated, TDBFG TDBFG excluding Commerce Consoli- Consoli- Commerce impact(1) dated dated (April (March (April (October (millions of Canadian dollars) 30, 2008) 31, 2008) 30, 2008) 31, 2007) ------------------------------------------------------------------------- Assets Cash and cash equivalents $17,711 $408 $18,119 $16,536 Securities 122,670 25,167 147,837 123,036 Loans, net of allowance for credit losses 190,393 18,034 208,427 175,915 Goodwill 8,099 6,114 14,213 7,918 Other intangibles (gross) 1,891 1,882 3,773 2,104 Other 105,749 5,503 111,252 96,615 ------------------------------------------------------------------------- Total assets $446,513 $57,108 $503,621 $422,124 ------------------------------------------------------------------------- Liabilities Deposits $302,252 $47,271 $349,523 $276,393 Other 105,648 3,427 109,075 112,905 Subordinated notes and debentures, liability for preferred shares, capital trust securities and non-controlling interests in subsidiaries 14,428 - 14,428 11,422 ------------------------------------------------------------------------- Total liabilities 422,328 50,698 473,026 400,720 ------------------------------------------------------------------------- Shareholders' equity Common shares 6,671 6,147 12,818 6,577 Contributed surplus 120 263 383 119 Preferred shares, retained earnings and accumulated other comprehensive income 17,394 - 17,394 14,708 ------------------------------------------------------------------------- Total shareholders' equity 24,185 6,410 30,595 21,404 ------------------------------------------------------------------------- Total liabilities and shareholders' equity $446,513 $57,108 $503,621 $422,124 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Commerce impact includes the Commerce assets and liabilities acquired (shown in Note 20 to the Interim Consolidated Financial Statements for the quarter ended April 30, 2008) and the purchase consideration for the Commerce acquisition. Cash portion of the purchase consideration is included in other liabilities. CREDIT PORTFOLIO QUALITY Gross impaired loans were $909 million at April 30, 2008, $340 million higher than at October 31, 2007, largely due to the addition of impaired loans in the Canadian Personal and Commercial Banking and $97 million due to the acquisition of Commerce. No allowance was initially recognized upon acquisition as these loans are measured at fair value. Net impaired loans as at April 30, 2008, after deducting specific allowances, totalled $654 million, compared with $366 million as at October 31, 2007. The total allowance for credit losses of $1,369 million as at April 30, 2008 comprised total specific allowances of $255 million and a general allowance of $1,114 million. Specific allowances increased by $52 million from $203 million as at October 31, 2007. The general allowance for credit losses as at April 30, 2008 was up by $22 million, compared with October 31, 2007, mainly due to the increase related to VFC. The Bank establishes general allowances to recognize losses that management estimates to have occurred in the portfolio at the balance sheet date for loans or credits not yet specifically identified as impaired. Changes in Gross Impaired Loans and Acceptances ------------------------------------------------------------------------- For the three months ended ----------------------------- Apr. 30 Oct. 31 Apr. 30 (millions of Canadian dollars) 2008 2007 2007 ------------------------------------------------------------------------- Balance at beginning of period $818 $590 $511 Additions 575 387 461 Return to performing status, repaid or sold (234) (188) (158) Write-offs (258) (202) (207) Foreign exchange and other adjustments 8 (18) (4) ------------------------------------------------------------------------- Balance at end of period $909 $569 $603 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Allowance for Credit Losses(1) ------------------------------------------------------------------------- As at ----------------------------- Apr. 30 Oct. 31 Apr. 30 (millions of Canadian dollars) 2008 2007 2007 ------------------------------------------------------------------------- Specific allowance $255 $203 $231 General allowance 1,114 1,092 1,147 ------------------------------------------------------------------------- Total allowance for credit losses $1,369 $1,295 $1,378 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Impaired loans net of specific allowance $654 $366 $372 Net impaired loans as a percentage of net loans 0.3% 0.2% 0.2% Provision for credit losses as a percentage of net average loans 0.49% 0.30% 0.41% ------------------------------------------------------------------------- (1) Certain comparative amounts have been restated to conform to the presentation adopted in the current period. Non-prime Loans As at April 30, 2008, the Bank's wholly-owned subsidiary, VFC Inc., had approximately $1 billion (October 31, 2007: $0.9 billion) gross exposure to non-prime loans which mainly consist of automotive loans originated in Canada. The credit loss rate, defined as the average provision for credit losses divided by the average month-end loan balance, which is an indicator of credit quality, is approximately 6% on an annual basis. The Bank's portfolio continues to perform as expected. These loans are recorded at amortized cost. See Note 3 to the 2007 Annual Consolidated Financial Statements for further information regarding the accounting for loans and related credit losses. Exposure to Alt-A Securities As discussed in Note 20 to the Interim Consolidated Financial Statements for the quarter ended April 30, 2008, the results of Commerce are recorded on a one month lag basis, therefore the balance sheet values of Commerce assets recorded in the Bank's consolidated balance sheet as at April 30, 2008, represent the fair value of Commerce assets at March 31, 2008. As at April 30, 2008, due to its acquisition of Commerce, the Bank had $3.7 billion (October 31, 2007: nil) gross exposure to Alt-A mortgages in residential mortgage-backed securities (RMBS) collateralized primarily by fixed-rate mortgages with no rate reset features. These securities are hedged for market risk in the context of the overall balance sheet, however, they may expose the Bank to credit risk. Upon the acquisition of Commerce, this portfolio was recorded at fair value. The Bank's Alt-A exposures are fair valued using broker-dealer quotes. Based on the Bank's analysis, the intrinsic value of the portfolio is considered to exceed the fair value, net of a liquidity discount, in today's market. These securities have public debt ratings of AAA and are accounted for as available-for-sale-securities. The following table discloses the fair value of the securities by vintage year: Alt-A Securities Exposure by Vintage Year ------------------------------------------------------------------------- As at --------- Apr. 30 (millions of Canadian dollars) 2008 ------------------------------------------------------------------------- 2003 $452 2004 825 2005 1,054 2006 553 2007 864 ------------------------------------------------------------------------- Total Alt-A securities $3,748 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CAPITAL POSITION The Bank's capital ratios are calculated using the guidelines of the Office of the Superintendent of Financial Institutions (OSFI). Effective November 1, 2007, the Bank began calculating its regulatory capital under the new capital adequacy rules included in Basel II. The top corporate entity to which Basel II applies at the consolidated level is The Toronto-Dominion Bank. Under Basel II, risk-weighted assets (RWA) are calculated for each of credit risk, market risk and operational risk. Operational risk is a new component of total RWA and represents the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. The Bank's RWA were as follows: Risk-weighted Assets ------------------------------------------------------------------------- As at As at Apr. 30, Jan. 31, (millions of Canadian dollars) 2008 2008 ------------------------------------------------------------------------- Risk-weighted assets (RWA) for: Credit risk 147,617 $121,460 Market risk 7,140 4,088 Operational risk 23,878 20,352 ------------------------------------------------------------------------- Total RWA 178,635 $145,900 ------------------------------------------------------------------------- ------------------------------------------------------------------------- RWA increased $32.7 billion over the prior quarter. Of this increase, $29.3 billion was due to the Commerce acquisition which produced $26.0 billion of credit risk RWA and $3.3 billion of operational risk RWA. The Commerce acquisition had no impact on market risk RWA. OSFI's target Tier 1 and Total capital ratios for Canadian banks are 7% and 10%, respectively. As at April 30, 2008, the Bank's Tier 1 capital ratio was 9.1% and the Total capital ratio was 12.7%, computed under Basel II. Under Basel I, the Bank's Tier 1 capital ratio and Total capital ratio were 10.3% and 13.0%, respectively, at October 31, 2007. The Bank continues to hold sufficient capital levels to ensure that flexibility is maintained to grow operations, both organically and through strategic acquisitions. The strong capital ratios are the result of the Bank's internal capital generation, management of the balance sheet and periodic issuance of capital securities. For accounting purposes, GAAP is followed for consolidation of subsidiaries and joint ventures. For regulatory capital purposes, insurance subsidiaries are deconsolidated and reported as a deduction from capital. Insurance subsidiaries are subject to their own capital adequacy reporting such as OSFI's Minimum Continuing Capital Surplus Requirements. Currently, for regulatory capital purposes, all the entities of the Bank are either consolidated or deducted from capital and there are no entities from which surplus capital is recognized. During the quarter, the Bank issued $250 million of its Class A First Preferred Shares, Series R. Also during the quarter, the Bank issued $500 million of medium term notes constituting subordinated indebtedness which qualify as Tier 2B regulatory capital. For further details of debt and equity issues/repurchases, see Notes 6, 7 and 8 to the Interim Consolidated Financial Statements. For further details of regulatory capital, see Note 9 to the Interim Consolidated Financial Statements. MANAGING RISK EXECUTIVE SUMMARY Financial services involve prudently taking risks in order to generate profitable growth. At the Bank, our goal is to earn a stable and sustainable rate of return for every dollar of risk we take, while putting significant emphasis on investing in our businesses to ensure we can meet our future growth objectives. Our businesses thoroughly examine the various risks to which they are exposed and assess the impact and likelihood of those risks. We respond by developing business and risk management strategies for our various business units taking into consideration the risks and business environment in which we operate. Through our businesses and operations, we are exposed to a broad number of risks that have been identified and defined in our Enterprise Risk Framework. This framework outlines appropriate risk oversight processes and the consistent communication and reporting of key risks that could hinder the achievement of our business objectives and strategies. Our risk governance structure and risk management approach have not changed from that described in our 2007 Annual Report. Certain risks have been outlined below. For a complete discussion of our risk governance structure and our risk management approach, see our 2007 Annual Report. WHO MANAGES RISK We have a risk governance structure in place that emphasizes and balances strong central oversight and control of risk with clear accountability for, and ownership of, risk within each business unit. Our structure ensures that important information about risks flows up from the business units and oversight functions to the Senior Executive Team and the Board of Directors. HOW WE MANAGE RISK We have a comprehensive and proactive risk management approach that combines the experience and specialized knowledge of individual business units, risk professionals and the corporate oversight functions. Our approach is designed to promote a strong risk management culture and ensure alignment to our strategic objectives. It includes: - Maintaining appropriate enterprise-wide risk management policies and practices including guidelines, requirements and limits to ensure risks are managed to acceptable levels; - Subjecting risk management policies to regular review and evaluation by the Executive Committees and review and approval by the Risk Committee of the Board; - An integrated enterprise-wide risk monitoring and reporting process that communicates key elements of our risk profile, both quantitatively and qualitatively, to senior management and the Board of Directors; - Maintaining risk measurement methodologies that support risk quantification, including Value-at-Risk (VaR) analysis, scenario analysis and stress-testing; - Annual self-assessments by significant business units and corporate oversight functions of their key risks and internal controls. Overall significant risk issues are identified, escalated and monitored as needed; - Supporting appropriate performance measurement that allocates risk- based economic capital to businesses and charges a cost against that capital; - Actively monitoring internal and external risk events to assess whether our internal controls are effective; - Independent and comprehensive reviews conducted by the Audit Department of the quality of the internal control environment and compliance with established risk management policies and procedure. Basel II Basel II is a framework developed by the Basel Committee on Banking Supervision, with the objectives of improving the consistency of capital requirements internationally and making required regulatory capital more risk sensitive. Basel II sets out several options which represent increasingly more risk-sensitive approaches to calculating credit-, market- and operational-risk- based regulatory capital. Under the more sophisticated approaches, banks develop their own internal estimates of risk parameters, which are used in the determination of RWA and calculation of regulatory capital. The Bank has implemented the Advanced Internal Ratings Based (AIRB) approach to credit risk for all material portfolios, with some exemptions and waivers in place to use the Standardized approach as outlined below. We do not use the Foundation Internal Ratings Based approach. - Exemptions are available for non-material portfolios to remain under the Standardized approach indefinitely. We have exemptions in place covering some small exposures in North America. The continued appropriateness of the Standardized approach will be reconfirmed annually by Risk Management. - Waivers are available to use the Standardized approach for a defined period of time where there are clear plans in place to implement the AIRB approach. We have received waivers for our Margin Trading Book, some small Retail portfolios and the majority of our TD Banknorth portfolios. Detailed plans are in place to implement the AIRB approach for these portfolios within timelines agreed with OSFI. Commerce portfolios are reported using the Interim Approach to Reporting, moving to the Standardized approach in 2009. We are compliant with the market risk requirements as at October 31, 2007 and are implementing the additional market risk requirements within the OSFI- established timelines. For operational risk, the Basic Indicator Approach is used primarily for TD Banknorth and Commerce. For the rest of the Bank, we use The Standardized Approach. Certain sections of this MD&A represent a discussion on risk management policies and procedures relating to credit, market and liquidity risks as required under the Canadian Institute of Chartered Accountants (CICA) Handbook Section 3862, Financial Instruments - Disclosures, which permits these specific disclosures to be included in the MD&A. Therefore, these sections form an integral part of the unaudited interim consolidated financial statements for the quarter ended April 30, 2008. These sections, which are included non-continuously below, are shaded on pages 21 to 27 of the fully formatted version of this second quarter 2008 Report to Shareholders, which can be found on the Bank's website at http://www.td.com/investor/earnings.jsp. CREDIT RISK Credit risk is the potential for financial loss if a borrower or counterparty in a transaction fails to meet its obligations in accordance with agreed terms. Credit risk is one of the most significant and pervasive risks in banking. Every loan, extension of credit or transaction that involves settlements between the Bank and other parties or financial institutions exposes the Bank to some degree of credit risk. Our primary objective is to create a methodological approach to our credit risk assessment in order to better understand, select and manage our exposures to deliver reduced earnings volatility. Our strategy is to ensure central oversight of credit risk in each business, reinforcing a culture of accountability, independence and balance. Who Manages Credit Risk The responsibility for credit risk management is enterprise-wide in scope. Credit risk control functions are integrated into each business to reinforce ownership of credit risk, reporting to the Risk Management Department to ensure objectivity and accountability. Each business segment's credit risk control unit is primarily responsible for credit adjudication, and is subject to compliance with established policies, exposure guidelines and discretionary limits, as well as adherence to established standards of credit assessment, with escalation to the Risk Management Department for material credit decisions. Independent oversight of credit risk is provided by the Risk Management Department, through the development of centralized policies to govern and control portfolio risks and product specific policies as required. The Risk Committee of the Board ultimately oversees the management of credit risk and annually approves all major credit risk policies. How we Manage Credit Risk Credit Risk is managed through a centralized infrastructure based on: - Centralized approval by the Risk Management Department of all credit risk policies and the discretionary limits of officers throughout the Bank for extending lines of credit; - The establishment of guidelines to monitor and limit concentrations in the portfolios in accordance with the Board approved, enterprise- wide policies governing country risk, industry risk and group exposures; - The development and implementation of credit risk models and policies for establishing borrower and facility risk ratings to quantify and monitor the level of risk and facilitate its management in our Commercial Banking and Wholesale Banking businesses. Risk ratings are also used to determine the amount of credit exposure we are willing to extend to a particular borrower. - Approval of the scoring techniques and standards used in extending, monitoring and reporting of personal credit in our retail businesses; - Implementation of management processes to monitor country, industry and counterparty risk ratings which include daily, monthly and quarterly review requirements for credit exposures; - Implementation of an ongoing monitoring process for the key risk parameters used in our credit risk models. Unanticipated economic or political changes in a foreign country could affect cross-border payments for goods and services, loans, dividends, trade- related finance, as well as repatriation of the Bank's capital in that country. The Bank currently has counterparty exposure in a number of countries, with the majority of the exposure in North America. Country risk ratings are based on approved risk rating models and qualitative factors and are used to establish country exposure guidelines covering all aspects of credit exposure across all businesses. Country risk ratings are managed on an ongoing basis and subject to a detailed review at least annually. As part of our credit risk strategy, we establish credit exposure limits for specific industry sectors. We monitor industry concentration limits to ensure the diversification of our loan portfolio. Industry exposure guidelines are a key element of this process as they limit exposure based on an internal risk rating score determined through the use of our industry risk rating model and detailed industry analysis. If several industry segments are affected by common risk factors, we assign a single exposure guideline to those segments. In addition, for each material industry, the Risk Management Department assigns a maximum exposure limit or a concentration limit which is a percentage of our total wholesale and commercial exposure. We regularly review industry risk ratings to ensure that those ratings properly reflect the risk of the industry. Credit derivatives may be used from time to time to mitigate industry concentration and borrower-specific exposure as part of our portfolio risk management techniques. Credit Risk Exposures under Basel II Gross credit risk exposures include both on- and off-balance sheet exposures. On-balance sheet exposures consist primarily of outstanding loans, acceptances, non-trading securities, derivatives and certain repo-style transactions. Off-balance sheet exposures consist primarily of undrawn commitments, guarantees and certain repo-style transactions. The calculation of gross credit risk exposures differs under each of the two approaches we use to measure credit risk: the Standardized approach and the AIRB approach. Gross credit risk exposures, measured before credit risk mitigants, are given below: Gross Credit Risk Exposures(1) by Counterparty Type - Standardized and AIRB Approaches ------------------------------------------------------------------------- As at April 30, 2008 ---------------------------------- (millions of Canadian dollars) Standardized AIRB Total ------------------------------------------------------------------------- Residential secured $7,849 $124,927 $132,776 Qualifying revolving retail - 41,019 41,019 Other retail 15,375 20,040 35,415 Corporate 45,019 99,646 144,665 Sovereign 724 42,261 42,985 Bank 6,841 84,982 91,823 ------------------------------------------------------------------------- Gross credit risk exposures $75,808 $412,875 $488,683 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- As at January 31, 2008 ---------------------------------- (millions of Canadian dollars) Standardized AIRB Total ------------------------------------------------------------------------- Residential secured $4,071 $117,856 $121,927 Qualifying revolving retail - 40,353 40,353 Other retail 11,903 19,589 31,492 Corporate 24,305 98,039 122,344 Sovereign 1,276 34,440 35,716 Bank 1,299 92,347 93,646 ------------------------------------------------------------------------- Gross credit risk exposures $42,854 $402,624 $445,478 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Gross credit risk exposures exclude equity and securitization exposures. Gross credit risk exposures increased $43.2 billion over the prior quarter. Of this increase, $30.3 billion was due to the Commerce acquisition and is included under the Standardized approach. Credit Risk Exposures subject to the Standardized approach Under the Standardized approach, used primarily for TD Banknorth portfolios, balance sheet exposures (net of specific allowances) are multiplied by OSFI-prescribed risk-weights to calculate RWA. Risk-weights are assigned based on certain factors including counterparty type, product type and the nature/extent of credit risk mitigation. External credit ratings from Moody's Investors Service are used to determine the risk-weight of our Sovereign and U.S. Bank exposures. For off-balance sheet exposures, the notional amount of the exposure is multiplied by a credit conversion factor to produce a credit equivalent amount which is then treated in the same manner as an on-balance sheet exposure. Commerce exposures are currently subject to the Interim Approach to Reporting. This approach is similar to the Standardized approach, with the exception of Small business entities, which receive a higher risk-weight under the Interim Approach to Reporting than they do under the Standardized approach. Credit Risk Exposures subject to the AIRB approach Banks adopting the AIRB approach to credit risk are required to categorize banking-book exposures by counterparty type, each having different underlying risk characteristics. These counterparty types may differ from the presentation in our financial statements. Our credit risk exposures are categorized into two main portfolios, non- retail and retail. For the non-retail portfolio, exposures are managed on an individual basis, using industry and sector-specific credit risk models, and expert judgement. We have categorized non-retail credit risk exposures according to the following Basel II counterparty types: corporate (wholesale and commercial customers, and certain small businesses), sovereign (governments, central banks and certain public sector entities), and bank (regulated deposit-taking institutions and securities firms). For the retail portfolio (individuals and certain small businesses), exposures are managed on a pooled basis, using predictive credit scoring techniques. We have categorized three sub-types of retail exposures: residential secured (e.g. individual mortgages, home equity lines of credit), qualifying revolving retail (e.g. individual credit cards, unsecured lines of credit and overdraft protection products), and other retail (e.g. personal loans, student lines of credit, small business banking credit products). Risk Parameters Under the AIRB approach, we have developed internal risk rating systems based on key risk estimates; first, probability of default (PD) - the degree of likelihood that the borrower will not be able to meet its scheduled repayments; second, exposure at default (EAD) - the total amount we are exposed to at the time of default; and third, loss given default (LGD) - the amount of the loss when a borrower defaults on a loan, expressed as a percentage of EAD. Application of these risk parameters allows us to measure and monitor our credit risk to ensure it remains within pre-determined thresholds. Non-retail Exposures Credit risk for non-retail exposures is evaluated through a two- dimensional risk rating system comprised of a borrower risk rating and a facility risk rating, which is applied to all corporate, sovereign, and bank exposures. The risk ratings are determined through the use of industry and sector-specific credit risk models designed to quantify and monitor the level of risk and facilitate its management. All borrowers and facilities are assigned an internal risk rating which must be reviewed at least once each year. Each borrower is assigned a borrower risk rating that reflects the PD of the borrower. Key factors in the assessment of borrower risk include the borrower's competitive position, industry, financial performance, economic trends, management and access to funds. The facility risk rating maps to LGD and takes into account facility-specific characteristics, such as collateral, seniority of debt, and structure. Internal risk ratings form the basis of several decision-making processes within the organization, including the calculation of general allowances for credit losses, regulatory capital and economic capital. Internal ratings are also integral to portfolio monitoring and management, and are used in setting exposure limits and loan pricing. Retail Exposures Our retail credit segment is composed of a large number of customers, and includes residential mortgages, unsecured loans, credit card receivables and small business credits. Requests for retail credit are processed using automated credit and behavioural scoring systems or, for larger and more complex transactions, directed to underwriters in regional credit centres who operate within designated approval limits. Once retail credits are funded they are monitored on an ongoing basis using quantitative customer management programs which utilize current internal and external risk indicators to identify changes in risk. Retail exposures are assessed on a pooled basis, with each pool consisting of exposures that possess similar homogeneous characteristics. Pools are segmented by product type and by the forward-looking one-year PD estimate. Credit risk is evaluated through statistically derived analytical models and decision strategies. Proprietary statistical models have been developed for each retail product portfolio based on a minimum of 10 years of internal historical data. Credit risk parameters (PD, EAD and LGD) for each individual facility are updated quarterly using the most recent borrower credit bureau and product-related information. The calculation of LGD includes an adjustment to reflect the potential of increased loss during an economic downturn. Validation of the Credit Risk Rating System Credit risk rating systems and methodologies are subject to independent validation to verify that they remain accurate predictors of risk. The validation process includes the following considerations: - Risk parameter estimates - PDs, EADs and LGDs are reviewed and updated against actual loss experience and benchmarked against public sources of information to ensure estimates continue to be reasonable predictors of potential loss - Model performance - estimates continue to be discriminatory, stable and predictive - Data quality - data used in the risk rating system is accurate, appropriate and sufficient - Assumptions - key assumptions underlying model development remain valid for the current portfolio and environment The Risk Management Department contributes to the oversight of the credit risk rating system in accordance with the Bank's model risk rating policy. The Risk Committee of the Board is apprised of the performance of the credit risk rating system, at a minimum, on an annual basis. The Risk Committee must approve any material changes to the Bank's credit risk rating system. Stress Testing Sensitivity and stress tests are used to ascertain the size of probable losses under a range of scenarios for our credit portfolios. Sensitivity tests are performed using different market and economic assumptions to examine the impact on portfolio metrics. Stress tests are also employed to assess client-specific and portfolio vulnerability to the effects of severe but plausible conditions, such as material market or industry disruption or economic downturn. Credit Risk Mitigation There are documented policies and procedures in place for the valuation and management of financial and non-financial collateral, for vetting and negotiation of netting agreements, and other credit risk mitigation techniques used in connection with on- and off-balance sheet banking activities which result in credit exposure. The amount and type of collateral and other credit enhancements required depend on the Bank's internal assessment of counterparty credit quality and repayment capacity. Non-financial collateral is primarily used in connection with retail exposures. Enterprise-wide standards for collateral valuation, frequency of recalculation of the collateral requirement, documentation, registration and perfection procedures and monitoring are in effect. Non-financial collateral taken by the Bank includes residential real estate, real estate under development, commercial real estate and business assets, such as accounts receivable, inventory and fixed assets. Non-financial collateral is concentrated in residential real estate and business assets. Financial collateral is primarily used in connection with non-retail exposures. Financial collateral processes are centralized in the Treasury Credit group within Wholesale Banking and include pre-defined haircuts and procedures for the receipt, safekeeping and release of the pledged securities. The main types of financial collateral taken by the Bank include cash and negotiable securities issued by governments and investment grade issuers. Guarantees may be taken in order to reduce the risk in credit exposures. For guarantees taken in support of a pool of retail exposures, the guarantor must be a government agency or investment grade issuer. The Bank makes use of credit derivatives and on-balance sheet netting for the purposes of credit risk mitigation. Derivative counterparties are investment grade financial institutions with the additional benefit of netting agreements and collateral support agreements. Credit policies are in place that limit the amount of credit exposure to an entity based on the credit quality and repayment capacity of the entity. Off-balance sheet transactions with qualifying financial institutions are subject to netting agreements and collateral agreements. Residual credit exposure, after the effects of collateral, are calculated and reported daily. This represents a substantial portion of credit risk mitigation used in connection with off-balance sheet items and related credit exposures. MARKET RISK Market risk is the potential for loss from changes in the value of financial instruments. The value of a financial instrument can be affected by changes in interest rates, foreign exchange rates, equity and commodity prices and credit spreads. We are exposed to market risk in our trading and investment portfolios, as well as through our non-trading activities. Market Risk in Trading Activities The four main trading activities that expose us to market risk are: - Market making: We provide markets for a large number of securities and other traded products. We keep an inventory of these securities to buy from and sell to investors, profiting from the spread between bid and ask prices; - Sales: We provide a wide variety of financial products to meet the needs of our clients, earning money on these products from mark-ups and commissions; - Arbitrage: We take positions in certain markets or products and offset the risk in other markets or products. Our knowledge of various markets and products and how they relate to one another allows us to identify and benefit from pricing anomalies; - Positioning: We aim to make profits by taking positions in certain financial markets in anticipation of changes in those markets. Who Manages Market Risk in Trading Activities Primary responsibility for managing market risk in trading activities lies with Wholesale Banking with oversight from Trading Risk Management within the Risk Management Department. How we Manage Market Risk in Trading Activities Trading Limits We set trading limits that are consistent with the approved business plan for each business and our tolerance for the market risk of that business. The core market risk limits are based on the key risk drivers in the business and can include notional limits, credit spread limits, yield curve shift limits, price and volatility shift limits. Another primary measure of trading limits is Value-at-Risk (VaR) which we use to monitor and control overall risk levels and to calculate the regulatory capital required for market risk in trading activities. At the end of each day, risk positions are compared with risk limits, with excesses reported in accordance with established market risk policies and procedures. Calculating VaR We estimate VaR by creating a distribution of potential changes in the market value of the current portfolio. We value the current portfolio using the most recent 259 trading days of market price and rate changes as well as the market value changes associated with probability of Debt Issuer rating migrations and defaults. VaR is then computed as the threshold level that portfolio losses are not expected to exceed more than one out of every 100 trading days. A graph that discloses daily VaR usage and trading-related income within the Wholesale Banking segment is included on page 24 of the fully formatted version of this second quarter 2008 Report to Shareholders, which can be found on TD's website at http://www.td.com/investor/earnings.jsp. Value-at-Risk Usage ------------------------------------------------------------------------- For the quarter ended --------------------------------------------------- (millions of April 30, 2008 Jan 31, April Canadian dollars) -------------------------------- 2008 30, As at Average High Low Average 2007 Average ------------------------------------------------------------------------- Interest rate and credit spread risk $23.6 $26.3 $31.6 $19.0 $15.8 $7.0 Equity risk 11.1 10.2 14.5 4.5 5.3 10.3 Foreign exchange risk 2.2 2.4 6.7 1.0 2.5 2.0 Commodity risk 1.7 1.6 3.0 0.7 1.0 1.6 Debt specific risk 35.0 31.2 41.7 19.8 19.1 13.1 Diversification effect(1) (30.3) (29.8) n/m(2) n/m(2) (19.9) (17.4) ------------------------------------------------------------------------- Total Value-at-Risk $43.3 $41.9 $54.1 $27.0 $23.8 $16.6 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------- For the six months ended ----------------- (millions of April April Canadian dollars) 30, 30, 2008 2007 Average Average ------------------------------------- Interest rate and credit spread risk $21.1 $7.3 Equity risk 7.7 8.7 Foreign exchange risk 2.5 2.0 Commodity risk 1.3 1.6 Debt specific risk 25.2 13.6 Diversification effect(1) (24.9) (16.1) ------------------------------------- Total Value-at-Risk $32.9 $17.1 ------------------------------------- ------------------------------------- (1) The aggregate VaR is less then the sum of the VaR of the different risk types due to risk offsets resulting from portfolio diversification. (2) Not meaningful. It is not meaningful to compute a diversification effect because the high and low may occur on different days for different risk types. Stress Testing Our trading business is subject to an overall global stress test limit. As well, each global business has a stress test limit, and each broad risk class has an overall stress test limit. Stress tests are produced and reviewed regularly with the Market Risk and Capital Committee. Market Risk in Investment Activities We are also exposed to market risk in the Bank's own investment portfolio and in the merchant banking business. Risks are managed through a variety of processes, including identification of our specific risks and determining their potential impact. Policies and procedures are established to monitor, measure and mitigate those risks. Who Manages Market Risk in Investment Activities The TDBFG Investment Committee regularly reviews the performance of the Bank's own investments and assesses the success of the portfolio managers. Similarly, the Merchant Banking Investment Committee reviews and approves merchant banking investments. The Risk Committee of the Board reviews and approves the investment policies and limits for the Bank's own portfolio and for the merchant banking business. How we Manage Risk in Investment Activities We use advanced systems and measurement tools to manage portfolio risk. Risk intelligence is embedded in the investment decision-making process by integrating performance targets, risk/return tradeoffs and quantified risk tolerances. Analysis of returns identifies performance drivers, such as sector and security exposures, as well as the influence of market factors. Market Risk in Non-trading Banking Transactions We are exposed to market risk when we enter into non-trading banking transactions with our customers. These transactions primarily include deposit taking and lending, which are also referred to as "asset and liability" positions. Asset/Liability Management Asset/liability management deals with managing the market risks of our traditional banking activities. Market risks primarily include interest rate risk and foreign exchange risk. Who is Responsible for Asset/Liability Management The Treasury and Balance Sheet Management Department measures and manages the market risks of our non-trading banking activities, with oversight from the Asset/Liability Committee, which is chaired by the Chief Financial Officer, and includes other senior executives. The Risk Committee of the Board periodically reviews and approves all asset/liability management market risk policies and receives reports on compliance with approved risk limits. How we Manage our Asset and Liability Positions When Bank products are issued, risks are measured using a fully hedged option-adjusted transfer-pricing framework that allows us to measure and manage product risk within a target risk profile. The framework also ensures that business units engage in risk-taking activities only if they are productive. Managing Interest Rate Risk Interest rate risk is the impact that changes in interest rates could have on our margins, earnings and economic value. The objective of interest rate risk management is to ensure that earnings are stable and predictable over time. To this end, we have adopted a disciplined hedging approach to managing the net income contribution from our asset and liability positions including a modeled maturity profile for non-rate sensitive assets, liabilities and equity. Key aspects of this approach are: - Evaluating and managing the impact of rising or falling interest rates on net interest income and economic value; - Measuring the contribution of each Bank product on a risk-adjusted, fully-hedged basis, including the impact of financial options, such as mortgage commitments, that are granted to customers; - Developing and implementing strategies to stabilize net income from all personal and commercial banking products. We are exposed to interest rate risk when asset and liability principal and interest cash flows have different payment or maturity dates. These are called "mismatched positions." An interest-sensitive asset or liability is repriced when interest rates change, when there is cash flow from final maturity, normal amortization, or when customers exercise prepayment, conversion or redemption options offered for the specific product. Our exposure to interest rate risk depends on the size and direction of interest rate changes, and on the size and maturity of the mismatched positions. It is also affected by new business volumes, renewals of loans or deposits, and how actively customers exercise options, such as prepaying a loan before its maturity date. Interest rate risk is measured using various interest rate "shock" scenarios to estimate the impact of changes in interest rates on both the Bank's annual Earnings at Risk (EaR) and Economic Value at Risk (EVaR). EaR is defined as the change in our annual net interest income from a 100 bps unfavourable interest rate shock due to mismatched cash flows. EVaR is defined as the difference in the change in the present value of our asset portfolio and the change in the present value of our liability portfolio, including off-balance sheet instruments, resulting from a 100 bps unfavourable interest rate shock. Valuations of all asset and liability positions, as well as off-balance sheet exposures, are performed regularly. Our objectives are to protect the present value of the margin booked at the time of inception for fixed-rate assets and liabilities, and to reduce the volatility of net interest income over time. The interest rate risk exposures from instruments with closed (non-optioned) fixed-rate cash flows are measured and managed separately from embedded product options. Projected future cash flows include the impact of modeled exposures for: - An assumed maturity profile for our core deposit portfolio; - Our targeted investment profile on our net equity position; - Liquidation assumptions on mortgages other than from embedded pre- payment options. The objective of portfolio management within the closed book is to eliminate cash flow mismatches, thereby reducing the volatility of net interest income. Product options, whether they are freestanding options such as mortgage rate commitments or embedded in loans and deposits, expose us to a significant financial risk. Our exposure from freestanding mortgage rate commitment options is modeled based on an expected funding ratio derived from historical experience. We model our exposure to written options embedded in other products, such as the rights to prepay or redeem, based on analysis of rational customer behaviour. We also model an exposure to declining interest rates resulting in margin compression on certain demand deposit accounts that are interest rate sensitive. Product option exposures are managed by purchasing options or through a dynamic hedging process designed to replicate the payoff on a purchased option. The Bank's policy sets overall limits on EVaR and EaR based on 100 bps interest rate shock for its management of Canadian and U.S. non-trading interest rate risk. A graph that shows our interest rate risk exposure (as measured by EVaR) on all non-trading assets, liabilities and derivative instruments used for interest rate risk management instruments is included on page 26 of the fully formatted version of this second quarter 2008 Report to Shareholders, which can be found on TD's website at http://www.td.com/investor/earnings.jsp. The Bank uses derivative financial instruments, wholesale instruments and other capital market alternatives and, less frequently, product pricing strategies to manage interest rate risk. As at April 30, 2008, an immediate and sustained 100 bps increase in interest rates would have increased the economic value of shareholders' equity by $51.4 million after tax. An immediate and sustained 100 bps decrease in interest rates would have reduced the economic value of shareholders' equity by $124 million after tax. The following table shows the sensitivity by currency for those currencies where the Bank has material exposure. Sensitivity of After-tax Economic Value at Risk by Currency ------------------------------------------------------------------------- As at As at (millions of Canadian dollars) April 30, 2008 Jan 31, 2008 ------------------------------------------------------------------------- 100 bps 100 bps 100 bps 100 bps Currency increase decrease increase decrease ------------------------------------------------------------------------- Canadian dollar $16.1 $(53.4) $(3.9) $(30.1) U.S. dollar 35.3 (70.6) 3.7 (27.4) ------------------------------------------------------------------------- Managing Non-trading Foreign Exchange Risk Foreign exchange risk refers to losses that could result from changes in foreign-currency exchange rates. Assets and liabilities that are denominated in foreign currencies have foreign exchange risk. We are exposed to non-trading foreign exchange risk from our investments in foreign operations, and when our foreign currency assets are greater or less than our liabilities in that currency, they create a foreign currency open position. An adverse change in foreign exchange rates can impact our reported net income and equity, and also our capital ratios. Our objective is to minimize these impacts. Minimizing the impact of an adverse foreign exchange rate change on reported equity will cause some variability in capital ratios, due to the amount of RWA that are denominated in a foreign currency. If the Canadian dollar weakens, the Canadian-dollar equivalent of our RWA in a foreign currency increases, thereby increasing our capital requirement. For this reason, the foreign exchange risk arising from the Bank's net investments in foreign operations is hedged to the point where capital ratios change by no more than a tolerable amount for a given change in foreign exchange rates. LIQUIDITY RISK Liquidity risk is the risk that we cannot meet a demand for cash or fund our obligations as they come due. Demand for cash can arise from withdrawals of deposits, debt maturities and commitments to provide credit. Liquidity risk also includes the risk of not being able to liquidate assets in a timely manner at a reasonable price. As a financial organization, we must always ensure that we have access to enough readily-available funds to cover our financial obligations as they come due and to sustain and grow our assets and operations both under normal and stress conditions. In the unlikely event of a funding disruption, we need to be able to continue to function without being forced to sell too many of our assets. The process that ensures adequate access to funds is known as the management of liquidity risk. Who Manages Liquidity Risk The Asset/Liability Committee oversees our liquidity risk management program. It ensures that a management structure is in place to properly measure and manage liquidity risk. In addition, a Global Liquidity Forum, comprising senior management from Finance, Treasury and Balance Sheet Management, Risk Management and Wholesale Banking, identifies and monitors our liquidity risks. When necessary, the Forum recommends actions to the Asset/Liability Committee to maintain our liquidity position within limits in both normal and stress conditions. We have one global liquidity risk policy, but the major operating areas measure and manage liquidity risks as follows: - The Treasury and Balance Sheet Management Department is responsible for consolidating and reporting the Bank's global liquidity risk position and for managing the Canadian Personal and Commercial Banking liquidity position. - Wholesale Banking is responsible for managing the liquidity risks inherent in the wholesale banking portfolios. - TD Commerce is responsible for managing its liquidity position. - Each area must comply with the Global Liquidity Risk Management policy that is periodically reviewed and approved by the Risk Committee of the Board. How we Manage Liquidity Risk Our overall liquidity requirement is defined as the amount of liquidity required to fund expected cash outflows, as well as a liquidity reserve to fund potential cash outflows in the event of a disruption in the capital markets or other event that could affect our access to liquidity. We do not rely on short-term wholesale funding for purposes other than funding marketable securities or short-term assets. We measure liquidity requirements using a conservative base case scenario to define the amount of liquidity that must be held at all times for a specified minimum period. This scenario provides coverage for 100% of our unsecured wholesale debt coming due, potential retail and commercial deposit run-off and forecast operational requirements. In addition, we provide for coverage of Bank-sponsored funding programs, such as Bankers' Acceptance notes we issue on behalf of clients, and Bank-sponsored Asset-backed Commercial Paper. We also use an extended liquidity coverage test to ensure that we can fund our operations on a fully collateralized basis for a period up to one year. We meet liquidity requirements by holding assets that can be readily converted into cash, and by managing our cash flows. To be considered readily convertible into cash, assets must be currently marketable, of sufficient credit quality and available for sale. Liquid assets are represented in a cumulative liquidity gap framework based on settlement timing and market depth. Assets needed for collateral purposes or those that are similarly unavailable are not considered readily convertible into cash. While each of our major operations has responsibility for the measurement and management of its own liquidity risks, we also manage liquidity on a global basis to ensure consistent and efficient management of liquidity risk across all of our operations. On April 30, 2008, our consolidated surplus liquid asset position up to 90 days was $5.7 billion, compared with a surplus liquid-asset position of $7.8 billion on January 31, 2008. Our surplus liquid-asset position is our total liquid assets less our unsecured wholesale funding requirements, potential non-wholesale deposit run-off and contingent liabilities coming due in 90 days. Contingency Planning If a liquidity crisis were to occur, we have contingency plans in place to ensure that we can meet all our obligations as they come due. At the time of preparing this report, global debt markets were experiencing a significant liquidity event. During that time, we continued to operate within our liquidity risk management framework and limit structure. OFF-BALANCE SHEET ARRANGEMENTS The Bank carries out certain business activities via arrangements with special purpose entities (SPEs). We use SPEs to obtain sources of liquidity by securitizing certain of the Bank's financial assets, to assist our clients in securitizing their financial assets, and to create investment products for our clients. SPEs may be organized as trusts, partnerships or corporations and they may be formed as qualifying special purpose entities (QSPEs) or variable interest entities (VIEs). When an entity is deemed a VIE, the entity must be consolidated by the primary beneficiary. Consolidated SPEs have been presented in the Bank's Consolidated Balance Sheet. Securitization of Bank-originated Assets The Bank securitizes residential mortgages, personal loans, credit card loans and commercial mortgages to enhance its liquidity position, to diversify sources of funding and to optimize the management of the balance sheet. All products securitized by the Bank were originated in Canada and sold to Canadian securitization structures. Details of these securitization exposures are as follows: ------------------------------------------------------------------------- Total Outstanding Exposures Securitized by the Bank as an Originator(1),(2) ------------------------------------------------------------------------- (millions of Canadian dollars) As at April 30, 2008 ------------------------------------------------------------------------- Significant Significant unconsolidated QSPEs unconsolidated SPEs ----------------------------------------- Carrying Carrying Securi- value of Securi- value of tized retained tized retained assets interests assets interests ------------------------------------------------------------------------- Residential mortgage loans $- $- $20,497 $322 Personal loans 8,500 88 - - Credit card loans 800 3 - - Commercial mortgage loans 155 5 - - ------------------------------------------------------------------------- $9,455 $96 $20,497 $322 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- (millions of Canadian dollars) As at October 31, 2007 ------------------------------------------------------------------------- Significant Significant unconsolidated QSPEs unconsolidated SPEs ----------------------------------------- Carrying Carrying Securi- value of Securi- value of tized retained tized retained assets interests assets interests ------------------------------------------------------------------------- Residential mortgage loans $- $- $20,352 $289 Personal loans 9,000 71 - - Credit card loans 800 6 - - Commercial mortgage loans 163 5 - - ------------------------------------------------------------------------- $9,963 $82 $20,352 $289 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Certain comparative amounts have been restated and reclassified to conform to the presentation adopted in the current period. (2) In all the securitization transactions that the Bank has undertaken for its own assets, it has acted as an originating bank and retained securitization exposure. Residential mortgage loans The Bank may be exposed to the risks of transferred loans to the securitization vehicles through retained interests. There are no expected credit losses on the retained interests of the securitized residential mortgages as the mortgages are all government guaranteed. Personal loans The Bank securitizes personal loans through QSPEs, as well as single-seller conduits via QSPEs. These structures are used to enhance the Bank's liquidity position, to diversify its sources of funding and to optimize the management of its balance sheet. As at April 30, 2008, the single-seller conduits had $5.1 billion (October 31, 2007 - $5.1 billion) of commercial paper outstanding while another Bank-sponsored QSPE had $3.4 billion (October 31, 2007 - $3.9 billion) of term notes outstanding. While the probability of loss is negligible, as at April 30, 2008, the Bank's maximum potential exposure to loss for these conduits through the sole provision of liquidity facilities was $5.1 billion (October 31, 2007 - $5.1 billion) of which $1.1 billion of underlying personal loans was government insured. Additionally, the Bank had retained interests of $88 million (October 31, 2007 - $71 million) relating to excess spread. Credit card loans The Bank provides credit enhancement to the QSPE through its retained interests in the excess spread. As at April 30, 2008, the maximum potential exposure to loss was $3 million (October 31, 2007 - $6 million) through retained interests. Commercial mortgage loans As at April 30, 2008, the Bank's maximum potential exposure to loss was $5 million (October 31, 2007 - $5 million) through retained interests in the excess spread and cash collateral account of the QSPE. Securitization of Third Party-originated Assets The Bank administers multi-seller conduits and provides liquidity facilities as well as securities distribution services; it may also provide credit enhancements. All Bank-sponsored third party-originated assets are securitized through SPEs, which are not consolidated by the Bank. The Bank's maximum potential exposure to loss due to its ownership interest in commercial paper and through the provision of global style liquidity facilities for multi-seller conduits was $12.4 billion (October 31, 2007 - $12.7 billion) as at April 30, 2008. Further, the Bank has committed to an additional $2.4 billion (October 31, 2007 - $2.5 billion) in liquidity facilities for asset-backed commercial paper that could potentially be issued by the conduits. As at April 30, 2008, the Bank also provided deal-specific credit enhancement in the amount of $73 million (October 31, 2007 - $59 million). Note 25 to the Bank's 2007 Annual Consolidated Financial Statements provides detailed information about the maximum amount of additional credit the Bank could be obligated to commit. All third-party assets securitized by the Bank were originated in Canada and sold to Canadian securitization structures. Details of the Bank-administered multi-seller, asset-backed commercial paper conduits are as follows: ------------------------------------------------------------------------- Total Outstanding Exposures Securitized by the Bank-Sponsored Third Party-originated Assets(3) ------------------------------------------------------------------------- (millions of Canadian dollars) As at April 30, 2008 As at October 31, 2007 ------------------------------------------------------------------------- Signi- Ratings profile of Signi- Ratings profile of ficant SPE asset class ficant SPE asset class unconsol- ------------------ unconsol- ------------------- idated idated SPEs AAA AA+ to AA- SPEs AAA AA+ to AA- ------------------------------------------------------------------------- Residential mortgage loans $3,337 $3,284 $53 $3,046 $2,998 $48 Credit card loans 507 507 - 486 486 - Automobile loans and leases 5,207 5,203 4 5,593 5,589 4 Equipment loans and leases 644 643 1 701 700 1 Trade receivables 2,749 2,722 27 2,833 2,805 28 ------------------------------------------------------------------------- $12,444 $12,359 $85 $12,659 $12,578 $81 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (3) Certain comparative amounts have been restated and reclassified to conform to the presentation adopted in the current period. Liquidity Facilities to Third Party-sponsored Conduits The Bank has exposure to the U.S. arising from providing liquidity facilities of $453 million (October 31, 2007 - $427 million) to third party-sponsored conduits of which none has been drawn. The assets within these conduits are primarily comprised of automotive-related financing assets, including loans and leases. In the event that the facilities are drawn, the Bank's credit exposure will mainly be AAA rated. Other Investment and Financing Products Other Financing Transactions The Bank enters into transactions with major U.S. corporate clients through jointly-owned VIEs as a means to provide them with cost efficient financing. Under these transactions, as at April 30, 2008, the Bank provided approximately $1.9 billion (October 31, 2007 - $3.0 billion) in financing to these VIEs. The Bank has received guarantees from or has recourse to major U.S. banks with credit ratings from AA to AA+ on an S&P equivalent basis fully covering its investments in these VIEs. At the inception of the transactions, the counterparties posted collateral in favour of the Bank and the Bank purchased credit protection to further reduce its exposure to the U.S. banks. At April 30, 2008, the Bank's net exposure to the U.S. banks after taking into account collateral and CDS was approximately $900 million (October 31, 2007 - $1.5 billion). As at April 30, 2008, the Bank's maximum total exposure to loss before considering guarantees, recourse, collateral and CDS was approximately $1.9 billion (October 31, 2007 - $3.0 billion). The transactions allow the Bank unilateral discretion to exit the transactions every 30 to 90 days. As at April 30, 2008, these VIEs had assets totalling more than $9.6 billion (October 31, 2007 - $12.0 billion). Exposure to Collateralized Debt Obligations Since the decision was made in 2005 to exit the structured products business, the Bank no longer originates Collateralized Debt Obligation vehicles (CDOs). As at April 30, 2008, the Bank had approximately $583 million (October 31, 2007 - $ 677 million) of run-off notional exposure where the Bank purchased credit protection via CDOs which it originated. In addition, as at April 30, 2008, the Bank had approximately $2.4 billion (October 31, 2007 - $2.1 billion) of gross notional exposure where the Bank sold credit protection via CDOs, of which $1.6 billion (October 31, 2007 - $1.5 billion) was hedged on a back-to-back basis by buying credit protection on the same CDOs, which resulted in a net position of $0.8 billion (October 31, 2007 - $0.6 billion). The Bank does not have any exposure to U.S. subprime mortgages via the CDOs. The CDOs are referenced to primarily investment-grade corporate debt securities. The back-to-back hedges are not entered into with monoline insurers; rather they are entered into with global financial institutions, such as universal banks or broker-dealers. All exposures are managed as part of a trading portfolio with risk limits that have been approved by the Bank's risk management group and are hedged with various financial instruments, including credit derivatives and bonds. Counterparty exposure on hedges is collateralized under Credit Support Agreements (CSAs) and netting arrangements, consistent with other over-the-counter (OTC) derivative contracts. The Bank's CDO positions are fair valued using valuation techniques with significant non-observable market inputs. A sensitivity analysis was performed for all items fair valued using valuation techniques with significant non-observable market inputs, and disclosed in the Bank's 2007 Annual Consolidated Financial Statements. Leveraged Finance Credit Commitments The Bank enters into various commitments to meet the financing needs of the Bank's clients and to earn fee income. Included in 'commitments to extend credit', in Note 25 to the Bank's 2007 Annual Consolidated Financial Statements, are leveraged finance commitments. Leveraged finance commitments, are agreements that provide funding to a wholesale borrower with higher levels of debt, measured by the ratio of debt capital to equity capital of the borrower, relative to the industry in which it operates. The Bank's exposure to leveraged finance commitments as at April 30, 2008, was not significant, except for its commitment to provide funding in the amount of $3.3 billion (October 31, 2007 - $3.3 billion) to a consortium led by Ontario Teachers' Pension Plan in their bid to privatize BCE Inc. These products may expose the Bank to liquidity and credit risks. There are adequate risk management and control processes in place to mitigate these risks. Note 25 to the Bank's 2007 Annual Consolidated Financial Statements provides detailed information about the maximum amount of additional credit the Bank could be obligated to extend. Funding commitments on loans that the Bank intends to syndicate are recorded as a derivative at fair value with changes in fair value recorded through income. RELATED-PARTY TRANSACTIONS During the quarter ended January 31, 2008, the Bank purchased certain securities with a notional value of approximately $300 million at par from a fund that is managed by the Bank. The Bank immediately recognized a securities loss of $45 million that was recorded in the Wholesale Banking segment. QUARTERLY RESULTS The following table provides summary information related to the Bank's eight most recently completed quarters. Quarterly Results(1) ------------------------------------------------------------------------- For the three months ended ------------------------------------------------- (millions of 2008 Canadian dollars) Apr. 30 Jan. 31 Oct. 31 July 31 Apr. 30 ------------------------------------------------------------------------- Net interest income $1,858 $1,788 $1,808 $1,783 $1,662 Other income 1,530 1,816 1,742 1,899 1,882 ------------------------------------------------------------------------- Total revenue 3,388 3,604 3,550 3,682 3,544 Provision for (reversal of) credit losses (232) (255) (139) (171) (172) Non-interest expenses (2,206) (2,228) (2,241) (2,216) (2,297) Provision for income taxes (160) (235) (153) (248) (234) Non-controlling interests (9) (8) (8) (13) (27) Equity in net income of an associated company, net of income taxes 71 92 85 69 65 ------------------------------------------------------------------------- Net income - reported 852 970 1,094 1,103 879 Items of note affecting net income, net of income taxes: Amortization of intangibles 92 75 99 91 80 Gain relating to restructuring of Visa - - (135) - - TD Banknorth restructuring, privatization and merger-related charges - - - - 43 Restructuring and integration charges relating to the Commerce acquisition 30 - - - - Change in fair value of credit default swaps hedging the corporate loan book, net of provision for credit losses (1) (25) 2 (30) (7) Other tax items - 20 - - - Provision for insurance claims - 20 - - - Initial set up of specific allowance for credit card and overdraft loans - - - - - General allowance release - - (39) - - ------------------------------------------------------------------------- Total adjustments for items of note, net of income taxes 121 90 (73) 61 116 ------------------------------------------------------------------------- Net income - adjusted 973 1,060 1,021 1,164 995 Preferred dividends (11) (8) (5) (2) (7) ------------------------------------------------------------------------- Net income available to common shareholders - adjusted $962 $1,052 $1,016 $1,162 $988 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (Canadian dollars) ------------------------------------------------------------------------- Basic earnings per share - reported $1.12 $1.34 $1.52 $1.53 $1.21 - adjusted 1.33 1.46 1.42 1.61 1.37 Diluted earnings per share - reported 1.12 1.33 1.50 1.51 1.20 - adjusted 1.32 1.45 1.40 1.60 1.36 Return on common shareholders' equity 13.4% 18.0% 20.8% 21.0% 17.1% ------------------------------------------------------------------------- ----------------------------------------------------- For the three months ended ----------------------------- (millions of 2007 2006 Canadian dollars) Jan. 31 Oct. 31 July 31 ----------------------------------------------------- Net interest income $1,671 $1,714 $1,623 Other income 1,834 1,604 1,688 ----------------------------------------------------- Total revenue 3,505 3,318 3,311 Provision for (reversal of) credit losses (163) (170) (109) Non-interest expenses (2,221) (2,211) (2,170) Provision for income taxes (218) (175) (235) Non-controlling interests (47) (48) (52) Equity in net income of an associated company, net of income taxes 65 48 51 ----------------------------------------------------- Net income - reported 921 762 796 Items of note affecting net income, net of income taxes: Amortization of intangibles 83 87 61 Gain relating to restructuring of Visa - - - TD Banknorth restructuring, privatization and merger-related charges - - - Restructuring and integration charges relating to the Commerce acquisition - - - Change in fair value of credit default swaps hedging the corporate loan book, net of provision for credit losses 5 8 5 Other tax items - - 24 Provision for insurance claims - - - Initial set up of specific allowance for credit card and overdraft loans - 18 - General allowance release - - - ----------------------------------------------------- Total adjustments for items of note, net of income taxes 88 113 90 ----------------------------------------------------- Net income - adjusted 1,009 875 886 Preferred dividends (6) (5) (6) ----------------------------------------------------- Net income available to common shareholders - adjusted $1,003 $870 $880 ----------------------------------------------------- ----------------------------------------------------- (Canadian dollars) ----------------------------------------------------- Basic earnings per share - reported $1.27 $1.05 $1.10 - adjusted 1.40 1.21 1.22 Diluted earnings per share - reported 1.26 1.04 1.09 - adjusted 1.38 1.20 1.21 Return on common shareholders' equity 18.2% 15.7% 16.8% ----------------------------------------------------- (1) Certain comparative amounts have been restated to conform to the presentation adopted in the current period. ACCOUNTING POLICIES AND ESTIMATES The Bank's unaudited Interim Consolidated Financial Statements, as presented on pages 32 to 46 of this Report to Shareholders, have been prepared in accordance with GAAP. These Interim Consolidated Financial Statements should be read in conjunction with the Bank's audited Consolidated Financial Statements for the year ended October 31, 2007. The accounting policies used in the preparation of these Consolidated Financial Statements are consistent with those used in the Bank's October 31, 2007 audited Consolidated Financial Statements, except as described below. Changes in Significant Accounting Policies Capital Disclosures Effective November 1, 2007, the CICA's new accounting standard, Section 1535, Capital Disclosures, was implemented, which requires the disclosure of both qualitative and quantitative information that enables users of financial statements to evaluate the entity's objectives, policies and processes for managing capital. The new guidance did not have an effect on the financial position or earnings of the Bank. Financial Instruments Disclosures and Presentation Effective November 1, 2007, the accounting and disclosure requirements of the CICA's two new accounting standards, Section 3862, Financial Instruments - Disclosures, and Section 3863, Financial Instruments - Presentation, were implemented. The new guidance did not have a material effect on the financial position or earnings of the Bank. Accounting for Transaction Costs of Financial Instruments Classified Other Than as Held For Trading Effective November 1, 2007, the Bank adopted EIC-166, Accounting Policy Choice for Transaction Costs. This abstract provided clarity around the application of accounting guidance related to transaction costs that is codified in Section 3855, Financial Instruments - Recognition and Measurement. More specifically, the abstract contemplated whether an entity must make one accounting policy choice that applies to all financial assets and financial liabilities classified other than as held for trading or whether these transaction costs may be recognized in net income for certain of these financial assets and liabilities and added to the carrying amount for other financial assets and liabilities. The new guidance did not have a material effect on the financial position or earnings of the Bank. Critical Accounting Estimates The critical accounting estimates remain unchanged from those disclosed in the Bank's 2007 Annual Report. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING During the most recent interim period, there have been no changes in the Bank's policies and procedures and other processes that comprise its internal control over financial reporting, that have materially affected, or are reasonably likely to materially affect, the Bank's internal control over financial reporting. INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) INTERIM CONSOLIDATED BALANCE SHEET (unaudited) ------------------------------------------------------------------------- As at ------------------- April 30 Oct. 31 (millions of Canadian dollars) 2008 2007 ------------------------------------------------------------------------- ASSETS Cash and due from banks $2,520 $1,790 Interest-bearing deposits with banks 15,599 14,746 ------------------------------------------------------------------------- 18,119 16,536 ------------------------------------------------------------------------- Securities Trading 83,084 77,637 Designated as trading under the fair value option 2,043 2,012 Available-for-sale 53,929 35,650 Held-to-maturity 8,781 7,737 ------------------------------------------------------------------------- 147,837 123,036 ------------------------------------------------------------------------- Securities purchased under reverse repurchase agreements 33,067 27,648 ------------------------------------------------------------------------- Loans Residential mortgages 67,137 58,485 Consumer installment and other personal 75,114 67,532 Credit card 6,166 5,700 Business and government 60,661 44,258 Business and government designated as trading under the fair value option 718 1,235 ------------------------------------------------------------------------- 209,796 177,210 Allowance for credit losses (Note 4) (1,369) (1,295) ------------------------------------------------------------------------- Loans, net of allowance for credit losses 208,427 175,915 ------------------------------------------------------------------------- Other Customers' liability under acceptances 10,848 9,279 Investment in TD Ameritrade 4,829 4,515 Trading derivatives 37,602 36,052 Goodwill 14,213 7,918 Other intangibles 3,773 2,104 Land, buildings and equipment 3,715 1,822 Other assets 21,191 17,299 ------------------------------------------------------------------------- 96,171 78,989 ------------------------------------------------------------------------- Total assets $503,621 $422,124 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES ------------------------------------------------------------------------- Deposits Personal $185,490 $147,561 Banks 8,773 10,162 Business and government 102,704 73,322 Trading 52,556 45,348 ------------------------------------------------------------------------- 349,523 276,393 ------------------------------------------------------------------------- Other Acceptances 10,848 9,279 Obligations related to securities sold short 23,546 24,195 Obligations related to securities sold under repurchase agreements 14,850 16,574 Trading derivatives 37,730 39,028 Other liabilities 22,101 23,829 ------------------------------------------------------------------------- 109,075 112,905 ------------------------------------------------------------------------- Subordinated notes and debentures (Note 6) 12,466 9,449 ------------------------------------------------------------------------- Liabilities for preferred shares and capital trust securities (Note 7) 1,428 1,449 ------------------------------------------------------------------------- Non-controlling interests in subsidiaries 534 524 ------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Common shares (millions of shares issued and outstanding: April 30, 2008 - 802.9 and Oct. 31, 2007 - 717.8) (Note 8) 12,818 6,577 Preferred shares (millions of shares issued and outstanding: April 30, 2008 - 45.0 and Oct. 31, 2007 - 17.0) (Note 8) 1,125 425 Contributed surplus 383 119 Retained earnings 16,864 15,954 Accumulated other comprehensive income (loss) (Note 10) (595) (1,671) ------------------------------------------------------------------------- 30,595 21,404 ------------------------------------------------------------------------- Total liabilities and shareholders' equity $503,621 $422,124 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Certain comparative amounts have been reclassified to conform to the current period's presentation. The accompanying notes are an integral part of these Interim Consolidated Financial Statements. INTERIM CONSOLIDATED STATEMENT OF INCOME (unaudited) ------------------------------------------------------------------------- For the three For the six months ended months ended --------------------------------------- April 30 April 30 April 30 April 30 (millions of Canadian dollars) 2008 2007 2008 2007 ------------------------------------------------------------------------- Interest income Loans $3,240 $3,117 $6,636 $6,191 Securities Dividends 242 189 502 462 Interest 929 919 1,904 1,905 Deposits with banks 159 111 273 158 ------------------------------------------------------------------------- 4,570 4,336 9,315 8,716 ------------------------------------------------------------------------- Interest expense Deposits 2,056 1,989 4,310 4,037 Subordinated notes and debentures 159 124 317 232 Preferred shares and capital trust securities 23 32 46 62 Other liabilities 474 529 996 1,052 ------------------------------------------------------------------------- 2,712 2,674 5,669 5,383 ------------------------------------------------------------------------- Net interest income 1,858 1,662 3,646 3,333 ------------------------------------------------------------------------- Other income Investment and securities services 544 619 1,123 1,199 Credit fees 108 103 209 199 Net securities gains 110 102 262 172 Trading (loss) income (104) 192 56 408 Income (loss) from financial instruments designated as trading under the fair value option 5 5 (44) (4) Service charges 258 244 518 493 Loan securitizations (Note 5) 91 97 167 231 Card services 116 107 235 216 Insurance, net of claims 250 251 436 505 Trust fees 36 38 70 69 Other 116 124 314 228 ------------------------------------------------------------------------- 1,530 1,882 3,346 3,716 ------------------------------------------------------------------------- Total revenue 3,388 3,544 6,992 7,049 ------------------------------------------------------------------------- Provision for credit losses (Note 4) 232 172 487 335 ------------------------------------------------------------------------- Non-interest expenses Salaries and employee benefits 1,137 1,169 2,308 2,326 Occupancy, including depreciation 188 185 369 360 Equipment, including depreciation 148 153 292 297 Amortization of other intangibles 117 112 239 230 Restructuring costs (Note 13) 48 67 48 67 Marketing and business development 102 111 212 224 Brokerage-related fees 63 57 122 111 Professional and advisory services 118 108 229 234 Communications 48 49 95 98 Other 237 286 520 571 ------------------------------------------------------------------------- 2,206 2,297 4,434 4,518 ------------------------------------------------------------------------- Income before provision for income taxes, non-controlling interests in subsidiaries and equity in net income of an associated company 950 1,075 2,071 2,196 Provision for income taxes 160 234 395 452 Non-controlling interests in subsidiaries, net of income taxes 9 27 17 74 Equity in net income of an associated company, net of income taxes 71 65 163 130 ------------------------------------------------------------------------- Net income 852 879 1,822 1,800 Preferred dividends 11 7 19 13 ------------------------------------------------------------------------- Net income available to common shareholders $841 $872 $1,803 $1,787 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Average number of common shares outstanding (millions) (Note 14) Basic 747.7 719.1 732.9 718.7 Diluted 753.7 725.9 739.0 725.4 Earnings per share (in dollars) (Note 14) Basic $1.12 $1.21 $2.46 $2.49 Diluted 1.12 1.20 2.44 2.46 Dividends per share (in dollars) 0.59 0.53 1.16 1.01 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Certain comparative amounts have been reclassified to conform to the current period's presentation. The accompanying notes are an integral part of these Interim Consolidated Financial Statements. INTERIM CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited) ------------------------------------------------------------------------- For the three For the six months ended months ended --------------------------------------- April 30 April 30 April 30 April 30 (millions of Canadian dollars) 2008 2007 2008 2007 ------------------------------------------------------------------------- Common shares (Note 8) Balance at beginning of period $6,632 $6,417 $6,577 $6,334 Proceeds from shares issued on exercise of options 29 19 71 53 Shares issued as a result of dividend reinvestment plan 22 21 43 40 Impact of shares (acquired) sold for trading purposes(1) (12) (2) (20) 28 Shares issued on acquisition of Commerce 6,147 - 6,147 - ------------------------------------------------------------------------- Balance at end of period 12,818 6,455 12,818 6,455 ------------------------------------------------------------------------- Preferred shares (Note 8) Balance at beginning of period 875 425 425 425 Share issues 250 - 700 - ------------------------------------------------------------------------- Balance at end of period 1,125 425 1,125 425 ------------------------------------------------------------------------- Contributed surplus Balance at beginning of period 121 68 119 66 Stock options (Note 11) (1) 4 1 6 Conversion of TD Banknorth stock options on privatization (Note 11) - 52 - 52 Conversion of Commerce stock options on acquisition (Note 11) 263 - 263 - ------------------------------------------------------------------------- Balance at end of period 383 124 383 124 ------------------------------------------------------------------------- Retained earnings Balance at beginning of period 16,499 14,375 15,954 13,725 Transition adjustment on adoption of Financial Instruments standards - - - 80 Net income 852 879 1,822 1,800 Common dividends (473) (382) (883) (727) Preferred dividends (11) (7) (19) (13) Other (3) - (10) - ------------------------------------------------------------------------- Balance at end of period 16,864 14,865 16,864 14,865 ------------------------------------------------------------------------- Accumulated other comprehensive income (loss), net of income taxes (Note 10) Balance at beginning of period (1,187) (268) (1,671) (918) Transition adjustment on adoption of Financial Instruments standards - - - 426 Other comprehensive income for the period 592 174 1,076 398 ------------------------------------------------------------------------- Balance at end of period (595) (94) (595) (94) ------------------------------------------------------------------------- Total shareholders' equity $30,595 $21,775 $30,595 $21,775 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Purchased by subsidiaries of the Bank, which are regulated securities entities in accordance with Regulation 92-313 under the Bank Act. DATASOURCE: TD Bank Financial Group CONTACT: PRNewswire - - 05/28/2008

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