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Toronto Dominion Bank (NYSE:TD)

F3Q07 Earnings Call

August 23, 2007, 3:00 PM ET

Executives

Tim Thompson - VP, IR

W. Edmund - President and CEO

Colleen M. Johnston - Group Head Finance and CFO

Bharat B. Masrani - President and CEO, TD Banknorth Inc.

Robert E. Dorrance - Chairman, CEO and President

Mark R. Chauvin - Chief Risk Officer

Timothy D. Hockey - Co-Chair, TD Canada Trust

Analysts

James Bantis - Credit Suisse First Boston

Michael Goldberg - Desjardins Securities

Ian De Verteuil - BMO Nesbitt Burns

André-Philippe Hardy - RBC Capital Markets

Brad Smith - Blackmont Capital

Sumit Malhotra - Merrill Lynch

Shannon Cowherd - Citigroup

Mario Mendonca - Genuity Capital Markets

John Aiken - Dundee Securities

Ohad Lederer - Veritas Investment Research

Darko Mihelic - CIBC World Markets

Presentation

Tim Thompson - Vice President, Investor Relations

Good afternoon and welcome to the welcome to the TD Bank Financial Group Third Quarter 2007 Investor Presentation. My name is Tim Thompson and I am Vice President of Investor Relations of the Bank.

We will begin today's presentation with strategic remarks from Ed Clark, the Bank's CEO, after which Colleen Johnston, the Bank's CFO, will present our third quarter operating performance. We will then entertain questions from those present as well as pre-qualified analysts and investors on the phone. In response to feedback from previous calls, we are trying to keep the call to about one hour today, with Ed and Colleen’s remarks taking up aboth half of that time. As well, we are asking those participating in the question-and-answer of the call to ask one question at time, so that everybody has an opportunity to contribute.

Other Executives present today include Bob Dorrance, Chairman and CEO of TD Securities; Tim Hockey and Bernie Dorval, Co-Chairs of TD Canada Trust; Bill Hatanaka, Chairman and CEO of TD Waterhouse; Bharat Masrani, President and CEO of TD Banknorth; and Mark Chauvin, Chief Risk Officer TD Bank Financial Group.

Please turn to page two. We know that this presentation contains forward-looking statements and actual results could differ materially from what is discussed. Certain material factors or assumptions were applied in making these statements. For additional information, we refer you to our annual report. This document includes a description of factors that could cause actual results to differ and can be found on our website at td.com.

Ed, over to you.

W. Edmund - President and Chief Executive Officer

Thanks Tim and hello everyone and thank you for joining us today. In few minutes, Colleen is going to provide all of the details on the numbers for the third quarter of 2007.

Before she does, let me start by giving you my perspective on our results and current events. Now, I know we are we are supposed to keep to keep this short today, but you are going to have to forgive me if I speak a little longer than normal because it actually has been a very busy last few weeks.

Now turning to our results, simply put… we had an outstanding third quarter for TD Bank. We delivered adjusted earnings per share of $1. 60, that's an increase, up 32% over what was a very good third quarter last year and up 18% from a very strong quarter, second quarter. More pleasing to me than the numbers our performance is a validation of our strategy. A part of what makes us different, a different kind of Bank, is a way we position TD to deliver consistently growing earnings in our retail businesses, while shifting the risk return strategy within our wholesale business. TD Securities out performance reflected great results across its businesses, and was aided by the fact that as a Bank, we have always positioned our trading businesses conservatively. Long, both on volatility and credit protection.

In the context of these great results, the Board has raised the divided to $0.57 or 8%. With this increase, our dividend this year up 19% in 2007 compared to 2006, a spectacular performance and great news for our shareholders. At the risk of being repetitive as you know, we have a consistent approach to the dividend and policy. Dividend increases were flat, in our view of increases in sustainable earnings. The best way to have consistent dividend growth is to build franchises which deliver consistent earnings growth. That’s what we do. We manage capital levels through securities issuance or buybacks. Our preference is to buyback shares to mitigate the dilution effect from options.

Let me get into more details now each of our businesses is performed. Our Canadian Personal and Commercial Bank and Wealth Management in Canada posted another strong quarter, up 16% year-over-year. On top of, a 22% year-over-year growth in the third quarter of last year, this is really an unbelievable achievement. Looking at TD Canada Trust specifically, 9% revenue growth in that business represents continued broad base strength. Following up on last quarter’s great expense performance, expenses grew by just 1% in the third quarter to create outstanding operating leverage of 8%. This performance delivered an efficiency ratio of 50%, an imaging achievement. Looking now, we expect to see a revenue expense GAAP to move more closely inline with our 3% paradigm.

Canadian Wealth Management kept up its impressive track record with another very strong financial performance. The increase volumes in the mutual funds, discount brokerage and advice based businesses all contributed to bottom line growth. The continuing investments we are making to build out of our advice channels and mutual funds keeps proving that we can grow earnings while creating solid growth opportunities for the future. Again, even more important to us than the numbers is our focus on franchise building. TD Canada Trust leads in the service and convenience brand space in Canada. We continue to reinforce that brand by increasing our branch hours even further. This fall, over 800 TD branches across Canada will be open at least 62 hours a week, including 8 AM to 4 PM every Saturday. As we like to say around here open at 6, open at 8 days straight, I think that great. In terms of a simple way of looking at this is our branches are open more than 50% longer on average from the other four large Canadian banks. And when you coupled those longer branch hours with our clear and undisputed leadership position and online banking, you get a retail banking franchise that delivers exceptional customer service, around the clock everyday of the year.

Turing to the Wholesale Bank. We had a record quarter, up 41% over last year. Now, this was all significantly exceeded our expectations and was different from the seasonal slowdown which we particularly expect in the third quarter. The pace of progress that we are seeing in building a great franchise is a wonderful validation for hard work that's going in and moving it to where we are today. We continue to solidify our position as a top three dealer in Canada.

Now, we would expect our fourth quarter will resume more normalized performance consistent with last year, which as you know, is usually our weakest quarter. Given recent activities in the capital markets, I want to make some general comments about our Wholesale Bank. As you know we reposition TD Securities to get out of businesses where the risk is not transparent, because of our illiquid markets and long tail per model risk. And this quarter was a perfect example of how our shareholders benefited from that business strategy. But you can not be in the wholesale business without taking risk. The issue is what’s risk.

In trading, as I have said, we are focus on transparent and liquid markets. For our domestic franchise businesses, we want to use our balance sheet strategically to support our clients that’s why we underwrite loan transactions. And as you can imagine we have a rigorous process around underwriting. We watch the number of deals we do at any one time, so that if there is a market disruption, we won’t be caught simultaneously with a number of deals. We ask ourselves a very simple question. If we need to, would we be happy to hold this credit return? And finally, we stress pass our decisions to see what it would cost us after fees to exit in a tough market, if we don’t want the single name [ph] concentration.

Now normally we won’t comment of specific deals, but I will make some comments about BCE deal because elements of it are in the public demand. However, pleased bear in mind that because deal is in progress, we won’t able to talk about the many of the details. The BCE deal is a landmark transaction in Canada, and we are proud to be playing such a key role. The deal is completely consistent with our wholesales strategy to build on our franchise businesses and further is our goal to be a top three dealer in Canada. We subjected it for the same standards as we do all of our deals. BCE is a good example of our risk approach and action. We will take risk when the risk are transparent when we can understand and measure those risks. And while it is relatively large underwriting, we consider the credit risk for BCE to be acceptable for a major Canadian diversified market leader in this industry, and we are quite comfortable with the risk. As our overall position how we are feeling today, very comfortable. We have a limited underwriting portfolio, and we do not see it posing significant earning risks to us going forward nor do we see ourselves pulling back from our aggressive support for our clients.

Looking at our U.S. operations, we saw a solid contribution from both TD Banknorth and TD Ameritrade. TD Banknorth said they were going to earn $108 million and they delivered right on track with $109 million even with the much stronger Canadian dollar, a terrific result. We know there is still lot more to be done in TD Banknorth and we are continuing to drive forward to ensure to meet our organic growth objectives.

At TD Ameritrade, they delivered exactly what they said they would. They have successfully move TD Waterhouse customers to the TD Ameritrade platform and removing cost from their operations. They are now focused on their long-term potential to grow organically and deliver value to their shareholders. The current market turmoil has underscored the superiority of the TD Ameritrade business model. For example, with regard to TD Ameritrade’s banking relationship with TD Bank USA, TD Ameritrade gets its net spread with no cost, no capital, and no risk. The risk adjusted return is dramatically higher than if they had their own bank. The result for TD Ameritrade is a superior expense ratio, a higher ROE and a better multiple.

In addition, TD Ameritrade had access to the whole suite of banking products of one of the top 10 banks in North America at certainly attracted rates. TD Ameritrade can be a pure play brokerage firm with the resulting PE, while still offering the appropriate set of banking products. That is great for all TD Ameritrade shareholders. Now there are continues to be a number of rumors concerning possible deals with respect to TD Ameritrade. Let me underscore point TD Ameritrade, and we have made in the past without commenting any specific situations, which obviously will be inappropriate for me to do so.

We will be the TD Ameritrade Board that will decide whether or not to make an acquisition. TD is totally supportive of an acquisition that management and the board view right in time, right in strategy, and which creates value for all shareholders. Indeed the governance terms we had with TD Ameritrade, specifically provide for the opportunity for TD Ameritrade to make acquisitions using shares, which will dilute our stake and provide us with adequate time to bring it all our share owners back to our 39.9% ownership limit.

The key issues looking at deals are strategic. Joe Moglia has made clear on many occasions that he recognizes the value of consolidation opportunities, but the issues are complex. Specifically, Ameritrade before the TD Waterhouse acquisition and TD Ameritrade sense that acquisition have consistently for a pure play brokerage strategy that’s focus on moving from our pure transaction player to one which also gathers assets from long-term investors. This strategy has been proven to be very successful. TD Ameritrade remain open to pursuing acquisitions, which enhance shareholder value and continuing to try to find ways in which the deal with any issues that may arise in order to unlock opportunities. TD will support them in doing so.

Let me close our commentary on the current financial market turmoil. While no one likes to see this degree of disruption, there is a positive size benefit. The market is moving in recent years to under price risks, allow excessive leverage, and over reward unproven structures for significant pure liquidity. Now, we move aggressively out of those areas both on our own balance sheet and in areas where we have fiduciary responsibility. Re-pricing risk to reflect more accurately, the risk reward trade up will ultimately be a good thing, however, painful in the short run.

I would also like to briefly address the issue of non-bank sponsored asset backed commercial paper conduit. The Canadian banks have work together to stabilize issues in the Canadian market, and we are working proactively with our customers adversely affected by these events. So, let me look at TD in light of these market conditions. While reposition of the bank may have helped us avoid some of the most immediate impacts of the turmoil, we are not immune from knock-on effects if market turmoil slows capital market activity or feeds-in to a slower economy. Our business mix will be a strong positive and our relative performance should be very good. But a major showdown would produce lower earnings growth. So, far we haven’t seen it, even in our retail or commercial lending businesses. Indeed, the net result has been positive for our online discount bookers businesses, but the risks are clearly there. My own view is that the de-leveraging the system and the re-pricing of risks will take some time to work through. But capital markets are well capable of doing so. And over time, as more information comes out, the market will more and more begin to differentiate the players to better understand who is and who is not at risk. We will likely see a somewhat slower economy in 2008, but I don’t actually see a dramatic fall off. In this kind of scenario, TD will continue to perform well.

With that, I will turn things over to Colleen.

Colleen M. Johnston - Group Head Finance and Chief Financial Officer

Thanks very much, Ed. Let me take you through the third quarter. Please turn to slide four.

Let’s start with the quarterly highlights. Total Bank adjusted net income was $1.164 billion, up 31% from last year. This translated to adjusted EPS of $1.60, up 32% from last year. All of our businesses contributed to the growth, an excellent quarter overall. Our Canadian Retail businesses continue to perform very well, $723 million for the quarter, up 16% year-over-year.

Net income from our U.S. Retail businesses TD Banknorth and TD Ameritrade was $168 million, up 37% from last year. Our Wholesale net income of $253 million was up a strong 41% versus last year and up 17% from a strong second quarter of 2007. The Corporate segment posted income of $20 million on an adjusted basis, improved from a loss of $37 million last year. Our capital ratios remained strong with our Tier 1 ratio at 10.2% and the tangible common equity ratio at 7.1%. We recently completed our 5 million share buyback.

We continue to be very pleased with our productivity performance. At the all Bank level, adjusted revenues grew by 9% versus last year, while expenses on the same basis were up just 2%, a gap of 7%. This took our adjusted efficiency ratio to 57%.

One page five, we see reported net income of $1.1 billion or $1.51 per share. We have two items of note this quarter. First, amortization of intangibles was $91 million this quarter or $0.13 per share. Second, changes in fair value of credit default swaps hedging the corporate loan book. This pertains to mark-to-market on credit protection purchased on corporate loans. During the quarter, the market value of credit protection increased as credit spreads widened, which amounted to a gain of $30 million or $0.04 a share in the quarter.

Let’s take a look at our businesses starting with Canadian Retail. Turning to page seven, we include a basic P&L for our Canadian Retail business which combines both Canadian P&C and Canadian Wealth results. We are very pleased with our 16% year-over-year growth in this business.

Turning to page eight, we show results for the Canadian Personal and Commercial bank, TD Canada Trust. Net income of $597 million, a new record was up 14% from last year.

On page nine, we show revenues for TD CT of $2.1 billion, a new record up 9% from last year. The increase was supported by strong broad based growth. Impressive volume growth contributed to $128 million or 10% year-over-year growth in net interest income. In terms of volume growth, Visa cardholder was up 20%, while real estate secured lending was up 11%. On the business side, small business deposits were up 8%, commercial loans were up 11%, and commercial deposits were up 9%. Other income was up $44 million from higher sales and service fee revenue on strong core banking and Visa growth. Insurance revenues were up as well due to increases in our life business. Overall, we have experienced exceptional top line growth at TD CT. Revenue growth was strong at 9%, but below the double digit levels posted earlier this year. We expected this result and expect to see revenue growth in the high single digits in the coming quarters.

On page 10, we show our net interest margin for the quarter at 3.07% down one basis point from last year, but up two basis points versus last quarter. The increase from the prior quarter was largely attributable to higher mortgage breakage revenue. Margins are expected to remain relatively stable as we head into 2008.

Turning to page 11, provision for credit losses increased $47 million from last year to $151 million and $8 million from last quarter. Our personal banking provisions increased $48 million year-over-year, primarily due to unsecured lending volume growth coupled with higher loss rates on new accounts. Our PCL as a percentage of average assets is up one basis point versus last quarter. We expect continued volume growth in the Visa and other lending businesses to result in modest increase in PCLs for the next few quarters. Small business and commercial banking provisions remain at historically low levels with low new formations.

Please turn to page 12. Expenses of $1.50 billion were up 1% over last year and 2% quarter-over-quarter. Our efficiency ratio improved 200 basis points quarter-over-quarter to 50%, yet another new record. Continued strong top line growth coupled with disciplined expense growth resulted in the efficiency gains you see here. Our year-over-year expense growth was due largely to the addition of new branches, while higher volume related costs and variable compensation were mostly offset by lower discretionary spending primarily IT development. Our operating leverage of 8% was exceptional in the quarter and we expect it to narrow next quarter as expense growth normalizes.

Page 13, market share. Personal lending share has improved six basis points versus last year, while deposits are down 24 basis points. While we did have good deposit volume growth, it did not keep pace with the industry, most notably the non-traditional financial providers. We have seen impressive market share gains in our credit card business with our Visa market share up almost 70 basis points year-over-year. Market share for small business lending rose 59 basis points versus last year, while other business loans are up 23 basis points. Of note, our small business lending share has grown from under 16% two years ago to over 18% today. That is amazing progress.

Let’s turn to Canadian Wealth Management on page 14, which excludes TD Ameritrade. This business generated net income of $126 million, up 30% from last year, another very strong quarter.

Page 15. Total revenues of $587 million were up 19% from last year with strong growth across all businesses. Last quarter I mentioned a change in the structure of our mutual funds that impacts both revenues and expenses. Excluding this change revenues, grew by over 16% with a revenue to expense gap of 6%. Mutual fund revenues increased driven by 20% growth in assets under management. Revenues from the advice channels grew from last year mainly due to growth in both fees and net interest income. This was attributable to 18% growth in assets under administration and an increase in client facing advisors. Our goal in 2007 is to increase client facing advisors by 130, an ambitious, but achievable target with 58 advisors added year-to-date.

Discount brokerage revenues were up year-over-year on increased net interest income and higher volumes, but partly offset by lower commissions per trade. Expense growth of 15% or 10% excluding the mutual fund methodology change was mainly revenue related.

On page 16, we provide a breakdown of the TD mutual fund business as a percentage of both the banks and the larger industry group. Versus last quarter, market share for long-term mutual funds is down 2 basis point for the industry and 23 basis points for banks. Year-to-date, TD Asset Management is second overall in long-term fund net sales at $3.5 billion.

Page 18, shows our U.S. Retail business, which consists of TD Banknorth and TD Ameritrade. Net income was up 37% from last year.

Next slide, here we see the contribution made by the U.S. P&C segment to TD Bank Financial Group in both Canadian and U.S. dollars. Q3 net income was CAD109 million, up CAD47 million from last quarter’s adjusted results and up CAD41 million from Q3 of ’06. In U.S. Dollars, net income was up $40 million year-over-year and $48 million quarter-over-quarter. The increase from Q2 was due to higher average ownership, up from 59% to 91% and improved core earnings. These positive contributions were partially offset by the impact of the stronger Canadian Dollar during the quarter. As we outlined in our May 7th call, TD Bank USA is now part of TD Banknorth, and we moved certain corporate support cost to the corporate segment consistent with our other segments.

Please turn to slide 20. U.S. P&C revenue was $447 million in this quarter, up 3% both year-over-year and quarter-over-quarter. Managed reporting methodology changes accounted for roughly a 1.5 of the increase. I will focus my remarks on changes from Q2 of ’07. Contributing to the U.S. Dollar improvement was good growth in other income, mainly due to overdraft and ATM fees. Partly offsetting this was the margin decline of three basis points in the quarter, resulting from the flat yield curve and continued strong competition for deposits and high quality loans. With respect to volume growth versus last quarter, loans declined under 1%, but deposits were up slightly versus last quarter. The introduction of Earn Smart, TD Banknorth’s high yield money market account six months ago has helped to reverse the recent decline in personal banking deposits. To-date, over $2.4 billion in deposits has been generated by the product of which $900 million is new money. This is a great early indicator of success for this product.

Going forward as outlined during our Investor Day, our revenue initiatives will continue to be focused on the customer experience including longer branch hours, filling product gaps in the retail business line, simplifying our fee structure, and tailoring our compensation programs to align incentives with revenue growth and an improved customer experience.

Turning to slide 21. You can see U.S. Dollar PLCs were relatively flat in the quarter totaling $31 million versus $30 million last quarter. Both net impaired loans and net charge offs were up slightly from the prior quarter with net impaired loans as a percentage of total loans at 0.76%, up two basis points from the prior quarter. As we commented last quarter, problem loans were concentrated in for sale real estate. These loans are relatively well secured today, but will take some time to work out. TD Banknorth asset quality has shown signs of stabilization into Q4 of ’07. We are consciously optimistic, but the portfolio remains vulnerable to any further weakening in the U.S. economy.

Please turn to slide 22. In U.S. Dollars, non-interest expense was relatively flat versus last year, but declined by $8 million or 3% compared with Q2 of ’07, due mainly to the charitable foundation contribution in the previous quarter. Expenses in the current quarter were reduced by the impact of cost reduction initiatives offset by investment in business growth and seasonality. TD Banknorth is making good progress with cost control initiatives designed to reduce its annual expense base by 5% to 8% or $50 million to $80 million. As we reiterated our Investor Day, TD Banknorth expects to hit the top end of this range.

Turning to U.S. Wealth Management on slide 23, you can see TD Ameritrade reported record third quarter earnings of $159 million, up 14% from the prior year. TD's investment in TD Ameritrade generated $59 million of net income for the quarter, up 7% from the third quarter of last year. The increase was driven by stronger TD Ameritrade earnings and an increase in economic ownership, partially offset by a transfer pricing adjustment related to adoption of Basel II capital allocation to our TD Ameritrade investment. Quarter-over-quarter earnings from TD Ameritrade were down $4 million. This was due to this higher internal funding cost and the stronger Canadian Dollar, partially offset by an increase in TD Ameritrade earnings. Of note, the quarter includes a 3% decrease in average asset… average trades per day versus last year. However, recently released July trends show a 21% increase in trades per day from June.

Let’s now turn our focus to the Wholesale business. On slide 25, we see wholesale generated net income of $253 million, up 17% from last quarter, which was also a very strong quarter.

Let’s look at details on page 26. Wholesale revenue of $692 million was up $109 million or 19% from last year. We experienced stronger growth in our trading businesses with higher credit, foreign exchange, and equity derivative revenue benefiting from increased market volatility. Our total domestic franchise revenue also improved on higher lending and investing banking fees, which benefited from loans syndications and M&A activity. This was partially offset by lower fixed income results on weaker trading. Investing revenue was down driven mainly by lower security gains from merchant banking. Unrealized gains at over $1 billion were down modestly from the end of Q2 of ’07. Provision for credit losses of $8 million was down $7 million versus the previous year due to recovery of a single merchant banking exposure. The provision is related to the cost of credit protection on the lending portfolio. Expenses of $326 million increased 7% primarily due to higher variable compensation consistent with stronger financial performance partially offset by lower severance cost.

Please turn to page 27, for the punch line. Slide 27 answers your questions with respect to various exposures within our Wholesale Bank. As you can see, we have very limited exposures across Wholesale banking. This is a direct result of our shift in the risk returns strategy in Wholesale that Ed referenced earlier in his remarks. Ed also noted that we do not have any exposure to non-bank third party asset backed commercial paper, and since we did not distribute or sponsor this paper, there will be no P&L impact going forward. Overall, we are feeling very comfortable with our risk position.

Slide 29. As I mentioned earlier, our Corporate Segment posted income of $29 million this quarter, improved from a loss of $37 million last quarter… or last year. The year-over-year improvement was primarily due to lower and allocated expenses driven by lower U.S. brand advertising and certain favorable tax adjustments amounting to $29 million. At the gain on the sale of Ameritrade shares that exceeded our ownership cap came in at $6 million, a credit recovery in non-core and better securitization results also contributed to the improved results from the prior year. While we have definitely shown that this is… it is tough to predict the results in the Corporate Segment, we will try one more time to tell you that we do have a stated range of minus 20 to minus 40. We expect to be within this range in the fourth quarter.

In conclusion, we achieved excellent results this quarter following a great first half. All of our businesses posted higher numbers than last year. All have good momentum and are focused on executing their strategies. Year-to-date, we are up 25% in earnings per share. And we have increased our dividend by $0.04. Our dividends for 2007 will increase by 19% versus last year. We are feeling great about our 2007 results as we move into the fourth quarter.

And with that, I’ll turn it back to the Tim.

Question and Answer

Tim Thompson - Vice President, Investor Relations

Thanks, Colleen. As I mentioned at the beginning of the call, we are asking those participating in the question-and-answer portion to ask one question at a time. Certainly, feel free to join the queue several times if you have more than one question. So, with that, let’s get started.

First question? Jim?

James Bantis - Credit Suisse First Boston

Ed, you alluded to the change in branch hours just to focus on the topic, 50% increase in certain branches relative to the peers. Already number one in customer service, already had longer branch hours. How do you manage this stuff being overkill versus… in terms of your staffing requirements and just talk about maybe the benefits that you get from this?

W. Edmund - President and Chief Executive Officer

So, we think it’s important to play to your strength. We think that the competitive market around service has increased. And so, as a result we do a lot of research as you can imagine on this, and we know the customer still care about it. So, it doesn’t let us off the hook from our expense growth paradigm of 3%. By any means, it’s another investment, because we are already 25% more hours in the competition, we see this as an incremental add that so far the competition hasn’t matched. And so, we are quite comfortable that it drives our revenue and we keep our expense growth inside that revenue growth.

James Bantis - Credit Suisse First Boston

In the… when you think of some of the key products that benefit most from branch hours that should help revitalize the deposit base, market share that’s been eroding past couple of quarters?

W. Edmund - President and Chief Executive Officer

Yes and more particularly the one we care about most which is the core banking, thicker margin checking account, which is generally what’s driven by branch hours as opposed to the tighter margin term and high interest savings account.

Tim Thomson - Vice President, Investor relations

Thanks, Jim. Go ahead, Michael.

Michael Goldberg - Desjardins Securities

Thank you. My question’s on BCE just to follow-up on your comments, Ed. I feel like we don’t know the whole picture and obviously we are not going to know the whole picture. But one thing in particular, $3.8 billion commitment as I understand it overall that represents over 18% of your common equity at the end of the quarter. And I just find it hard to believe that you commit 18.4% of your common on any one transaction or counter party, non-government counter party unless you were awfully certain that your commitment was offset by equally solid take out commitments. So, how can you provide any comfort on this issue?

W. Edmund - President and Chief Executive Officer

I don’t think we are going to get into the details of this transaction to that extent. I am just telling you, I don’t think my track record tells you that I am a crazy man on risk. I am very comfortable. The question I always ask myself is knowing everything I know today, will I redo this transaction in a heart beat?

Michael Goldberg - Desjardins Securities

Thanks.

Tim Thomson - Vice President, Investor relations

Ian?

Ian De Verteuil - BMO Nesbitt Burns

Hi. A question for Bharat. When I look at the average loans and average deposits in Canadian Dollars which you show here even if I adjust for currency, it looks on a linked quarter basis as if there is no… as if it’s unchanged. And I think TD Bank USA is now included in here, I think came in this quarter. So, I would have thought that you would have done a bit better on the volume front. And isn’t there an opportunity to really break away from the pack here and go off the jumbos, sort of non-qualifying mortgages that other people seem to be walking away from.

Bharat B. Masrani - President and Chief Executive Officer, TD Banknorth Inc.

Yes. From a core perspective, you are right, we have had flat numbers. But there are some good signs on the commercial loan book. The pipeline is healthy, I would say. And we are starting to see some momentum on that side. However, it’s been offset by run off in the consumer lending book. To some extent is understandable given some of the issues that are going on in our markets. On the deposits side, I think overall deposits are slightly up thanks to the Earn Smart account that Colleen talked about. It was off set somewhat by declining government deposits, but I would say that was by design, because those are not very profitable, sometimes loss making deposits. So, overall, I feel good with return of the momentum we have got.

With respect to your question isn’t this a good opportunity. Yes, I would say it is a good opportunity, in a sense that at TD Banknorth we do not have any direct exposure to some of the problem areas that you talked about. And therefore, in a way, it gives us an opportunity. So, we did introduce over the weekend actually, a 30 year fixed rate home equity loan to offset some of the liquidity issues in the jumbo market, because we would be happy to take some of those loans. Those are good loans as long as the credit standards need. So, I feel that there is opportunity there. But having said that, some of the turmoil could result and headwinds as well for some of our commercial clients, and I am watching that. But overall, I feel good that some of the initiatives we announced on Investor Day on June 28 are taking hold and we are making progress.

Tim Thomason - Vice President, Investor Relations

We go to the phone lines please. First caller?

Operator

Your first question comes from Andre Hardy from RBC Capital Markets. Please go ahead.

André-Philippe Hardy - RBC Capital Markets

This question is probably for Colleen. We have got a narrower prime B spread. We have got rising wholesale rates. Can you talk about where that hurts margins? And also where you are able to increase margins as a results of spreads on some of your loans, they are probably expanding faster on the corporate side than your funding costs are rising? I guess net-net what is the impact of the movements in credits spreads on your margins?

Colleen M. Johnston - Group Head Finance and Chief Financial Officer

So, Andre, we talked about the key area for margins which is TD Canada Trust and we expect those margins to remain relatively stable. Obviously, we have a large retail deposit base there as rates are increased. We tend to see some widening of the margins. So, we expect our margins to remain relatively stable. And you might see some changes related to mix, the same would be true in TD Banknorth. But you are also seeing pretty much a stabilization of those margins as well versus last quarter.

André-Philippe Hardy - RBC Capital Markets

Are we going to see a hit or a benefit in the Wholesale Bank of the Corporate segment?

Colleen M. Johnston - Group Head Finance and Chief Financial Officer

No. I don’t think you will. I think that will be pretty neutral.

André-Philippe Hardy - RBC Capital Markets

Okay. Thanks.

Tim Thomason - Vice President, Investor Relations

Next caller please.

Operator

The next question comes from Brad Smith of Blackmont Capital. Please go ahead.

Brad Smith - Blackmont Capital

Bharat, my question relates to the slide on the Wholesale banking exposures. I was just wondering if you might be able to provide some detail on your non-subprime CDO exposures in terms of perhaps amounts and the sectors that you are exposed to. And also I was just interested if you could provide a little bit more detail as to what non-direct lending exposure you might have to hedge funds because I see here you have no direct exposure? Thank you.

Bharat B. Masrani - President and Chief Executive Officer, TD Banknorth Inc.

First the CDO exposure. I mean given our decision to exit the structured products, we have very little… we don’t really have any exposure to CDO’s that would formed of the category that would be difficult to value or be illiquid or have long model retail risk. With respect to the question on hedge funds exposures, we have always been very conservative in this area. And so, the only exposure we have is we will only take short-term interest rates soft of FX exposure maybe to a term up to two years. And we only really to do that on a collateralizes basis, meaning that all the exposure to us is be pledged cash to us. We have implemented caps several years ago. We are well within those caps. They haven’t changed recently, and it’s not really a material number.

Brad Smith - Blackmont Capital

Thank you. I was just wondering if you could put a dollar amount on the CDO exposures that you do have currently. What’s the aggregate number?

Bharat B. Masrani - President and Chief Executive Officer, TD Banknorth Inc.

No I think I… the only really CDO exposure that we are comfortable with is in the references index. The indexes, which are very liquid in the credit trading area. I would really prefer not to put a specific number on it.

Brad Smith - Blackmont Capital

Thank you.

Tim Thomason - Vice President, Investor Relations

Next caller please.

Operator

Your next question comes from Sumit Malhotra of Merrill Lynch. Please go ahead.

Sumit Malhotra - Merrill Lynch

Hi, good afternoon. This question is either for Colleen or Bob probably. If I just look at the total trading number in Wholesale banking, I see $308 million. I was hoping you could give us a little more color on the loss of $87 million we see in other income for the trading under the fair value option. That’s larger than we have seen since the standards came in. Could you tell us if we should look at those two numbers for trading and the fair value trading number in combination?

Colleen M. Johnston - Group Head Finance and Chief Financial Officer

Yes. Let me help you out on that one Sumit. So, the $87 million is… there is really two components of that. About three quarters of that number relates to loans that are in our trading book, and those are fully hedged. So, you would see an offset loans that are in our trading book and those are fully hedged. So, you would see an offset in the line in trading income. So, when you are looking at trading related income, that three quarters of the fair value amount as well as the trading income and other income should be factored into trading related income. The other component part as we have referenced in the footnote is related to insurance, that’s about one quarter of the amount, and you would see that as an offset to our insurance revenues also and other income. So, this is really a classification issue more than anything. But you are right it is a larger number that you have seen and I think that reflects movements in the …. in certainly in the loan trading side.

Sumit Malhotra - Merrill Lynch

Okay. To go along with it, would there be any… when you mentioned loan trading, will there be any issue or any offset with higher net interest income in wholesale, because that does seem to be a higher number even act to the trading. Is that have anything to do with this--?

Colleen M. Johnston - Group Head Finance and Chief Financial Officer

I think that’s what’s driving your model, precisely is that if in fact, if you factor in those three quarters of the 87 and do the calculation on that then you will come up with a number that looks more normalized versus Q2 and the prior Q3.

Sumit Malhotra - Merrill Lynch

Okay. Thanks.

Tim Thomason - Vice President, Investor Relations

Next caller please.

Operator

Your next question comes from Shannon Cowherd from Citigroup. Please go ahead.

Shannon Cowherd - Citigroup

Hi. I realized it’s not that large, but could you give some color to the magnitude of the contribution from VFC?

Bharat B. Masrani - President and Chief Executive Officer, TD Banknorth Inc.

Sure. I would say that, yes it’s not that large. But it continues to grow exactly on plan. Year-over-year the performance is not that high. I think we indicated last quarter that because it is now built into our year-over-year run rate, but was a bump up of over 1% in revenues for example has now built into the base. So, it just continues to grow nicely as we expected it to.

Tim Thomason - Vice President, Investor Relations

Next caller.

Operator

The next question comes from Mario Mendonca of Genuity Capital Markets. Please go ahead.

Mario Mendonca - Genuity Capital Markets

Good afternoon. The question for Ed. In your closing remarks, you suggested that… I am talking about the future, you said that retail and commercial conditions still look good despite all the turmoil, nothing is really deteriorating. Were you being specific, in so far as leaving out the capital markets environment, maybe assuming… it might be more build [ph] to someone else, but what’s the outlook on capital markets specifically trading, because that was obviously a big quarter?

W. Edmund - President and Chief Executive Officer

Why don’t I give this over to Bob? So, I think it is notoriously difficult to predict capital markets, but I am sure he is up to it.

Robert E. Dorrance - Chairman, Chief Executive Officer and President

Thanks. Did really, well, last time. I guess the… our view would be given the turbulence that’s happening in capital markets in August that it’s providing both opportunities in trading and also risk in trading. So, I think until this quiets down a little bit and stabilizes, I would consider more of a head win for the Wholesale Banking business. We had a quarter in Q3 where all the major businesses did well. They weren’t all at records, but when all major businesses are doing well and we are not showing any losses in credit losses and we are not… expenses under a good control, obviously, gives you an idea of what… what one might make in a quarter when every thing is firing on all cylinders. That really happens. So, I don’t think… we don’t look at Q3 and say well that’s an expectation of a run rate and Wholesale banking. What we do look at, however, is what business is that we do have and they are not all correlated. There is variety of different businesses though we have in wholesale. As we enter a period where we do have a head win, some of those that are more transactionally driven will suffer more. We do not, however, have the only transaction businesses, and we continue to have high expectations in the non-transaction businesses.

So, difficult markets means head wins in Wholesale like where we are in terms of the businesses that we have. We like the risk that we have. We don’t see large volatility in our business. We don’t see major credit losses. We don’t see major trading losses, but we do see head wins. And I think as Ed alluded to the fourth quarter and maybe this is why I didn’t put it in… the fourth quarter for Wholesale doesn’t tend to be a great quarter. If you look historically at where we are, we don’t see that forecast changing. As you look into ’08, we have good strategies. We are focused on executing them. And we will see what the earnings derive there from. But we are not looking for big volatility.

Mario Mendonca - Genuity Capital Markets

Not changing your… the range you have historically given us for Wholesale?

Robert E. Dorrance - Chairman, Chief Executive Officer and President

I am not.

Mario Mendonca - Genuity Capital Markets

I can’t change it for you.

W. Edmund - President and Chief Executive Officer

In guessing what the range is for the center, we have not done particularly good and in guessing the number for Bob, we have not been particularly good. I do think that if that’s were probably… we will probably have nudged that number upward. We will obviously achieve more progress in building our core franchise business faster than we thought, we were going to make. So, I think it’s stronger.

On the other hand, there is any doubt that this year is an unusually… going to turn out to be an unusually good year. I think when we look at our overall businesses and if we start with the world that we are 80, 20 business, since we got 80% sitting in the retail business, that’s pretty solid constant growth potential in it. And secondly, when we look historically, when people associate volatility in the Wholesale business, it’s less driven from their revenue line than it is from bad things happening to them either on the PCO side or trading losses. And we have addressed both of those issues in our business. It doesn’t mean you won’t have trading losses, but the big downside we have taken out. So, we do think that we will end up with a dealer that I think will has to retrieve probably what we did in 2007. But as clearly will be a solid performer because of the nature of the dealer we have built.

Mario Mendonca - Genuity Capital Markets

But just to be clear, the 525 to 625 you historically given us, you don’t want to move away from that right now?

W. Edmund - President and Chief Executive Officer

We haven’t formerly moved that number up, but I would admit that 525 sounds like a very low number today given what we have been able to produce.

Mario Mendonca - Genuity Capital Markets

Despite the environment?

W. Edmund - President and Chief Executive Officer

Yes.

Mario Mendonca - Genuity Capital Markets

Thank you.

Tim Thomason - Vice President, Investor Relations

Next caller please.

Operator

The next question comes from John Aiken from Dundee Securities. Please go ahead.

John Aiken - Dundee Securities

Good afternoon. I know you disclosed that you didn’t have any exposure to the third party asset back commercial paper conduits. And my understanding is that you are not very big in within the bank on, but taking a look at the Montreal Accord, if it does… if it ends up dissolving or doesn’t help the liquidity issue, is there any potential or what you see is the risk of infection coming through in terms of some of your other domestic lending volume growth?

W. Edmund - President and Chief Executive Officer

I am not sure, I fully understand the question. I think if I can comment, I think one of the things that was a very positive outcome over the last few weeks was the six major banks all acted together to say we have to drop certain Maginot lines here and start stop contingent. And I think we ended up collectively deciding that Maginot line was bank conduits versus non-bank conduits. And it wasn’t… there is no question you could go through and say what the good people or bad things happen on bank conduits and good things happen on non-bank conduits. So, might not be a perfect split. But I think when you are dealing with markets, you got to make life pretty simple. And so, we ended up making that simple distinction to say we were going to collectively act together to ensure the good operating of the bank conduits. I think we will… we have done that successfully and I think that’s a great outcome and then there is effect of the non-bank conduits as we indicate we really have zero earnings exposure here because we make sure that it wasn’t in our system, either in our client’s accounts or in the things that we put them in. So, we have no exposure.

John Aiken - Dundee Securities

Thanks, Ed.

Tim Thompson - Vice President, Investor Relations

Next caller please.

Operator

Your next question comes from Ohad Lederer of Veritas Investment Research. Please go ahead.

Ohad Lederer - Veritas Investment Research

Good afternoon. Just a question about Wholesale markets. The Bank has exited global structure products, dropped market risk over the last couple of years. I want to talk about not going into the serve longer tail… types of risks. The one number that does seem to really jump out is credit default swaps. Overall, notional amount of the trading is up very significantly. The swaps greater than five years in term. The growth rate is even higher. Just wondering, I guess a general question and a specific question, in general terms could you talk about the risks in that business? What proprietary versus client, what the revenue contribution is? And then specifically, I understand a lot of the non-bank ABC conduit have been using CDS to synthetically create some of their assets. Does TD do any trading of that sort with the conduits?

W. Edmund - President and Chief Executive Officer

Why don’t I start with the trading part of the business? On our credit trading business, which is a proprietary business that we run as a relative credit trading strategy where we are trading… where we would be trading bonds versus CDS for example on a hedge basis. So, what we look for is relative value opportunities within credit markets between asset classes, between term structure et cetera. We look for our options in bonds et cetera that you can monetize through the use of credit default protection. So, we tend not to take directional views on credit. We tend to take relative views on credit, and we would use credit default swaps in terms of building relative value positions. In terms of counterparty, I would let Mark Chauvin talk about that.

Mark R. Chauvin - Chief Risk Officer

I think to the later part of your question, do we saw credit default protection from the synthetic items that would be in the conduits to third parties? We do not. We have strict standards on what qualifies as acceptable CDS protection and that would not be a class that would fall into it. In terms of the risk within the overall credit trading book, I mean, the standards that we use are to make sure that where we do source protection from indexes, which are extremely liquid. There is clear market, and we have the ability to independently verify the valuations at all times. So, we are very comfortable with what we have and what we see at a point in time. And it’s a large book, but I mean reality is that they are offsetting. I mean it’s a long and short position. And on a net basis, we keep them with what we consider to be reasonable risk tolerance limits.

Ohad Lederer - Veritas Investment Research

Okay. Thank you.

Tim Thomason - Vice President, Investor Relations

Let’s go back to the floor here. Ian?

Ian De Verteuil - BMO Nesbitt Burns

Bob, I know these are tough markets, but see I am sling there. It’s tougher than I thought.

Robert E. Dorrance - Chairman, Chief Executive Officer and President

Happened in August.

Ian De Verteuil - BMO Nesbitt Burns

When I look at the trading revenues, one of the things leaps out is the TEB component. When you think about the risk… market is dealt with volatility and liquidity, but surely there is tax risk on this business. I mean it seems to be over 50% of the revenues. And if you… TEB just 161 and total revenues of 308. So, TEB has a huge numbers, the percent of this. I mean how can you make us comfortable in the… that’s a little risk business?

Robert E. Dorrance - Chairman, Chief Executive Officer and President

I think… and Ed make… speak to this as well. I think we are… we take a very conservative view on tax line in TDBFG overall. So, I think, what we look to do in is tax strategies that we are using to… that generate TEB revenue. We are comfortable with what we see the risk that we are taking there. I am not the tax expert. It’s a… we have a very, I think, conservative tax area in terms various interfaces that we have with tax at TD that’s… Ed.

W. Edmund - President and Chief Executive Officer

I guess what I would say to build on Bob’s point. I think what you have is a consistency of culture. It’s very difficult to run institutions and run inconsistent cultures either you tend to have in one direction or go in the other. And when you start going in a particular direction, I think, part of the reason you are getting the results that you are getting today, part of the reason why even on our balance sheet, you don’t see us running into trouble is that we all have a view. And we have a view that says, we have the banking business, it’s got to be one of the most spectacular business in the world to be in if only people would not have accidents. And with the performance between great companies and not great companies isn’t distinguished year-to-year. What it is, is do you avoid all the pitfalls. And so, I think even in respective tax, you will find the same conservatism built into us that we want to make sure we do nothing that would ever get us into any trouble.

Tim Thomason - Vice President, Investor Relations

Jim?

James Bantis - Credit Suisse First Boston

Yesterday we saw that Banc of America has stepped into provide some support to countrywide. And I know the Banknorth model on near term is more of an organic one. But when you see these difficult times and perhaps they are more than a headwind. But if you see a competitor in the local marketplace that’s under distress, is this an opportunity for the bank to take advantage of those situations?

W. Edmund - President and Chief Executive Officer

I think obviously, we watch this closely. There actually have been a couple of sales of small banks in our footprint that we might have gone on. We didn’t see a price reduction in them that we thought correspond to what’s going on here. So, as I said in previous meetings, we wanted Banknorth to focus on organic. We get its game plan down. My nightmare scenario is that something comes along that’s strategic, that I can’t… I really can’t miss and it comes at a price and I am prepared to pay. And so far that hasn’t happened. But obviously that dilemma could still arise in the circumstances, but we did pass on a couple of deals.

James Bantis - Credit Suisse First Boston

Okay. Thank you.

Tim Thomason - Vice President, Investor Relations

Michael?

Michael Goldberg - Desjardins Securities

TD Canada Trust or Canadian Personal and Commercial net interest revenue was 13.88 this quarter, and it’s up significantly from the second quarter, which is a short quarter. If I adjust for the number of days in the second quarter, it’s up about 4.6%. And if you look at the margin increase few basis points that would account for both 0.6% growth. So, I am wondering where the other 4% came from. I noticed that you commented that mortgage breakage fees for revenue contributed to higher net interest revenue. How much was that? How much did that account for the increase? And what else contributed to the increase in the quarter?

W. Edmund - President and Chief Executive Officer

So, Michael, we are not going to disclose individual items. But mortgage breakage was an uptick and due to what is a great underlying trend, which is that the actual real estate secured lending market is quite strong and robust. And whenever that happens more customers look to refinance. I am just looking at some of the breakdown, I have slightly different, but the numbers than you might have calculated. But the base volume growth sequentially, linked quarters is accounts for a couple of points of our overall 5.8% growth. It’s a pretty broad based. I am just looking at the various different pieces that I look at. Sales and service fees, home and auto insurance, days impact. So, there is a number of positive ones that all add up to that 5.8%. So, it’s pretty broad based. We are quite comfortable with it.

Michael Goldberg - Desjardins Securities

Was the mortgage breakage… was that the biggest component?

W. Edmund - President and Chief Executive Officer

The mortgage breakage was… no, not the biggest point.

Tim Thomason - Vice President, Investor Relations

Callers please on the phone? Next one?

Operator

Next question comes from Darko Mihelic of CIBC World Markets. Please go ahead.

Darko Mihelic - CIBC World Markets

Hi, my question is for Bob. I will squeeze two in here. Bob, have you lowered trading risk limits, and secondly, being this far into August. What can you tell us about the revenue so far?

Robert E. Dorrance - Chairman, Chief Executive Officer and President

No, we haven’t… [Technical Difficulty]. No, we have not changed our trading risk limits. I mean obviously, we haven’t changed our limits, I think different bests would respond to lower levels of liquidity in the marketplace by just adopting less risk where that’s suitable. And I don’t think I want to get into commenting about monthly progress in trading.

Darko Mihelic - CIBC World Markets

Okay. Thank you.

Tim Thomason - Vice President, Investor Relations

We will take one last question from the line, please.

Operator

The next question is a follow-up question from Andre Hardy from RBC Capital Markets. Please go ahead.

André-Philippe Hardy - RBC Capital Markets

Thanks. One for Tim Hockey. Tim, as you retool the credit scoring on the unsecured lending machine or whatever you call it. You had some vintages and higher losses than you thought. Do you have indications that the retooling is working in terms of bringing those losses down.

Timothy D. Hockey - Co-Chair, TD Canada Trust

Yes. There was a slight uptick as you know in the actual gross amount. One way to think about that in PCL this last quarter is a little over half of the growth was in the PCL number was actually due to growth in the underlying book. A couple it was the remaining operational issues that we had talked about. So, those are being fixed and about one I would say that eight growth quarter-over-quarter was due to the credit quality issues that we talked about. The tools that we have now put in place, we have now started to implement as series of quick fixes and then there is a series of longer term fixes that will be implemented. We have quite a strong degree of faith that the actual tool itself and the precision of the changes will be effective. But the issue, of course, with these is that it will take some time as in six to 18 months to actually verify 100% that it had the desired effect. But we are quite confident of these changes. We will start proving themselves out.

André-Philippe Hardy - RBC Capital Markets

Okay. Thank you.

Tim Thomason - Vice President, Investor Relations

Before ending the call, I will ask Ed to make some concluding remarks.

W. Edmund - President and Chief Executive Officer

Well, the first one thing that I want to say is that I have very limited opportunities to take money off my management team on the golf course as you will understand. But you can’t always suck them in they have got an old foggy like me would not say open at eight six days straight impact great. So, here’s the $10 for having done that.

Anyway, it was obviously from my point of view a great quarter and as I say our better quarter because I think in addition to the numbers I think it demonstrated value of all the strategic moves that we make, the strength of our fundamental businesses that we have been managing to build. I think our team is very clearly… we are extremely comfortable with what our approach to risk has been both on the credit and the market side. And I think that making those changes has paid off. And I think when we look forward, obviously, 2007 is going to be a great year. We will, obviously, clearly exceed our earning objectives for 2007, but we remain very positive about 2008. Thank you.

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Source: Toronto Dominion Bank F3Q07 (Qtr End 7/31/07) Earnings Call Transcript
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