e425
Filed by The Toronto-Dominion Bank
Pursuant to Rule 425 under the Securities Act of 1933
and deemed filed pursuant to Rule 14a-12 under the
Securities Exchange Act of 1934
Subject Company: The South Financial Group, Inc.
Commission File No.: 0-15083
This filing, which includes (i) communications made available to employees of The
Toronto-Dominion Bank and/or TD Bank, Americas Most Convenient Bank on June 1, 2010 and (ii)
communications made available on the website of The Toronto-Dominion Bank on June 1, 2010, may
contain forward-looking statements within the meaning of the Private Securities Litigation Reform
Act of 1995 and comparable safe harbour provisions of applicable Canadian legislation, including,
but not limited to, statements relating to anticipated financial and operating results, the
companies plans, objectives, expectations and intentions, cost savings and other statements,
including words such as anticipate, believe, plan, estimate, expect, intend, will,
should, may, and other similar expressions. Such statements are based upon the current beliefs
and expectations of our management and involve a number of significant risks and uncertainties.
Actual results may differ materially from the results anticipated in these forward-looking
statements. The following factors, among others, could cause or contribute to such material
differences: the ability to obtain the approval of the transaction by The South Financial Group,
Inc. shareholders; the ability to realize the expected synergies resulting from the transaction in
the amounts or in the timeframe anticipated; the ability to integrate The South Financial Group,
Inc.s businesses into those of The Toronto-Dominion Bank in a timely and cost-efficient manner;
and the ability to obtain governmental approvals of the transaction or to satisfy other conditions
to the transaction on the proposed terms and timeframe. Additional factors that could cause The
Toronto-Dominion Banks and The South Financial Group, Inc.s results to differ materially from
those described in the forward-looking statements can be found in the 2009 Annual Report on Form
40-F for The Toronto-Dominion Bank and the 2009 Annual Report on Form 10-K of The South Financial
Group, Inc. filed with the Securities and Exchange Commission and available at the Securities and
Exchange Commissions Internet site (http://www.sec.gov).
The proposed merger transaction involving The Toronto-Dominion Bank and The South Financial
Group, Inc. will be submitted to The South Financial Group, Inc.s shareholders for their
consideration. Shareholders are encouraged to read the proxy statement/prospectus regarding the
proposed transaction when it becomes available because it will contain important information.
Shareholders will be able to obtain a free copy of the proxy statement/prospectus, as well as other
filings containing information about The Toronto-Dominion Bank and The South Financial Group, Inc.,
without charge, at the SECs internet site (http://www.sec.gov). Copies of the proxy
statement/prospectus and the filings with the SEC that will be incorporated by reference in the
proxy statement/prospectus can also be obtained, when available, without charge, by directing a
request to The Toronto-Dominion Bank, 15th Floor, 66 Wellington Street West, Toronto, ON
M5K 1A2, Attention: Investor Relations, 1-866-486-4826, or to The South Financial Group, Inc.,
Investor Relations, 104 South Main Street, Poinsett Plaza, 6th Floor, Greenville, South
Carolina 29601, 1-888-592-3001.
The Toronto-Dominion Bank, The South Financial Group, Inc., their respective directors and
executive officers and other persons may be deemed to be participants in the solicitation of
proxies in respect of the proposed transaction. Information regarding The Toronto-Dominion Banks
directors and executive officers is available in its Annual Report on Form 40-F for the year ended
October 31, 2009, which was filed with the Securities and Exchange Commission on December 03, 2009,
and in its notice of annual meeting and proxy circular for its 2010 annual meeting, which was filed
with the Securities and Exchange Commission on February 25, 2010. Information regarding The South
Financial Group, Inc.s directors and executive officers is available in The South Financial Group,
Inc.s proxy statement for its 2010 annual meeting, which was filed with the Securities and
Exchange Commission on April 07, 2010. Other information regarding the participants in the proxy
solicitation and a description of their direct and indirect interests, by security holdings or
otherwise, will be contained in the proxy statement/prospectus and other relevant materials to be
filed with the SEC when they become available.
THE FOLLOWING IS A COMMUNICATION MADE AVAILABLE ON THE WEBSITE OF
THE TORONTO-DOMINION BANK ON JUNE 1, 2010
TD BANK FINANCIAL GROUP
Q2 2010 EARNINGS CONFERENCE CALL
MAY 27, 2010
DISCLAIMER
THE INFORMATION CONTAINED IN THIS TRANSCRIPT IS A TEXTUAL REPRESENTATION OF THE
TORONTO-DOMINION BANKS (TD) Q2 EARNINGS CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO PROVIDE AN
ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING
OF THE SUBSTANCE OF THE CONFERENCE CALL. IN NO WAY DOES TD ASSUME ANY RESPONSIBILITY FOR ANY
INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON TDS WEB SITE OR IN THIS
TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE WEBCAST (AVAILABLE AT TD.COM/INVESTOR) ITSELF AND TDS
REGULATORY FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
FORWARD-LOOKING INFORMATION
From time to time, the Bank makes written and oral forward-looking statements, including
in this presentation, in other filings with Canadian regulators or the U.S. Securities and Exchange
Commission (SEC), and in other communications. In addition, representatives of the Bank may make
forward-looking statements orally to analysts, investors, the media and others. All such statements
are made pursuant to the safe harbour provisions of applicable Canadian and U.S. securities laws,
including the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements
include, among others, statements regarding the Banks objectives and priorities for 2010 and
beyond and strategies to achieve them, and the Banks anticipated financial performance.
Forward-looking statements are typically identified by words such as will, should, believe,
expect, anticipate, intend, estimate, plan, may and could.
By their very nature, these statements require the Bank to make assumptions and are subject to
inherent risks and uncertainties, general and specific. Especially in light of the uncertainty
related to the current financial, economic and regulatory environments, such risks and
uncertainties many of which are beyond the Banks control and the effects of which can be
difficult to predict may cause actual results to differ materially from the expectations
expressed in the forward-looking statements. Risk factors that could cause such differences
include: credit, market (including equity, commodity, foreign exchange and interest rate),
liquidity, operational, reputational, insurance, strategic, regulatory, legal and other risks, all
of which are discussed in the Managements Discussion and Analysis (MD&A) in the Banks 2009 Annual
Report. Additional risk factors include changes to and new interpretations of risk-based capital
guidelines and reporting instructions; increased funding costs for credit due to market illiquidity
and competition for funding; the failure of third parties to comply with their obligations to the
Bank or its affiliates relating to the care and control of information; the use of new technologies
in unprecedented ways to defraud the Bank or its customers and the organized efforts of
increasingly sophisticated parties who direct their attempts to defraud the Bank or its customers
through many channels; the ability to obtain the approval of the proposed transaction with The
South Financial Group, Inc. by its shareholders; the ability to realize the expected synergies
resulting from the transaction in the amounts or in the timeframe anticipated; the ability to
integrate The South Financial Group, Inc.s businesses into those of The Toronto-Dominion Bank in a
timely and cost-efficient manner; and the ability to obtain governmental approvals of the
transaction or to satisfy other conditions to the transaction on the proposed terms and timeframe.
We caution that the preceding list is not exhaustive of all possible risk factors and
other factors could also adversely affect the Banks results. For more detailed information, please
see the Risk Factors and Management section of the MD&A, starting on page 65 of the Banks 2009
Annual Report. All such factors should be considered carefully, as well as other uncertainties and
potential events, and the inherent uncertainty of forward-looking statements, when making decisions
with respect to the Bank and undue reliance should not be placed on the Banks forward-looking
statements. Finally, there can be no assurance that the Bank will realize the anticipated benefits
related to the acquisition of the South Financial Group, Inc.
Material economic assumptions underlying the forward-looking statements contained in this
presentation are set out in the Banks 2009 Annual Report under the heading Economic Summary and
Outlook, as updated in the First Quarter 2010 Report to Shareholders; and for each of the business
segments, under the headings Business Outlook and Focus for 2010, as updated in the First Quarter
2010 Report to Shareholders under the headings Business Outlook.
Any forward-looking statements contained in this presentation represent the views of
management only as of the date hereof and are presented for the purpose of assisting the Banks
shareholders and analysts in understanding the Banks financial position, objectives and priorities
and anticipated financial performance as at and for the periods ended on the dates presented, and
may not be appropriate for other purposes. The Bank does not undertake to update any
forward-looking statements, whether written or oral, that may be made from time to time by or on
its behalf, except as required under applicable securities laws.
1
ADDITIONAL INFORMATION
The proposed merger transaction involving The Toronto-Dominion Bank and The South
Financial Group, Inc. will be submitted to The South Financial Group, Inc.s shareholders for their
consideration. Shareholders are encouraged to read the proxy statement/prospectus regarding the
proposed transaction when it becomes available because it will contain important information.
Shareholders will be able to obtain a free copy of the proxy statement/prospectus, as well as other
filings containing information about The Toronto-Dominion Bank and The South Financial Group, Inc.,
without charge, at the SECs internet site (http://www.sec.gov). Copies of the proxy
statement/prospectus and the filings with the SEC that will be incorporated by reference in the
proxy statement/prospectus can also be obtained, when available, without charge, by directing a
request to The Toronto-Dominion Bank, 15th floor, 66 Wellington Street West, Toronto, ON M5K 1A2,
Attention: Investor Relations, 1-866-486-4826, or to The South Financial Group, Inc., Investor
Relations, 104 South Main Street Poinsett Plaza, 6th Floor, Greenville, South Carolina 29601,
1-888-592-3001.
The Toronto-Dominion Bank, The South Financial Group, Inc., their respective directors and
executive officers and other persons may be deemed to be participants in the solicitation of
proxies in respect of the proposed transaction. Information regarding The Toronto-Dominion Banks
directors and executive officers is available in its Annual Report on Form 40-F for the year ended
October 31, 2009, which was filed with the Securities and Exchange Commission on December 03, 2009,
and in its notice of annual meeting and proxy circular for its most recent annual meeting, which
was filed with the Securities and Exchange Commission on February 25, 2010. Information regarding
The South Financial Group, Inc.s directors and executive officers is available in The South
Financial Group, Inc.s proxy statement for its most recent annual meeting, which was filed with
the Securities and Exchange Commission on April 07, 2010. Other information regarding the
participants in the proxy solicitation and a description of their direct and indirect interests, by
security holdings or otherwise, will be contained in the proxy statement/prospectus and other
relevant materials to be filed with the SEC when they become available.
2
CORPORATE PARTICIPANTS
Rudy Sankovic
Toronto-Dominion Bank IR
Ed Clark
Toronto-Dominion Bank President and CEO
Colleen Johnston
Toronto-Dominion Bank Chief Financial Officer
Mark Chauvin
Toronto-Dominion Bank Chief Risk Officer
Bharat Masrani
Toronto-Dominion Bank Group Head, U.S. Personal and Commercial Banking
Tim Hockey
Toronto-Dominion Bank Group Head Canadian Banking
Bob Dorrance
Toronto-Dominion Bank Group Head Wholesale Banking
CONFERENCE CALL PARTICIPANTS
Michael Goldberg
Desjardins Securities
John Reucassel
BMO Capital Markets Analyst
Ohad Lederer
Veritas Investment Research Analyst
Brad Smith
Stone Cap Securities Analyst
Robert Sedran
CIBC World Markets Analyst
Andre-Phillippe Hardy
RBC Capital Markets Analyst
Cheryl Pate
Morgan Stanley Analyst
Darko Mihelic
Cormark Securities Analyst
Sumit Malhotra
Macquarie Capital Analyst
Mario Mendonca
Canaccord Genuity Analyst
Peter Routledge
National Bank Financial Analyst
3
PRESENTATION
Rudy
Sankovic Toronto-Dominion Bank SVP, Investor Relations
Good afternoon and welcome to the TD Bank Financial Group Second Quarter 2010 Investor
Presentation. My name is Rudy Sankovic and Im the Head of Investor Relations for the Bank. Well
begin todays presentation with strategic remarks from Ed Clark, the Banks CEO, after which
Colleen Johnston, the Banks CFO, will present our second quarter operating results. Mark Chauvin,
our Chief Risk Officer will then offer comments on credit quality. After that, well entertain
questions from those present in the room and from pre-qualified analysts and investors on the
phone.
Also present today to answer your questions are Bob Dorrance, Group Head Wholesale Banking, Bernie
Dorval, Group Head of Insurance, Bill Hatanaka, Group Head Wealth Management, Tim Hockey, Group
Head Canadian banking and Bharat Masrani, Group Head US P&C Banking. As in the past, were trying
to keep the call to about an hour; and Ed, Colleen, and Marks remarks will be about half of that
time and the reminder will be for Q&A.
Please turn to slide two to go over the legal comments. At this time, I would like to caution our
listeners by stating the following on behalf of those speaking today. We know that this
presentation contains forward-looking statements and that there are risks that actual results could
differ materially from what is discussed. Any forward-looking statements contained in this
presentation represent the views of Management only as of the date hereof and are presented for
purposes of assisting the Bank shareholders and analysts in understanding the banks financial
position, objectives, and priorities, and anticipated financial performance as that and for the
periods ended on the dates presented and may not be appropriate for any other purposes.
Certain material factors or assumptions were applied in making these forward-looking statements.
For additional information on these material factors and assumptions that could cause actual
results to differ please see our Q2 2010 MD&A and 2009 Annual Report, which can be found on our
website at TD.com. We also refer you to our press release regarding our agreement to acquire the
South Financial Group, Inc as well as TDs and South Financials filings with the SEC. Also, parts
of this presentation relating to the South Financial transaction will be addressed in the
prospectus and proxy statement to be filed with the SEC. We urge you to read it when it becomes
available as it will contain important information. Information about the particulars in the
solicitation is also contained in our annual report and the proxy circular filed with the SEC and
in South Financials proxy statement for its annual meeting filed with the SEC.
With that, I will turn it over to Ed Clark.
Ed Clark Toronto-Dominion Bank President and CEO
Thanks, Rudy and thank you all for joining us this afternoon. Colleen is going to be up shortly to
discuss our second quarter results in detail, but Im going to start by sharing my thoughts on our
performance this quarter and then give you a sense of where we feel things are headed for the rest
of the year.
Well, we had another unbelievably strong quarter, adjusted earnings were up over were CAD$1.2
billion, but they were up 21% from last year. Our earnings per share growth was 19% and would have
been higher, if not there had been a significant rise in the Canadian dollar. All of our businesses
performed exceptionally well with strong double digit growth delivered by every segment. Our
earnings were negatively impacted by our corporate segment. Youll recall in the first quarter that
our corporate segment results were actually better than our expectations, and for the first half of
2010, our results in this
4
segment are about in line with what we would expect. Colleen is going to go into this in a few
minutes in more detail.
Our performance was clearly fueled by record earnings in TD Canada Trust, where they delivered
earnings growth of 29%. The strong housing market in Canada continued to sustain our volumes in
real estate secured lending and the improving economy benefited our growing business bank. Our
Wealth Management business saw earnings rise 42%. The story here is the steady improvement in
equity markets which is also helping our asset gathering and sales of long term mutual funds. Were
also seeing improved net interest margin. Wholesale earnings are starting to normalize, but still
rose 27% from a year ago. All of our wholesale businesses performed well in a relatively stable
market, even though earnings are down quarter-over-quarter as we made the predicted return to more
normal markets.
Turning to TD Bank, Americas Most Convenient Bank. Our performance was very strong and saw
adjusted earnings growth of 45% on a US dollar basis. Now, the major story here is that the credit
cycle in the United States seems to be improving faster than we expected. PCLs have moved below
first quarter levels and impaired loan formations were stable. We remain pleased with the
underlying fundamentals of our business. Margins have improved, loan and deposit volumes continue
to trend up, and we continue to invest for the future, which included the opening of 11 new stores
this quarter.
Our balance sheet remains very strong. The Tier 1 capital ratio hit a high of 12% and risk weighted
assets remain stable. This was also a very active quarter for TD on the mergers and acquisition
front with two announcements in the last six weeks. First, we acquired Riverside, First Federal,
and American First in Florida with the assistance of the Federal Deposit Insurance Corporation.
This transaction expanded our existing presence in the rapidly growing and deposit rich Florida
market. Since we announced this transaction, weve had further opportunities to tour the locations
and were feeling even better about what we see. Were particularly impressed with the strength of
employees that we acquired in these transactions. There is lots of potential in these great stores.
We also said we would look at small unassisted deals where the risks are understandable and
manageable. The offer to buy the South Financial Group that we announced after the quarter ended is
exactly that kind of transaction. South Financial lets us bolster our presence in the Florida
market even more. We also get a strong franchise in the Carolinas. More importantly, we acquire the
management talent to drive our growth in the southern United States. This deal is subject to
approval by the regulators and the South Financial shareholders and is expected to close in TDs
third quarter of 2010 promptly following receipt of those approvals. We believe that this will
prove to be an excellent deal for us. It is a high IRR and will be accretive to our US strategy.
Weve got a great opportunity here to introduce our retail and commercial banking model throughout
South Financials footprint. Weve also done extensive due diligence with the companys management
team and feel very comfortable with how we mark the book.
So what are we going to have after all these deals close? Well be a top 10 player in Florida with
$7.5 billion in deposits and 169 stores, and South Carolina will be a top five player with 83
stores and $5.5 billion in deposits. Well have added established commercial banking assets, a
solid network of stores and attractive to growing markets, and excellent risk managers who will be
part of the growth story going forward.
In terms of our outlook its clear that we performed extremely well through the recovery in a tough
business environment. On the economic front, everybody is trying to figure out where the world is
going. On the one hand, the employment picture, GDP growth, the improvement in credit markets are
all encouraging signs on both sides of the border. On the other hand, there are significant
concerns about several European governments and their banking systems. Were not worried about
sovereign risk per se as we have nominal credit exposure to Greece and Portugal and our exposure to
other weaker European countries is manageable. More worrying is the potential domino effect that
European problems could have on the United States, which could in turn impact Canadas economy.
This means that economic growth may slow down and interest rates could stay low for a longer period
of time. That could hurt
5
volume growth and deposit spreads. At the moment, I believe that the net balance of more positive
US performance and the potential negative of a drag of Europe on Canada and the United States is
overall a more positive economic outlook than we had last quarter.
The second big unknown in the world is capital reform. I dont think anyone really knows where the
rules are going. Central bankers and policy makers are now more focused on sovereign credit and
lost economic growth. On the other hand at least publicly, they want reform to proceed. Our capital
levels remain very strong, leaving, us well-positioned to address global capital reform as it
emerges.
So with that let me wrap up. I think TD has delivered exceptional results in the first half of the
year and Im quite optimistic about our future. Our Canadian Personal and Commercial businesses
continue their outstanding performance and we continue to expect strong, but more moderate growth
in the future. Wealth earnings are rebounding in line with the stronger direction of the capital
markets, with the big risk being a fall off in equity prices and continued low interest rates. Our
wholesale business is stronger than ever with what we believe is the operating model of the future
and on path to more normalized, but sustainable earning levels. Our US retail bank continues to
move forward with strong organic growth and stabilizing PCLs, while facing the headwinds of US
regulatory changes. Clearly, theres lots of moving pieces to the United States today and its too
early to conclude how it will ultimately all play out. The only certainty is Reg E which we are
working on carefully. Im confident that we will continue to perform well for the balance of the
year and into 2011.
Now, let me hand it over to Colleen.
Colleen Johnston Toronto-Dominion Bank Chief Financial Officer
Thanks, Ed, and good afternoon.
Q2 2010 Highlights. Total Bank adjusted net income of C$1.2 billion, up 21% from Q2 of 09 and down
14% from our record Q1. Adjusted diluted earnings per share for the quarter C$1.36, up 19% from
last year and down 15% from last quarter. The key takeaway from this quarter is improving credit
performance, with PCL at its lowest level in six quarters across all of our businesses. In
addition, our gross impaired formations were also at their lowest levels since Q4 of 2008.
Total adjusted retail earnings: another new record, almost C$1.2 billion up 27% from a year ago and
8% over last quarter, despite a stronger Canadian dollar. All of our retail businesses posted
double digit earnings growth versus last year with TD Canada Trust delivering yet another record
quarter. Wholesale: a strong quarter with net income of C$220 million up 27% over last year, but
down 41% from last quarters record. The corporate segment loss increased by C$79 million versus
last year. Tier 1 capital ratio 12%, up 50 basis points from last quarter, mainly due to retained
earnings growth.
Please turn to slide five. Reported net income of C$1.176 billion or C$1.30 per share. Adjusted net
income of C$1. 234 billion or C$1.36 per share difference between reported and adjusted results
due to four items of note. These are all items youve seen before. Its notable that we had a
general allowance release due to improving credit metrics across all of our Canadian businesses.
This is the first release since the fourth quarter of 2007 when we released CA$39 million
after-tax.
Please turn to slide six. Canadian, Personal and Commercial Bank: Net income of C$761 million, yet
another record, up 29% from last year and 6% from last quarter. Customer satisfaction was at the
highest level weve ever seen in this business. We continue to see great operating leverage
year-over-year. Highlights Revenue was up 11% over last year due to strong volume growth across
most banking products. Strong real estate secured lending growth continued as a result of the
sustained low interest rate environment, although at a slower rate than we noted in previous
quarters. Personal lending continued to show steady growth while business loan volumes started to
pick up in Q2. Volumes were particularly strong in core and business deposits. Compared to last
year, total lending for TDCT grew by
6
12%, with personal up 13% and business up 5%. TDCT deposits grew 6% with core banking growth of 22%
and business deposit growth of 15%.
For the quarter revenues decreased 1% sequentially, largely due to lower net interest income
because of lower number of days in the quarter partly offset by volume growth and the home equity
line of credit repricing. Insurance revenues were up from last quarter as a result of market share
growth and strengthening fundamentals which bodes well for the upcoming quarters and next year.
Provision for credit losses: C$256 million, down 10% from last year and 19% from last quarter,
mainly due to widespread improvements in personal credit quality. Business banking loan losses were
CA$26 million this quarter, very low and flat to last year. We think that this late in the cycle,
it is unlikely for a new large commercial losses to occur.
Expenses up 4% from last year primarily driven by higher employee compensation, increased
investment in strategic enterprise initiatives, technology related items, and non-credit losses.
Expenses were down 1% sequentially. Compared to last year, margin was down 2 basis points at 2.92%
as higher margins in real estate secured lending were partially offset by margin compression and
deposits. Although rising rates will benefit deposit margins, a competitive pricing environment
will put both lending and deposit margins under pressure and will lead to more moderate revenue
growth. Overall, an exceptional quarter for TD Canada Trust.
Please turn to slide seven. Global Wealth Management, which excludes TD Ameritrade, net income of
C$111 million, up 42% from last year and up 10% sequentially. We have seen improving performance in
this business for five straight quarters. Higher earnings were driven by higher asset levels,
strong trading activity, and margin improvement. Revenue of C$612 million was up 16% from last year
and up 4% from last quarter. The year-over-year increase was due to strong growth in the
advice-based and mutual fund businesses, higher trading volumes, and improved net interest margin.
Expenses were up 9% over last year, mainly due to higher variable compensation, mutual fund trailer
fees, and higher infrastructure investment to support business growth, partially offset by lower
expenses in the US wealth business. Expenses were up 1% compared to last quarter. TD Ameritrade
contributed C$56 million to TD this quarter, up 17% from last year and up 30% from last quarter.
The year-over-year increase was primarily due to higher core earnings at TD Ameritrade, partly
offset by the impact of a stronger Canadian dollar. On the whole, a very good performance from
Wealth.
Please turn to slide eight. The US Personal and Commercial Bank. In US dollars, adjusted net income
$241 million for the quarter, up 45% from last year and up 12% sequentially. The FDIC-assisted
Florida acquisitions we announced in the middle of April did not have a material impact on earnings
and average volumes in Q2 of 2010. The US Personal and Commercial segment had a stronger
performance in a challenging environment and in an uncertain regulatory environment. Revenues over
$1.1 billion up 11% compared to last year due to the combined deposit fee structure introduced in
connection with the Commerce conversion and integration and overall improving product mix. These
fees are expected to decline as a result of new regulations to be implemented later this year, but
we believe that this impact will be more than offset by declines in PCLs as the credit cycle
improves.
Revenues up 5% compared to last quarter, mainly due to higher NII. In terms of volume growth we
continue to see good deposit growth. Total deposits were up 6% versus last year and up 4% versus
last quarter. Lending volumes were up slightly versus last quarter, but up 4% compared to last year
which compares with declining lending volumes for US peer banks. Expenses were up 10%
year-over-year due to new stores, continued investment in our core platform post-integration,
higher FDIC premiums and increased expenses due to the current credit environment. We opened 11 new
stores this quarter and acquired 69 stores with the FDIC-assisted Florida acquisitions announced in
April. Compared to last quarter expenses were up 3% mainly due to higher FDIC premiums and
advertising related spend. Expenses are expected to remain at elevated levels throughout the year.
Provision for credit losses, down 37% compared to last year and down 15% sequentially. Excluding
provisions recorded on debt securities that are classified as loans, PCL for the quarter was $154
million, a
7
decrease of $8 million or 5% versus last year. Mark will talk more about this shortly, but we are
seeing signs of stabilization in the credit environment. Margin was up 18 basis points versus last
quarter mainly due to improved deposit mix, higher average commercial loan spreads and higher
investment yields. On the whole, a very good performance in the US Personal and Commercial bank
given market conditions.
Please turn to slide nine, Wholesale. Net income of C$220 million down 41% from a record Q1, but up
27% year-over-year. As expected wholesale earnings started to normalize this quarter, with the
exception of equity trading, our trading revenues declined versus last quarter for all businesses.
Markets were more liquid and less volatile in the quarter resulting in margins narrowing to more
traditional levels. Provision for credit losses down 83% year-over-year. PCL for the second quarter
last year included specific provisions of C$47 million. PCL of C$10 million for the current quarter
was mainly our cost of credit protection. Expenses compared to last year, expenses up 4% mainly due
to investments in risk and control infrastructure. Overall, another strong quarter for wholesale
with a return on invested capital up 29%.
Please turn to slide 10. On an adjusted basis the corporate segment posted a loss of C$159 million
this quarter compared with an C$80 million loss last year. The higher Q2 loss was attributable to
lower securitization gains, unfavorable valuations of securitization exposures, and higher net
corporate expenses. As we indicated last quarter, our corporate segment loss of just C$33 million
in Q1 benefited from some positive items. On a year-to-date basis the corporate segment loss was
C$192 million below last year and in line with our expectations.
This quarters corporate segment loss is higher than the range I suggested last quarter, so let me
review it. The corporate segment consists of unallocated corporate support costs, which are control
related, some unallocated tax benefits, and various other costs and benefits related to treasury,
liquidity, capital and balance sheet management. We have a well defined-set of principles that
guide what gets allocated to the segments and what stays in the corporate segment, and those
principles have stayed consistent over the years. A few years ago we talked about a range of loss
of minus 20 to minus 40. Since that time weve doubled the size of the Bank, which means that most
items have grown accordingly and on top of that the low interest rate environment and various
liquidity related items have impacted the corporate segment. The corporate segment loss is
difficult to predict. Going forward Id suggest a range of C$100 million to C$150 million.
Corporate expenses will continue to rise and securitization gains are expected to be lower going
forward which will contribute to the higher loss levels.
Please turn to slide 11. With the increased focus on capital in light of the proposed Basel rule
changes, Id like to take a minute to talk about the strength of our capital base. We continue to
have a very strong capital position. Our Tier 1 capital ratio was 12% as at Q2, compared to 11.5%
last quarter. Tier 1 capital grew this quarter due to strong retained earnings growth, greater
share issuance through stock option issuance exercises, and capital management activity such as the
sale of certain low rated non-agency CMOs in the US. RWA declined due to foreign exchange partly
offset by the impact of the Riverside deal and organic growth. As you know, we hedge our capital
ratios for foreign exchange movements.
With that I will turn the presentation over to Mark.
Mark Chauvin Toronto-Dominion Bank Chief Risk Officer
Thank you, Colleen, and good afternoon, everyone.
Please turn to slide 12. Ill begin my comments with an overview of our performance at a
consolidated level, followed by brief highlights for each of our credit portfolios. I should first
point out that our gross lending portfolio slide is now available on page 24 of the appendix.
Similar to prior quarters, let me remind you that the information provided in this section is
presented on a credit portfolio basis versus the financial results, which are presented on a
business segment basis. The primary difference is the inclusion of US credit cards in the US credit
portfolio. As in the past, weve excluded the impact of the debt securities classified as loans, to
provide a clear picture of US credit portfolio performance. Id also
8
note that the C$1.9 billion in FDIC-covered loans are not captured in any of the credit metrics
included in this credit review.
Turning to loan portfolio quality. Gross impaired loans were down C$97 million during the portfolio
in the second quarter. A stronger Canadian dollar produced a decline in US gross impaired loans. On
a US dollar basis, they were flat. New impaired loan formations were down C$210 million relative to
the first quarter and at their lowest level since the fourth quarter 2008. This is considered to
represent a leading indicator of future credit performance.
Please turn to slide 13. Turning to provision for credit losses, second quarter PCL performance
suggests credit losses have peaked. Total PCL was down C$90 million or 18% over Q1 in its lowest
level since the end of the fourth quarter 2008. Reductions were noted across most portfolios.
Improving credit metrics in the Canadian personal, commercial, and the wholesale bank segments
resulted in a general allowance release of C$60 million. We expect a downward trend in PCL to
continue.
Please turn to slide 14 for more detailed discussion of portfolio performance. With respect to
portfolio performance, I would highlight the following key points. Overall, we are pleased with the
performance of our Canadian P&C and Wholesale portfolios. The Personal portfolio is showing
continued signs of improvement, while Commercial loans are holding at historically low levels. Our
outlook for our US portfolio remains cautious, but optimistic. On balance, results in the US
Personal portfolio were positive. Default rates stabilized or improved. Losses were down in the
real estate secure portfolio and stable across the balance of the other portfolios.
The US commercial credit portfolio is also showing signs of stabilizing. Both defaults and losses
in the Residential Commercial Real Estate portfolio appear to be nearing their peak. Defaults
continued to rise in the Non-Residential Commercial Real Estate portfolio, albeit at a slowing
pace. Losses showed a nominal upward trend. In the Commercial & Industrial portfolio, defaults
remained elevated, but flat relative to Q1 on a US dollar basis. Losses trended up, consistent with
the lag effect we expect to see at this stage of the credit cycle. Considering the current
environment we are satisfied with our credit performance and expect losses to moderate. Overall,
credit performance showed signs of improvement across most portfolios in the second quarter.
Before I conclude Id like to comment on our exposure to European sovereign debt. Weve undertaken
a detailed review of our European sovereign positions and we can confirm that TD has nominal credit
exposure to Greece and Portugal. Our credit exposure to Ireland, Italy, and Spain is related
primarily to the governments and the large global financial institutions, and overall we are
comfortable with these exposures and consider them to be manageable.
Now, Ill turn the presentation back to Rudy.
Rudy Sankovic Toronto-Dominion Bank SVP, Investor Relations
Great. Thank you very much Mark.
That ends our formal comments and well move over to the Q&A right now, so were asking those that
are participating in the Q&A portion of the meeting to ask only one question at a time, please.
9
QUESTION AND ANSWER
Rudy Sankovic Toronto-Dominion Bank SVP, Investor Relations
For those who will be asking a question, can I ask you to identify your name and firm before asking
the questions? Before ending the call today, I will ask Ed for some final remarks, so lets get
started and well start with the folks in the room first. Any questions from our analysts?
Michael Goldberg Desjardins Securities
Michael Goldberg, Desjardins Securities.
So, youve now got more than C$800 million of loans that were originally classified as securities
classified non-performing. Am I correct in interpreting the hair cut you originally took on
valuation represents in effect of phantom allowance against these loans and thats why you dont
have any allowance actually taken against them?
And just as a follow-up on that, in the recent FDIC-assisted transactions, what equivalent, call it
phantom allowance, was set up on the difference between the acquired loans and the fair value of
those loans?
Colleen Johnston Toronto-Dominion Bank Chief Financial Officer
Why dont I start, Michael.
So on the debt securities, the fact we have impaireds and theyve grown, what that suggests is that
some of those securities, the losses will exceed our original credit marks when we did the deals,
so youre right we essentially had a built-in allowance. Having said that we did set up the general
allowance last year, so when we reclassified from debt securities into loans we set up the GA on a
retroactive basis; and we definitely have an adequate GA now against the entire portfolio, so you
may continue to see those impaireds rise. Thats in fact expected, but we are fully covered in
terms of the original marks as well as general allowance that we have set up, hence you dont
really see any movement in the provision.
Your second question related to the Riverside deal. The additional credit marks were about C$300
million.
Michael Goldberg Desjardins Securities
Thank you.
Rudy Sankovic Toronto-Dominion Bank SVP, Investor Relations
Next question, please?
John Reucassel BMO Capital Markets Analyst
John Reucassel from BMO Capital Markets.
10
I guess since Im limited one question, Bharat, Ill ask you, and Ed. The earnings number out of US
Bank looked quite high, so can you talk about the sustainability of the earnings number, the impact
of Reg E on your non-interest income. I assume that has to come down but I dont know if thats
true.
Then Ed if you could make comments about we now have Financial Services reform in the United
States. Despite your best efforts to build a good bank down there, they seem to be throwing up more
roadblocks. Does this delay your ability to generate the required returns, push back those ultimate
returns over time?
Ed Clark Toronto-Dominion Bank President and CEO
Isnt that two questions, John?
John Reucassel BMO Capital Markets Analyst
One question in two parts.
Bharat Masrani Toronto-Dominion Bank Group Head, U.S. Personal and Commercial Banking
Ill go first. Yes, John. A reasonable quarter, largely driven by, as Colleen mentioned, good
deposit spreads, we are seeing good spreads on the lending book as well and fee income, as well,
has been strong, which has been also helped by stabilizing credit costs.
As to how I feel going forward, you specifically asked about Reg E. For people who are not fully
aware of Reg E, this is the overdraft regulation that has now been introduced in the US whereby
clients would have to specifically opt in in order to qualify for that product and the effect of
this should start more or less in our fourth quarter. The exact impact of that I wish it was a
science because it will take analysis on how many people are opt in. We are of the view that there
is a segment of our customers that want this product and over time they will opt into that product.
In addition to that some of our fee income growth has been bringing the two banks together, and we
rationalize those fees that has also resulted in growth. And lastly as to what the impact would be
because of the Reg E changes, my expectation is that any impact we have will be more than offset by
PCL improvement in 2011, so it will be your view on the general economy and the continuing progress
that we have, but as far as Reg E is concerned I see it fully offset by improving PCL performance.
John Reucassel BMO Capital Markets Analyst
So last quarter was roughly C$200 million in earnings, you thought you could get quarterly out of
TD USA. Is that still the number?
Bharat Masrani Toronto-Dominion Bank Group Head, U.S. Personal and Commercial Banking
I think what you saw in this quarter is probably not a bad proxy to look at.
Ed Clark Toronto-Dominion Bank President and CEO
In terms of Part 2, I think you have to say on balance, obviously the changes are probably going to
be negative, not positive. I think youve got a couple of uncertainties here, one is in fact what
the actual rules
11
will be, so I think theres still two or three weeks to go here and US process is such that some of
these rough edges get rounded off at the last moment, so I think you really kind of have to wait
the month out.
Then secondly, I think the harder issue is how does the market move to reprice things in lieu of
the changes? and so the Reg E is a perfect example. I think its clearly forcing the transition in
the way banking is charged and I would say in some sense, it will become more Canadian-like in its
style of charging than historically is the case. Im not sure thats necessarily a bad thing in the
end. Its just how bumpy and painful the journey is as you go from one kind of regime to the other.
So I think when we look at it, Americas Most Convenient Bank is earning us an operating return of
about 18%. I think, historically, when we first went in the US, we saw 30% type returns is quite
possible and in fact realized. I would say now were probably shading that number down closer to
25% as PCLs come off, interest rates move up, we optimize the franchise, and we absorb some of
these regulatory changes, but thats just to try to give you if you want to say as a guesstimate,
do we think weve lost a few ROE points here? I think yes, but I think it still means we can have a
good recovery in terms of the operating performance.
Colleen Johnston Toronto-Dominion Bank Chief Financial Officer
Maybe just to conclude we have now officially announced were doing an Investor Day on June 16th in
New York City, and Bharat and I are very committed to showing you a bit of a road map in terms of
where we are today, what the picture can look like three to five years out in terms of returns and
profitability, and look at all of the proof points around whether its franchise optimization, the
normalized environment, acquisitions, organic growth and lay some of that out, so we hope you can
join us for that.
Ed Clark Toronto-Dominion Bank President and CEO
Yes, maybe you can actually they will show you how to get to 25% ROE.
Rudy Sankovic Toronto-Dominion Bank SVP, Investor Relations
Another question in the room?
Ohad Lederer Veritas Investment Research Analyst
Ohad Lederer, Veritas Investment Research.
Looking at the domestic Bank, TD Canada Trust, the HELOC product has obviously been a huge winner,
C$9 billion of average balance growth in the last four quarters, C$18 billion in the last eight
quarters growth. Just wondering, Tim, as you talk to your front line staff, do you get a sense of
feeling for what people are doing? Are they debt consolidating? Are they funding consumer spending?
And are there any concerns at your end that the growth is a little faster than youd like?
Tim Hockey Toronto-Dominion Bank Group Head Canadian Banking
If you break it down between the two parts of the lending growth on the personal and consumer side,
if you talk about Real Estate Secured Lending, a lot of it is very much driven by the continued
strong pace of the housing market. We see that moderating so its less about using HELOC because
many of our customers use our home equity line of credit as a mortgage substitute, a very good
mortgage substitute and more flexible.
12
Generally our consumer lending has continued to increase, as we all know, we think the economy is
getting stronger in Canada, so were quite comfortable with that so I would say overall were still
quite comfortable with the exposure we have to the Canadian consumer; and that were quite
comfortable with how we adjudicating the credit were granting.
Ohad Lederer Veritas Investment Research Analyst
Do you think there was any pulling of drawdowns to get in advance of the April ?
Tim Hockey Toronto-Dominion Bank Group Head Canadian Banking
We think the housing market in the second half of the year will be slower than the first half,
and I think TD Economics just announced their belief there will be a little but of a pull back in
housing prices in Canada. I concur; were already seeing that slowdown in growth.
Rudy Sankovic Toronto-Dominion Bank SVP, Investor Relations
Any other questions in the room before we go to the phones?
Operator, can we take calls from the phones please?
Operator
Your next question comes from Brad Smith of Stone Cap Securities. Please go ahead.
Brad Smith Stone Cap Securities Analyst
Thanks very much.
I had a couple of questions about the debt securities that are classified as loans. First of all
that balance is moving quite a bit. I think its down C$1.3 billion, sequentially. I was just
wondering if that is reflective of dispositions that youre doing.
Secondly Im just curious at the rate at which the impairments are forming there, what is it about
those securities that are so different than your other credit profile, which is stabilizing, and
this is getting worse?
Colleen Johnston Toronto-Dominion Bank Chief Financial Officer
Sorry, on the debt securities, so we did sell about C$750 million in the non-agency CMOs this
quarter, so those were some low-rated securities where it definitely made economic sense for us to
free up some capital. That actually freed up about 18 basis points of capital, so Brad that would
be part of the decline in the debt securities on a quarter-over-quarter basis.
Just in terms of the quality, again these are, the credit issues were all I think very much
foreseeable in the original portfolio; Ill turn that over to Mark.
Mark Chauvin Toronto-Dominion Bank Chief Risk Officer
13
Brad, I would say that our original view of the credit, we havent seen anything that would change
that view, that it was incorrect. We anticipated a certain migration down in that portfolio as we
went through to this period and really the ones that have become impaired during the past quarter
were all ones that we expected to become impaired and in our view, we designated them and we
provisioned for them in the general allowance.
Brad Smith Stone Cap Securities Analyst
And I think Colleen you mentioned we should expect those impairments to continue to rise. I think
they are sitting at 13.5% roughly of the face value of the ending balance. Where do you see it
going to?
Colleen Johnston Toronto-Dominion Bank Chief Financial Officer
I probably cant give you a specific prediction on that, Brad, but I think you will see an upward
trend.
Brad Smith Stone Cap Securities Analyst
Okay, and then I had a quick question for Ed about the operating return that you were just
referring to. I think it was 18% currently. Can you just run through how you calculated that
number, so I can understand it?
Ed Clark Toronto-Dominion Bank President and CEO
Yes, basically, we look at operating capital and then we look at return on invested capital and the
difference between the two is the goodwill and intangibles associated with the purchase.
Brad Smith Stone Cap Securities Analyst
Oh, okay so your 18% is your return, excluding your goodwill?
Ed Clark Toronto-Dominion Bank President and CEO
Right, exactly. When you look at a business, I always say to Bharat you can blame me for the price
you pay and I blame Bharat for the operating results, so when you run the business you want to make
sure that are you actually making money on an operating basis so thats how hes held accountable.
Brad Smith Stone Cap Securities Analyst
Great, but Ed if youre not making a return on your goodwill do you think its appropriate to carry
it on your balance sheet and have it reflected in your equity?
Ed Clark Toronto-Dominion Bank President and CEO
Absolutely, because it depends what you view the outcome is, so I have absolutely no question well
have a visit here in five years and you can look back and say yes, you were right. So absolutely,
no question in my mind we have a winner in the United States.
14
Brad Smith Stone Cap Securities Analyst
And when do you review your goodwill? Is it in the third or fourth quarter?
Colleen Johnston Toronto-Dominion Bank Chief Financial Officer
Yes, we review it mid-year and we do that on an annual basis, so if theres any reason from a
market or economic standpoint to review it more frequently. In the last couple of years we would
have looked at that on a more frequent basis and weve got lots of head room in terms of valuation.
Brad Smith Stone Cap Securities Analyst
Thank you. Im sorry for asking more than one question.
Rudy Sankovic Toronto-Dominion Bank SVP, Investor Relations
Not a problem. Thank you. Next question please.
Operator
Your next question comes from Robert Sedran of CIBC World Markets.
Robert Sedran CIBC World Markets Analyst
Hi, good afternoon. Im not sure if this ones for Mark or Bharat. In the past couple quarters,
youve suggested that US credit quality is slightly flat to down, not a huge amount of torque in
2010 at the very least and it doesnt seem like the environment is that much better at least not at
the national level, so can you tell us whats changed? Is it just that you were excessively
conservative in your provisioning previously or is the northeast actually recovering faster than
the rest?
Bharat Masrani Toronto-Dominion Bank Group Head, U.S. Personal and Commercial Banking
Robert this is Bharat.
What we are seeing is higher level of activity, so there is more confidence, there seems to be more
activity in some of the areas we were not seeing before. So when a loan goes into workout there is
higher likelihood and it seems to get sorted out quicker than it used to. So I would say in the
northeast, obviously, it did not suffer as much as the rest of the country. It appears to be
stabilizing as well.
So its a combination of factors and we go through an analysis every quarter, look at our
portfolio, the formations that Mark went through, and weve not changed the way we look at this.
The market appears to be stabilizing.
Rudy Sankovic Toronto-Dominion Bank SVP, Investor Relations
Next question, please?
15
Operator
Your next question comes from Andre-Phillippe Hardy of RBC Capital Markets. Please go ahead.
Andre-Phillippe Hardy RBC Capital Markets Analyst
Thank you, my question is for Bob Dorrance.
Looking at page 9 of the supp pack and your revenues being, call it C$175 million lower than the
average over the last two quarters, yet your expenses are as high as theyve been. In a business
with so much variable comp, how does that happen?
Bob Dorrance Toronto-Dominion Bank Group Head Wholesale Banking
Well it happens in two ways, Andre. One, I think if you take the variable component of expenses, we
accrue that on the basis of both our quarterly results as well as our target results, and reflects
the underlying performance of the business. There can be variability between quarters. If you look
at the last quarter and indeed last year, the revenues were significantly above average and we
would have seen those revenues as being non-sustainable and would not have accrued variable comp to
fully pay out on those revenues.
As revenues return to what we would think would be more normalized, variable comp will return to a
more normalized level. So I guess in HR terms its called the S-curve and clearly, in 2009, with
revenues significantly above what we consider to be normal, we didnt pay out. As you get into 2010
and have more regular normalized revenues, the variable comp doesnt come down as much, so that
would be one part of it.
The other part is on the expense line, as Colleen mentioned, we continue to invest in the
infrastructure side of the business reflecting both increased governance and control initiatives,
as well as building businesses for the future.
Andre-Phillippe Hardy RBC Capital Markets Analyst
Is there a way you could help us understand what kind of long term efficiency ratio youre
targeting? Or you just dont look at it that way, as a return on investment capital?
Bob Dorrance Toronto-Dominion Bank Group Head Wholesale Banking
Yes, I think the problem with the efficiency revenue in the business is the mix in the business
swings fairly substantially and with that swing in mix comes changes in efficiency. You can see
that as you compare the various banks as to how you see the mixes between the various banks and
then within our bank we have quite a mix of different businesses with various pay out ratios, so
its hard to say. At the end of the day you look more at ROIC than a targeted efficiency ratio.
Rudy Sankovic Toronto-Dominion Bank SVP, Investor Relations
Next question please?
16
Operator
Your next question comes from Cheryl Pate of Morgan Stanley. Please go ahead.
Cheryl Pate Morgan Stanley Analyst
Hi, good afternoon. My question is for Bharat. Obviously, we saw good improvement in the net
interest margin this quarter from a multitude of factors, including better spreads on the
commercial lending. Can you just talk a little bit about the competitive environment in commercial
lending and the sustainability of loan yields at these levels? Clearly, theres some good tailwinds
with rates expected to rise and non-performing loans coming down, but just wondering about the
yield on the loans.
Bharat Masrani Toronto-Dominion Bank Group Head, U.S. Personal and Commercial Banking
Cheryl, Id say its a tale of two stories there. The spreads on loans are healthier. We continue
to see that, but loan growth is not as strong as we would like. I think if you look at the overall
industry numbers, commercial and industrial loans are down on a national basis by quite a large
percentage.
In our case, weve been able to grow our loans. We are taking share, but when the whole market goes
down, obviously, that has an impact on us. So I feel that loan spreads will, in our case, will
continue at the levels we are seeing, but its loan growth that may be an issue going forward. Now,
so the flip side is, if some of the confidence that is emerging in the US, some of the
stabilization that we are seeing, if that continues then, obviously, that will start to have an
impact on our customers who would want to grow again.
I think over the short-term, I see pressure on volumes, but I see continued strength in spreads,
but over the next few quarters, hopefully the economy continues to improve and that should have
more loan demand in the market.
Rudy Sankovic Toronto-Dominion Bank SVP, Investor Relations
Next question please?
Operator
Your next question comes from Darko Mihelic of Cormark Securities. Please go ahead.
Darko Mihelic Cormark Securities Analyst
Hi, good afternoon.
I think Ill be the Analyst that beats a dead horse and talk about debt securities again classified
as loans. As far as I can tell, it looks like you released about C$60 million of that general and
then you took the provisioning against it, which leaves you with about C$195 million of general
allowance against that portfolio, so the question for Mark is twofold. One, is the 2% provision
enough? Youre obviously signaling it is enough, but what is the maturity profile of this loan
portfolio? How far out can we look at this thing and think to ourselves that weve got a general of
C$195 million against something that seems to be going impaired at a relatively rapid pace? Can you
just speak to, if Ive got my numbers correct and the mechanics correct?
17
Secondly, why should I view C$195 million provision against an C$8.8 billion book as sufficient,
given that 9% of that book is already impaired?
Mark Chauvin Toronto-Dominion Bank Chief Risk Officer
Yes, so first on the provisioning side, we re-run the provisioning methodology on a quarterly
basis, and so all I can say is that based on the most current view and the modeling that we use,
which is proven in our view to be correct, that the remaining provision of C$195, which is the
correct number, is appropriate at this time.
In terms of the maturity profile I dont have that off the top of my head. I would guess it would
be in the I wouldnt even venture a guess. Id want to give you the exact number on it, so we
can certainly look at that. The number really isnt C$8 billion. I think the troubled portfolios
were in the C$6 billion range.
Ed Clark Toronto-Dominion Bank President and CEO
Maybe when we have our deep dive, its Ed here, because I think you have to start with you have a
mortgage and what we have is a security so theres an equity layer against that mortgage. You
really have to get a feel for these numbers you have to start with a gross mortgage number and then
you have an equity tranche and then we mark these to market where we bought them, so you have our
markdown and then you added a GA on top of that so you really have to to understand whats going
on. Its got to go all the way back up again and we can do that with Investor Days. Take you
through the arithmetic of this portfolio.
Mark Chauvin Toronto-Dominion Bank Chief Risk Officer
Absolutely, as Michael mentioned. The discount were carrying at is part of our protection.
Darko Mihelic Cormark Securities Analyst
And I guess that would be helpful because its not just the level of cushion you have but the fact
that whats triggering all of the sudden high rate of improvement would also be interesting.
Colleen Johnston Toronto-Dominion Bank Chief Financial Officer
I think another interesting data point, Darko, is if you go to our shareholders report on page 25
we continue to include the table on the fair value versus amortized cost on the debt security; and,
in fact, the valuation, the data points that we have on valuation, have improved now that we would
consider these to be traded in an active market. For the first time in a long time actually the
fair value of the portfolio exceeds the amortized costs net of the GA by roughly about C$150
million, so that would also suggest, you know thats also very positive data point.
Now that information is less relevant now because obviously this is being treated like a loan and
its being held at cost, but I think its still relevant which is why we continue to include it in
the shareholders report.
Darko Mihelic Cormark Securities Analyst
Okay, thank you.
18
Rudy Sankovic Toronto-Dominion Bank SVP, Investor Relations
Next question please?
Operator
Your next question comes from Sumit Malhotra of Macquarie Capital. Please go ahead.
Sumit Malhotra Macquarie Capital Analyst
Good afternoon. Two hopefully quick numbers questions for Colleen.
First off, on risk weighted assets, could you please tell me the RWA associated with the Florida
acquisitions was?
Colleen Johnston Toronto-Dominion Bank Chief Financial Officer
That was about C$1 billion.
Sumit Malhotra Macquarie Capital Analyst
OK. And in the corporate segment, you gave us a little bit of color on what to expect there in
upcoming quarters. Specifically, for net interest income, the uptick that was referenced in US P&C
banking and net interest income was basically offset in Corporate.
Just on a quarter-over-quarter basis what would drive something like a C$40 million increase in the
negative carry you have here? Is it an uptick in funding costs? Are you carrying more liquidity now
with the sudden uptick in market volatility? What would drive something like that in Q2?
Colleen Johnston Toronto-Dominion Bank Chief Financial Officer
Theres a variety of items, Sumit. Its probably difficult to get into all of them and all of the
related methodologies. If youre talking on a quarter-over-quarter basis we did have some positive
items in the first quarter so those numbers will move around.
Sumit Malhotra Macquarie Capital Analyst
So when you talk about certainly I appreciate that you said youve doubled the size of the Bank
in the last few years the losses are going to be bigger here, but is this something where
specifically for NII those items I mentioned whether its recent uptick in funding costs or
liquidity, are those factors that go into it or is it just more Corporate has to partially fund the
rest of the segments and its going to be more expensive in the near term?
Colleen Johnston Toronto-Dominion Bank Chief Financial Officer
19
Not true to the latter point in terms of funding the segments. The low interest rate environment
does have some effects on the corporate segment. An example would be earnings on excess capital
which are very minor at this point in time would be a good example of the low rate environment and
again, there are various liquidity related items that have a bit of a long tail and that will to
you in the corporate segment for a couple of years.
Rudy Sankovic Toronto-Dominion Bank SVP, Investor Relations
Next question please?
Operator
Your next question comes from Mario Mendonca of Canaccord. Please go ahead.
Mario Mendonca Canaccord Genuity Analyst
First I want to close a loop on the question Sumit just asked and then ask a question about
capital. Colleen, was your answer to the question that it was not the latter, were you specifically
saying the increase in the losses in Corporate to C$150, or C$100 to C$150, does not reflect any
allocation of segment expenses into corporate or maybe a lower allocation, actually thats the
nature of the question.
Colleen Johnston Toronto-Dominion Bank Chief Financial Officer
What I was trying to say in that answer is I would not want to infer that in any way theres been
any tradeoff between whats in corporate segment and whats in the operating segments is that those
methodologies have remained very constant over the years as I mentioned in my formal remarks, so
there isnt anything specific thats moved between. Its just there is variability in the corporate
segment and there are some valuation and accounting items that land there as well and that can
create some variability.
Mario Mendonca Canaccord Genuity Analyst
Including the US business, nothing there?
Colleen Johnston Toronto-Dominion Bank Chief Financial Officer
No. Nothing.
Mario Mendonca Canaccord Genuity Analyst
Then the question on capital. While I can appreciate that the Banks capital ratio is strong and
particularly strong relative to international peers, relative to your Canadian peers, it is looking
light. Does that enter your thinking at all when you are thinking about this is a question for
Ed. Does that enter your thinking at all for the bank?
Ed Clark Toronto-Dominion Bank President and CEO
20
Frankly, no. I think the mistake a lot of business leaders do is spend too much time watching what
their competitors do and think; weve always had a view of we know exactly what our strategy is and
so it is somehow reached the absurdity that 12% Tier 1 now is regarded as inadequate. So were
comfortable that were a extremely well capitalized Bank. My hat is off to other colleagues in
Canada that are getting wonderful capital ratios and God speed to them.
Mario Mendonca Canaccord Genuity Analyst
Do you view your capital ratio as 12% or do you see it more as 11% or 11.5% pro forma?
Ed Clark Toronto-Dominion Bank President and CEO
Well, its 12% now. I think it will come down; obviously, weve indicated it will come down, so Im
not sure if it will come down as you go through the quarter and we earn money and do other things,
it will come down all the way to 11.5% but its somewhere between 11.5% and 12% is what I think you
could think of.
Rudy Sankovic Toronto-Dominion Bank SVP, Investor Relations
Next question please?
Operator
Your next question comes from Peter Routledge of National Bank Financial. Please go ahead.
Peter Routledge National Bank Financial Analyst
Hi, greetings. My question is for Ed.
In the last cycle, TD took or was generating capital internally at a pretty good clip and takes
that excess capital and builds the thousand-branch network in the US, which is pretty substantial
in and of itself. Looking forward, as the recovery takes route, TD is likely going to be in a
similar situation where youre generating a lot of internal capital at pretty high capital ratios
going into the cycle. So Ed, will TD return a materially higher proportion of this surplus to
shareholders in the form of buybacks or dividend raises this cycle than in the last cycle, and by
implication Im asking if TD will moderate its acquisition activity in favor of distributing more
earnings to shareholders?
Ed Clark Toronto-Dominion Bank President and CEO
Thats a good question. I dont think theres a snappy answer to that. I think we certainly dont
feel under pressure to do acquisitions, if thats maybe one way of answering this.
I think we were always convinced when we went in the United States that there was a window of
opportunity here and that if you didnt take that window of opportunity you would find yourself
having actually implicitly made a decision not to go in the United States or to go in an extremely
large size. As you recall, we went in; we only bought 51% of BankNorth, and then we privatized
BankNorth and a couple of small acquisitions and then we did Commerce, and now weve done this
assisted deal, and then we are hoping to do a South Financial deal.
21
We tend to be cautious here on making sure that we can digest and manage that which we do, but
cumulatively we think weve got ourselves in a position where were not strategically challenged in
the US, which is where we set out to get. Now the question is can we make money, good money, for
the shareholders making acquisitions and if the answer was yes, then we would probably do it, but
we dont yearn to do acquisitions. I think the thing thats different about our model is we have a
remarkable organic growth model, so I think its certainly possible that we will return more
capital.
Obviously, hanging over all of that is where the capital rules will be, and as I said in my
comments, and Im not being trivial, I think no one really knows where those will be and I think no
one really knows when well know what those will be. Id like I dont like the uncertainty,
myself, and I can appreciate that the market doesnt like it but I think we just have to relax here
and know that its going to take a number of months at the minimum to work itself out before well
know the answer to that question.
Operator
There are no further questions at this time. Please continue.
Rudy Sankovic Toronto-Dominion Bank SVP, Investor Relations
Well, thanks everyone for your questions, so Ill turn it back to Ed for final comments.
Ed Clark Toronto-Dominion Bank President and CEO
Yes, well, obviously I think the core story of this is that clearly our PCL rates in Canada have
started to come down. With our growth that means at a minimum I think youll see stabilizing PCLs
and a pretty good credit environment.
I think clearly we have been surprised by the speed of the improvement in the United States. I
think that has turned in to be better than we originally anticipated. I think we are very, very
pleased at how our Personal & Commercial banks on both sides of the border are performing extremely
well. They are solid engines of growth.
What weve obviously had a decline quarter-over-quarter in the Wholesale business, but weve
been saying for some time that that was coming and it now seems to have finally come. And I think
were probably at the upper end of those earnings, the range that we see. We still see this as a
good solid 20% ROE business and were very pleased in the sense that we have a franchise business
there and it is already moved to where we think other banks are going.
So all in all when we look forward, I think, as I said, net balance, were more optimistic about
the economy on both sides of the border. We recognize the fragility of the economy. I was saying to
someone the other day, I think when everyone says this recovery will be fragile, when we see things
in Europe we say, Ah, so this is what fragility actually means a fragile recovery means. And
thats what were going through, but I dont think we should over react to that. I think we turned
a corner here and I think TD will emerge with obviously tremendous momentum on our side.
Thank you for your time.
Rudy Sankovic Toronto-Dominion Bank SVP, Investor Relations
Great. Thanks, Ed. And that concludes our meeting for today. If you do have any further questions,
our IR team would be happy to answer them. Thank you very much for your time today and good
afternoon.
22
Operator
Ladies and gentlemen, this concludes the conference call for today. Thank you for your
participation. You may now disconnect your lines.
23
THE FOLLOWING IS A COMMUNICATION SENT TO EMPLOYEES OF TD BANK,
AMERICAS MOST CONVENIENT BANK AND THE TORONTO-DOMINION BANK ON JUNE 1, 2010
Daily News Brief
June 1, 2010
Compiled by Brittany Roberge, Corporate and Public Affairs
TD BANK NEWS
1. |
|
Philadelphia International Cycling Championship - Philadelphia Inquirer |
Pro cyclists from 20 countries will return to Philadelphia on Sunday for the TD Bank Philadelphia
International Cycling Championship. Billed as Americas biggest single-day race, this will be the
26th mens race and the 16th Liberty Classic for women. [TD Bank is mentioned.]
2. |
|
Developer Conley Sets Sights On Medical Facility For His Providence Waterfront Land -
Providence Journal (RI) |
Facing foreclosure on one of his signature properties, and a debt of more than $9 million,
developer Patrick T. Conley says he is pushing forward with his vision to transform the industrial
South Providence waterfront into a vibrant new city destination. [TD Bank is mentioned.]
3. |
|
Summer Fun for Kids. Savings for Parents. - WPVI-TV (PA) |
Even with all of our snow days this winter, school is finally coming to a close. And that means
its going to be up moms, dads and other caregivers to keep the kids amused for the summer. [TD
Bank is mentioned.]
4. |
|
Answers Sought On Closed Auction House - The Telegraph (NH) |
Financial questions continue to surround the final auction by the closed J.C. Devine Inc., with
employees claiming they are owed more than $5,000 in back wages because the firms bank account was
frozen as security for the corporate debt. In addition, prosecutors are seeking to pin down the
total amount of money involved in the March 7 auction in Nashua. [TD Bank is mentioned.]
5. |
|
Philadelphia Fans Guide - SI.com |
With as many as three championship contenders in town these days, Philadelphia hosts some of the
biggest sporting events every year. Citizens Bank Park has hosted the World Series for two years
running, while the Eagles Lincoln Financial Field always holds big games in December and January.
Meanwhile, the Sixers and Flyers light up the Wachovia Center, which paved the way for the further
renovations of the Philadelphia sports complex. [TD Bank is mentioned.]
6. |
|
Mercantile Bank, Carolina First Bank and South Financial Group being acquired by TD Bank
Financial Group - Lake City Journal (FL) |
Page 1 of 19
Lake City customers will not notice changes immediately, but Mercantile Bank, Carolina First Bank
and The South Financial Group are being acquired by a Canadian company, TD Bank Financial Group.
7. |
|
Southeast Deals Signal M&A Slide Is Abating
American Banker |
Community bank M&A activity has awakened from a two-year slump with a pair of recent deals in the
Southeast. Banks are reaching historically low prices, particularly in coastal markets like
Florida, Georgia and California, after the real estate collapse eroded their once-lucrative loan
and deposit bases. [Toronto-Dominion Bank is mentioned.]
INDUSTRY NEWS
1. |
|
Rule Phase of Reg Reform Promises to Be Grueling - American Banker |
Even if lawmakers sign off as expected on a final regulatory reform bill before the July 4 recess,
the battle over the legislation will just be a prologue to the longer and much more complicated
fight over how the legislation will be implemented.
2. |
|
Fed Officials Upbeat On U.S. Recovery Wall Street Journal |
Two senior Federal Reserve officials were upbeat Monday about the U.S. economic recovery despite
the worsening debt crisis in Europe, but gave no indication the Fed is anywhere near raising
interest rates.
3. |
|
Bernanke Says Global Recovery Depends On Emerging Markets, Central Banks Washington Post |
The global economy will depend increasingly on emerging markets to foster strong growth, Federal
Reserve Chairman Ben S. Bernanke said, adding that central banks worldwide must carefully weigh the
timing of their withdrawals from various economic stimulus programs put in place during the
financial crisis.
4. |
|
ECB Warns Write-Downs Could Reach $239 Billion Wall Street Journal |
In the latest indication that European banks are in ill health, the European Central Bank warned
late Monday that euro-zone banks face 195 billion euros ($239.26 billion) in write-downs this year
and the next due to an economic outlook that remained clouded by uncertainty.
TD BANK NEWS
1. |
|
Philadelphia International Cycling Championship
June 1, 2010 Philadelphia Inquirer |
Pro cyclists from 20 countries will return to Philadelphia on Sunday for the TD Bank Philadelphia
International Cycling Championship.
Billed as Americas biggest single-day race, this will be the 26th mens race and the 16th Liberty
Classic for women.
Page 2 of 19
Here is the schedule of weekend events:
Saturday: 7 a.m. Philadelphia Insurance Time Trials. Registration for this event is at 6 a.m. in
front of the Art Museum; one can race against the clock on a five-mile course that starts and ends
at the foot of the Art Museum and runs along Martin Luther King Drive.
Sunday: 7:15 a.m. to 8:45 a.m., AstraZeneca Wellness Challenge. Cyclists can ride the same course
as the pros, including Kelly Drive, the Manayunk Wall and Lemon Hill, on Sunday morning before the
races. Register in advance at www.procyclingtour.com or Sunday beginning at 6 a.m. at the main
staging area at Kelly Drive and Sedgely Avenue, just below the Art Museum. The fee is $45 in
advance, $55 on the day of event.
Sunday: 8:30 a.m. to 4 p.m., Philadelphia Cycling, Health and Fitness Expo. Check out everything
you need to know about cycling, fitness, and sports on the course side of the Benjamin Franklin
Parkway.
Sunday: 9 a.m., TD Bank Philadelphia International Cycling Championship; 9:10 a.m., Liberty Classic
womens race.
Sunday: 11:45 a.m., Junior PCT Grand Prix. This is open to riders ages 15 to 18 who qualify to
compete on a loop between Logan Circle and Eakins Oval. Go to www.procyclingtour.com for details.
Sunday: 12:45 p.m., Cadence Cycling Foundation Sprints. Approximately 40 riders ages 8 to 16 will
compete in heats between Logan Circle and Eakins Oval, followed by an awards ceremony.
Sunday: 8 a.m. to end of championship race. TD Bank Family Fun Zone. Looking for something fun to
do with the kids between laps? Check out the zone at the base of the Art Museum steps.
Visit www.procyclingtour.com for more information and to buy VIP tickets for access to Champions
Row from 8:30 a.m. to 4 p.m.
Top
2. |
|
Developer Conley Sets Sights On Medical Facility For His Providence Waterfront Land
By Philip Marcelo
June 1, 2010 Providence Journal (RI) |
PROVIDENCE Facing foreclosure on one of his signature properties, and a debt of more than $9
million, developer Patrick T. Conley says he is pushing forward with his vision to transform the
industrial South Providence waterfront into a vibrant new city destination.
Gone is a controversial plan to build a hotel, condominium, marina and marine terminal complex on
about six acres of old oil tank fields that he owns next to Conleys Wharf, the historic warehouse
redevelopment on Allens Avenue that Conley owns and is in foreclosure.
Page 3 of 19
Now, Conley says, a group of Massachusetts investors wants to buy him out to build a medical
complex.
A newly formed company, Rhode Island Medical Arts LLC, has proposed building a long-term care
hospital for patients recovering from major medical illnesses or injuries.
The $300-million development would include an extended-stay hotel for the families of patients, a
marina and a marine terminal for cruise ships and ferry boats, according to a proposal that has
been informally presented to the mayor and City Council members in recent months.
Mayor David N. Cicilline says the project has the potential to create 2,000 permanent health-care
jobs. Anytime a developer says that they are going to create 2,000 jobs, we sit and listen. When
and if they make a formal proposal well review it carefully.
The investor group formed in March 2010, according to state records, and includes Manuel Lipson,
the former president of Spaulding Rehabilitation Hospital, a long-term care hospital in Boston, and
Stanton D. Shifman, a Boston-area developer.
Conley says he would use proceeds from the potential $12-million sale of the dock and an area now
used as a parking lot to pay his debts on the properties, including a now delinquent $1.1-million
loan owed to Barrington businessman Joseph S. Ruggiero.
Ruggiero is foreclosing on Conleys Wharf to get his money, but the foreclosure is being challenged
by Bank of America, another one of Conleys investors, in Superior Court, Providence.
Conley also owes $2 million to TD Bank and another $6 million to a group of Chicago-area investors
led by Stanley Gurnick, a Chicago-based financial adviser who grew up in South Providence.
Conley said he believes he can pull off the sale, even if he doesnt see a dime of profit and he
loses Conleys Wharf to foreclosure.
Even if I lose the building, the building itself is still there, Conley says of the wharf. It
was derelict and vacant, and wasnt even on the National Register of Historic Places before I took
it over. Now, its a vibrant artist colony. As far as Im concerned, that is a successful venture,
whether Patrick Conley ends up owning it or not.
He said later: Its not all about money. It is about a legacy. It is enough of a reward for me to
be the catalyst for the development of the South Providence waterfront, where my ancestors settled
in 1870 when they came from Ireland.
To date, Conley says, he has spent about $14 million on the project: $6.8 million to open Conleys
Wharf and $7 million to build a parking lot and a dock on the old oil tank field next door.
The two properties opened in 2007. Today, Conley says that Conleys Wharf houses about 42 small
businesses (none of which will be affected by the foreclosure). In addition, he said, American
Cruise Lines will bring 27 excursions this summer into the dock.
Conley says he has another year and a half on his $2-million loan from TD bank, and that he met
with his Chicago investors in April to assure them that hell deliver on their
Page 4 of 19
investment. They have great confidence in me, and I have great confidence in myself to be able to
sell the property and pay everyone off, including Mr. Ruggiero.
Ruggiero, who had purchased the dock and parking lot land with Conley as an equal share partner, is
not so sure. Its going nowhere. Im getting old, and I want out. The problem is that the sale to
Rhode Island Medical Arts hinges on two factors largely out of Conleys control: city approval of a
hotly contested proposal to rezone the waterfront, and extensive environmental cleanup of the
former industrial site.
Cicilline has proposed changing the Waterfront 3 zone (of which Conleys properties are a part) to
allow for non-water-dependent enterprises, such as hotels, marinas and medical complexes. Local
companies and manufacturers fear the rezoning would strangle their businesses and are waging a
public relations battle against it.
Two former owners of Conleys properties energy company National Grid and Cargill, the
international agricultural and food giant are required to remediate the site and are
developing a plan to present to the state Department of Environmental Management.
Conley says the process is gaining momentum but acknowledges it might still be years from
completion. This is not a dead deal. This is a very valuable piece of property. Anyone can see the
development potential.
Top
3. |
|
Summer Fun for Kids. Savings for Parents.
By Amy Buckman
May 31, 2010 WPVI-TV (PA) |
Even with all of our snow days this winter, school is finally coming to a close. And that means
its going to be up moms, dads and other caregivers to keep the kids amused for the summer.
Fortunately, you dont have to spend a lot to do that.
The librarys a great place to start the hunt for cheap summer fun.
Many local libraries have summer reading clubs, where children can earn prizes, while keeping their
reading skills sharp during the school break.
And if your child reads ten books over the summer, it can really pay off, thanks to TD Banks
sumemr reading program.
Michael Carbone of TD Bank in Philadelphia explains, The summer reading program incents them to
read 10 books. And if they read 10 books, well put $10 into an existing account or open a new
account for them. If they read 20 books, well put another $10 in for them.
Movies are always fun in the summer especially when air-conditioned theaters provide a break
from the heat.
Regal Cinemas are once again sponsoring their Free Family Film Festival on Tuesday and Wednesday
mornings at 10:00.
Page 5 of 19
Arrive early to get tickets at the box office the morning of the show for classics like ET and
new films like Cloudy with a Chance of Meatballs.
Also, check out the website Kids Bowl Free (http://www.kidsbowlfree.com/) to find out which bowling
alleys near you are offering two free bowling games for children each day of the summer when you
purchase a low-price family pass.
Top
4. |
|
Answers Sought On Closed Auction House
By David Brooks
June 1, 2010 The Telegraph (NH) |
Financial questions continue to surround the final auction by the closed J.C. Devine Inc., with
employees claiming they are owed more than $5,000 in back wages because the firms bank account was
frozen as security for the corporate debt. In addition, prosecutors are seeking to pin down the
total amount of money involved in the March 7 auction in Nashua.
We want to know how much money did they collect, what was sold that day, and what happened to the
money? said James Boffetti, a senior assistant attorney general who is chief of the state Consumer
Protection Bureau. We want to look at (the companys) books.
Boffetti has given an estimate of $200,000 collected in sales at the consignment auction and
$145,000 owed to people who owned the firearms, but said this figure is far from certain.
J.C. Devine Inc. was founded 35 years ago and was run by Joe Devine out of second-floor offices at
20 South St., Milford. Devine died Feb. 24 at age 72.
At that point, the March auction had already been planned, with glossy catalogues printed and
distributed, so the company went through with it. A May 9 auction had also been scheduled but it
was later canceled, and earlier this month the company shut down. A notice on the door says it has
suspended operations due to the passing of our president and CEO Joseph Devine and tells people
to write to a post office box, adding We are doing our best to address all concerns in a timely
manner.
The March auction featured dozens of modern and historic firearms. They included engraved dueling
pistols in a special case, a Chicago palm pistol known as The Protector, a Japanese sword of the
type called wakizashi, and an 1803 flintlock rifle. People knowledgeable in the field say it wasnt
uncommon for J.C. Devines auctions to collect several hundred thousand dollars from buyers, some
of it in cash.
Since the sale, many questions have arisen. Boffetti said his office has heard from about 15
consignors who say they were not paid after their items were apparently sold.
One of those is Harvey Pendelton of Idaho, who had previously sold several guns through J.C.
Devine, which was one of the most prominent firearms auction houses in the country.
Pendelton said he put up an 1878 Browning rifle at the March auction, and was told by office
manager Denise Rankins that it had sold, and then by e-mail that it sold for $14,500. He has yet to
see any money, he said.
Page 6 of 19
They wouldnt return phone calls, e-mails. I started panicking, he said in a telephone interview
Friday.
Pendelton said he has retained a law firm, looking to get the money or the gun, which was left to
him by his father.
Ive sold lots of collector cars ... Ive never run into any problem even close to this, he said.
J.C. Devine had been in the firearms auction business for 35 years and had an excellent reputation.
Pendelton says he chose them because of the companys high standing.
On May 6, 21/2 months after Devines death, J.C. Devine Inc. was listed on AuctionZip.com, a popular
auction-industry Web site, with Bernice Rankins listed as contact. Rankins is a Hillsboro resident
who worked for the company for many years.
Rankins is one of five employees who have filed claims for unpaid wages with the state Department
of Labor, for amounts ranging from $291 to almost $3,000.
Letters from estate lawyer Ruth Tolf Ansell, representing J.C. Devine Inc., say that TD Bank has
frozen the corporate bank account as security for the corporate debt and that the corporation
does not have any other assets from which wages can be paid at this time.
Court paperwork says the late Joe Devine was president, treasurer, secretary and sole stockholder
of the company, and that one of Devines sons, Joseph J. Devine of Hancock, is executor of the
estate.
Devines obituary says the son lives in Brookline, but he could not be reached for comment.
Top
5. |
|
Philadelphia Fans Guide
What a sports fan needs to know and do in these 10 U.S. cities
By Robert Dougherty
June 1, 2010 SI.com |
With as many as three championship contenders in town these days, Philadelphia hosts some of the
biggest sporting events every year. Citizens Bank Park has hosted the World Series for two years
running, while the Eagles Lincoln Financial Field always holds big games in December and January.
Meanwhile, the Sixers and Flyers light up the Wachovia Center, which paved the way for the further
renovations of the Philadelphia sports complex.
Beyond the professional ranks, Philadelphia is a prime destination for other major events. The TD
Bank Philadelphia International Cycling Championship is among them, proving that the city isnt
just about the Phillies, Eagles, Sixers and Flyers. College sports such as Big Five hoops,
soccer, lacrosse and boxing have also made a home here.
The myths and occasional brutal truths about Philadelphia fanatics can be hard to get through.
However, the rewards are plentiful for those who seek some of the best sports
Page 7 of 19
action in the country. These days, that action is defined by Philadelphias current champions, and
by their sparkling new home.
Top
6. |
|
Mercantile Bank, Carolina First Bank and South Financial Group being acquired by TD Bank
Financial Group
By Karl Burkhardt
May 31, 2010 Lake City Journal (FL) |
Lake City customers will not notice changes immediately, but Mercantile Bank, Carolina First Bank
and The South Financial Group are being acquired by a Canadian company, TD Bank Financial Group.
Toronto-Dominion Bank and its subsidiaries are collectively known as TD Bank Financial Group.
Suzanne Norris, Market President of Mercantile Bank, said business is continuing as usual. This
will make Mercantile Bank stronger, Norris said. TD Bank is known for its commitment to customer
service.
TD Bank reports that customers will be served by the same people at the same locations.
The acquisition requires regulatory approval and TSFG shareholder approval.
Under the agreement, TD Bank will acquire 100% of the outstanding common shares of South Financial
Group for approximately $61 million in cash or TD common stock.
Upon completion of the transaction, TD will acquire all of The South Financial Group and all of
its businesses and obligations, including all deposits of Carolina First Bank, which also operates
as Mercantile Bank in Florida, TD Bank reported.
TSFG reported, In addition, immediately prior to completion of the transaction, the United States
Department of the Treasury will sell to TD its $347 million of South Financial preferred stock and
the associated warrant acquired under the Treasurys Capital Purchase Program and discharge all
accrued but unpaid dividends on that stock for total cash consideration of approximately $130.6
million.
The South Financial Group is a bank holding company serving small businesses, middle market
companies and retail customers in the Carolinas and Florida. At March 31, 2010, it had
approximately $12.4 billion in total assets and 176 branch offices.
The South Financial Group operates Carolina First Bank, which conducts banking operations in North
Carolina and South Carolina (as Carolina First Bank), and in Florida (as Mercantile Bank). At March
31, 2010, approximately 44% of TSFGs total customer deposits were in South Carolina, 45% were in
Florida, and 11% were in North Carolina. On April 20, The South Financial Group reported a first
quarter 2010 net loss available to common shareholders of $85.8 million, or $(0.40) per diluted
share, compared to a net loss available to common shareholders of $193.9 million, or $(0.90) per
diluted share, for fourth quarter 2009 and $90.8 million, or $(1.10) per diluted share, for first
quarter 2009.
Page 8 of 19
Additional investor information is available at www.thesouthgroup.com.
TD Bank is one of the 15 largest commercial banks in the United States with $152 billion in assets,
and provides customers with a full range of financial products and services at more than 1,000
locations from Maine to Florida. TD Bank, N.A., is headquartered in Cherry Hill, N.J., and
Portland, Maine.
TD Banks slogan is Americas Most Convenient Bank.
For more information, visit www.tdbank.com
Top
7. |
|
Southeast Deals Signal M&A Slide Is Abating
By Rachel Witkowski
June 1, 2010 American Banker |
Community bank M&A activity has awakened from a two-year slump with a pair of recent deals in the
Southeast.
Banks are reaching historically low prices, particularly in coastal markets like Florida, Georgia
and California, after the real estate collapse eroded their once-lucrative loan and deposit bases.
Two northeast Florida banks planted the M&A-revival seed when Jacksonville Bancorp Inc. announced a
merger with rival Atlantic BancGroup Inc. on May 10. The deal was the Southeasts first in two
years without Federal Deposit Insurance Corp. assistance and with a capital infusion from outside
investors.
This is a small but meaningful example of what needs to develop in terms of investors supporting
community banks, said Christopher Marinac, a bank analyst at FIG Partners LLC in Atlanta. Were a
little further along in the credit cycle for buyers to consider [a deal] versus a year ago; it
would not have hit their radar screen.
A week later, another deal was announced by Toronto-Dominion Bank, which agreed to buy South
Financial Group Inc. in Greenville, S.C., with its 67 Florida branches in addition to 110 in the
Carolinas.
Potential buyers are getting very competitive for Florida franchises, said Ken Thomas, an
economist and independent bank consultant in Miami. The bidding is also competitive in Texas and
California because thats where all the growth is and thats where all the money will be once the
economy stabilizes, he said.
Fueling investor interest is the fact that bank stocks are bargains compared with tangible book
value, said Ben Bishop, chairman of Allen C. Ewing & Co., an investment banking firm in
Jacksonville. There is a lot of private-equity money interested in buying into banks on a bargain
basis, he said.
Though the Jacksonville Bancorp and TD Bank deals differ in size and structure, Marinac said, the
acquisition targets, Oceanside Bank and South Financial, were both in the limp-
Page 9 of 19
along category. They might not have failed, but they would have just limped along for a long
time, he said.
A bank holding company controlled by CapGen Financial Group (the investment firm founded by former
Comptroller of the Currency Eugene Ludwig), along with three other private investors, would inject
$30 million into Jacksonville Bancorp when it closes the Atlantic deal. The holding company, CapGen
Capital Group IV LP, would then have more than a 40% ownership stake in Jacksonville Bancorp, the
parent company of Jacksonville Bank.
CapGens managing director, John Sullivan, who would become a director of Jacksonville Bancorp when
the deal closes, said his firm likes the northeast Florida market for its long-term potential for
job and population growth.
Bank M&A activity slowed markedly during the past two years in overbuilt markets like Florida
because no one could estimate how much declining land values would erode bank values, and investors
were afraid to buy before the bleeding stopped.
Non-FDIC-assisted bank and thrift deals in the Southeast dropped from 65 in 2005 to 31 in 2008 and
33 in 2009, according to SNL Financial. This year, six deals had been announced through May 27,
totaling $204.8 million.
The CapGen deal could not have happened a year ago or even six months ago. ... It reflects the
stability of values, Bishop said.
Though most recent private-equity investments have boosted capital, healthier companies have sought
infusions to leverage bids on failed banks. This has spurred competition in the Southeast.
CapGen, for example, invested $13.5 million in Seacoast Banking Corp. of Florida in Stuart late
last year. Seacoast then raised $200 million to bid on a failed bank, reportedly Riverside National
Bank. But the FDIC sold Riverside, along with two others, to Toronto-Dominion in April.
Marinac said he doubts that Jacksonville Bancorp. would have tried to buy Atlantic from the FDIC
had things gone that far. Atlantic BancGroup and its Oceanside Bank were each under a regulatory
order to raise capital.
Gilbert J. Pomar, the president and CEO of Jacksonville Bank, said his company sought Atlantic
BancGroup because it combined all the right things at the right time, including a recent capital
boost and improving market-value conditions.
Jacksonville Bank was well-capitalized, with an 11.06% total risk-based capital ratio as of March
31. It will be north of 12% the day the deal closes, which is expected late in the third quarter,
Pomar said.
Capital ratios are so important, he said. The capital is not just to plug a hole but to give the
balance sheet a super-normal capital ratio.
Top
Page 10 of 19
INDUSTRY NEWS
1. |
|
Rule Phase of Reg Reform Promises to Be Grueling
By Joe Adler
June 1, 2010 American Banker |
WASHINGTON Even if lawmakers sign off as expected on a final regulatory reform bill before the
July 4 recess, the battle over the legislation will just be a prologue to the longer and much more
complicated fight over how the legislation will be implemented.
If conference negotiations produce a law similar to the Senate version of reform, the industry and
regulators face a gargantuan task of enacting roughly 120 required rules, not to mention completing
scores of mandated reports.
Observers said the assignment for the financial agencies will be unprecedented in recent decades,
eclipsing past government overhauls, such as the implementation of post-Sept. 11 changes and the
Sarbanes-Oxley law. The new bill calls for not only extensive agency collaboration, but rules from
new bodies that must first be created.
The conditions will be more complex than weve ever seen, since regulators will be asked to work
in new ways, with consultation and joint rulemaking and through new institutions, said Margaret
Tahyar, a partner at Davis Polk. Its the post-SOX regulatory march magnified exponentially.
As banks lobby fiercely on Capitol Hill, groundwork is being laid for an equally intense engagement
process with the regulators, who have the direct role of determining how strict policies will be.
Industry representatives said they are still focusing on the legislative process but plan to move
on to regulators soon after the bill is signed.
There is going to be quite a bit of action after this legislation is passed, said Christopher
Cole, a senior regulatory counsel with the Independent Community Bankers of America. No formal
discussions have begun, and thats just because whenever weve met with regulators weve asked
what if, and theyve always said thats a big if, and meaning its a big if ... whether the law
passes the way they think it will.
Total regulatory moves to implement the law, as proposed in the Senate version, could exceed 200 by
some estimates. (The House version includes many of the same requirements, but the Senate version
goes further. Many observers expect the final version to resemble the Senate bill more than the
House bill.)
Among some of the more pressing details, observers said, would be the Federal Deposit Insurance
Corp.s implementing a new system for calculating premiums, and how the Office of the Comptroller
of the Currency which will absorb the Office of Thrift Supervision will change supervisory
policies for federal thrifts.
There are also much broader reform issues, including how to create a new consumer protection
regulator and systemic-risk council, enactment of new capital limits and how to restrict
proprietary trading under the so-called Volcker Rule.
Among other required issuances are separate regulations by the FDIC and the Federal Reserve Board
concerning their respective emergency assistance facilities; joint rules by the bank regulators and
the Securities and Exchange Commission requiring securitizers to retain a portion of the credit
risk of transferred assets; rules from the Fed governing the
Page 11 of 19
concentration limits of large firms; and a regulation by the new consumer financial protection
regulator restricting the interchange fees charged by debit card issuers.
Its a very, very big, and quick, pile of rules, said Karen Shaw Petrou, the managing partner of
Federal Financial Analytics Inc. The thing to focus on is not just the number of rules, but the
speed with which most of this bill is to be implemented. The new resolution process essentially
takes effect upon enactment, and theres no experience with it. The whole process is dramatically
different, and it comes at a time obviously of ongoing significant systemic fragility.
Tahyar, who has worked on an analysis of the implementation for her firm, estimated 125 required
rulemakings under the Senate bill, in addition to 45 reports or studies and 33 rulemakings that
agencies are permitted but not required to complete. Over a dozen agencies would be involved.
Yet she said the breakdown was conservative and its impossible to be precise while the bills are
still bouncing around.
Where will busy regulators find the time and where will all the expertise come from? Tahyar said.
What if the regulatory agenda laid out in the statutes, and filling up all the time, pushes aside
the space for other emerging agenda items?
A similar analysis by Sullivan & Cromwell counts more than 250 required and recommended rulemakings
and studies in the Senate bill. (It shows that in many cases a single section of the legislation
requires multiple acts by a regulator.)
Wayne Abernathy, the American Bankers Associations executive director of financial institutions
policy and regulatory affairs, said his staffs work to prepare for the implementation is
preliminary, but will accelerate once the bill is finalized.
As soon as it is signed, my staff has to be involved with, one, helping banks cope with the
changes, and, two, how to provide the best information to the regulators so theyre implementing it
with as much information and understanding as they possibly can, Abernathy said.
An FDIC spokesman agreed the process will not kick into high gear until final enactment.
We are reviewing implementation and how to ensure the FDIC can meet any mission that Congress may
ask us to perform when the legislation is finalized, said Andrew Gray, the FDICs chief spokesman.
Implementation is an outgrowth of our ongoing planning process to ensure maximum capabilities to
resolve the largest failing banks.
Even though no formal talks on implementation have begun with Congress yet to reconcile the House
and Senate versions, observers said the bill touches on several issues that the industry and
regulators have debated domestically and internationally for years.
Many of the critical rules in the bill are pending in global frameworks, and any of the large
institutions have been rightly engaged for awhile particularly on contingent capital, liquidity and
living wills issues, Petrou said.
She has been advising clients to talk to the regulatory agencies as much as Congress. Many of them
have ... at very senior levels with the U.S. and global regulators, she said.
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In any areas where there was some question about statutory authority, thats obviously been
resolved in favor of the regulators. Its not like somebody just woke up and said, Lets a have a
liquidity rule.
But even though banks and regulators have discussed issues raised by the bill ahead of time, the
sheer complexity of overhauling the regulatory structure will present new challenges.
Richard Hunt, the president of the Consumer Bankers Association, cited the creation of a new
consumer financial protection regulator which in the Senate bill would be housed under the Fed
but many want to make it a separate agency as an example.
If its a new responsibility of an existing agency, thats much easier than the creation of a new
agency, Hunt said.
While the eventual consumer protection agency is likely to borrow heavily from existing bank
regulators, bankers at the moment have no vehicle to engage officials on how it will be run.
Hunt said the CBA has had high-level discussions with various regulators about how the consumer
regulator would be staffed, but, he added, You cant talk to an agency that doesnt exist.
Michael Bleier, a partner at Reed Smith and former assistant general counsel at the Fed, said the
revised regulatory structure ... will make implementing the overhaul more complex and longer
than in the past.
The need for multiple agencies to create joint rules will emphasize the importance of
cross-regulator panels, such as the Federal Financial Institutions Examination Council, Bleier
said.
The FFIEC may come to play a greater coordinating role than in the past, he said. At the same
time, Congress will not be very tolerant of delay and will expect the regulatory agencies to fast
track many of the likely new rules.
Abernathy said a priority early on in the process is clear rules from the FDIC on how it would use
assets, instead of deposits, to calculate insurance premiums. (The provision was added as an
amendment to the Senate bill.)
Theyll need to establish rules that make clear what gets counted and what doesnt get counted,
and how that information is gathered, he said.
Also near the top of the regulators list are rules to implement the transition of the OTS into the
OCC, and how the combined regulator will oversee thrifts. There are ways the OTS is run that dont
match the way the OCC is run, Abernathy said.
But after regulators finish such nuts-and-bolts changes, there is still the question of
implementing newly conceived reforms, such as the Volcker Rule, named for former Fed chief Paul
Volcker. (The Senate bill calls for the rule to be implemented jointly between the Fed, FDIC and
OCC.)
Nothing happens under the Volcker Rule until there is some kind of implementing regulation that
sets definitions, tolerances and all kinds of other terms and parameters, Abernathy said.
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2. |
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Fed Officials Upbeat On U.S. Recovery
By In-Soo Nam and William Mallard
May 31, 2010 Wall Street Journal |
Two senior Federal Reserve officials were upbeat Monday about the U.S. economic recovery despite
the worsening debt crisis in Europe, but gave no indication the Fed is anywhere near raising
interest rates.
Right now, the prospects for continued growth in the U.S. remain relatively solid, Charles
Plosser, the president of the Federal Reserve Bank of Philadelphia, told a news conference during a
Bank of Korea seminar in Seoul. I hope, I anticipate at this point that the U.S. wont have a
double-dip recession. He added that the European crisis raises some clouds on the horizon and
that the Fed would have to be cautious in response.
Charles Evans, president of the Chicago Fed, said the U.S. recovery is well under way but
still-low inflation means the central bank should keep rates very low for an extended period, in
line with its official policy statement.
Inflation is severely under-running price stability, so its still appropriate to keep an
accommodative policy, Mr. Evans told a separate news conference at the Seoul event. But if the
situation turns rapidly, policy will need to respond more quickly.
A few weeks ago, many analysts expected the Fed to begin raising interest rates by the end of 2010.
As the situation in Europe worsened in May, those expectations have been put off and now many
analysts dont expect the Fed to move until 2011.
Mr. Evans said the European crisis would likely damp U.S. exports to a small degree but that for
now it wasnt likely to have a big impact or change the outlook for Fed policy.
Fed Chairman Ben Bernanke, addressing the Seoul conference by video, said the worlds central banks
will exit their economic-stimulus policies at different times, weighing local factors as they seek
to be neither hasty nor tardy in tightening, U.S. Federal Reserve Chairman Ben Bernanke said.
Because economic conditions vary, the appropriate timing of the exit is likely to differ across
countries, Bernanke said. To guide these important decisions, each central bank will have to
carefully monitor economic developments in its own jurisdiction.
Mr. Plosser and Mr. Evans both cited recent improvement in the U.S. labor market as promising signs
for the broader recovery and predicted the improvements will continue. Mr. Plosser said many people
may be surprised by how fast employment bounces back, while Mr. Evans said that if inflation
expectations should surge, the Fed would need to respond quicklyshifting its current emphasis on
promoting growth.
Mr. Evans, asked about the outlook for the Fed to sell back some of the massive amount of
mortgage-backed securities it has bought in a bid to provide liquidity to the financial system,
said he expects this would come after the Fed unwinds other emergency measures.
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3. |
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Bernanke Says Global Recovery Depends On Emerging Markets, Central Banks
By Tomoeh Murakami Tse
June 1, 2010 Washington Post |
The global economy will depend increasingly on emerging markets to foster strong growth, Federal
Reserve Chairman Ben S. Bernanke said, adding that central banks worldwide must carefully weigh the
timing of their withdrawals from various economic stimulus programs put in place during the
financial crisis.
The Federal Reserve and many other central banks . . . will have to manage its exit from
accommodative policies, evaluating the risks of a premature exit against the ramifications of
leaving them in place for too long, said Bernanke, addressing a conference sponsored by the Bank of
Korea in Seoul by video Sunday. Because economic conditions vary, the appropriate timing of the
exit is likely to differ across countries. To guide these important decisions, each central bank
will have to carefully monitor economic developments in its own jurisdiction.
The Fed chief, however, gave no new insight into when his central bank might start tightening
credit. Up until recently, many analysts were predicting that the central bank late this year would
start raising a key interest rate that has been held near zero since December 2008. But now, with
rising concerns about the impact of Europes debt crisis on the recovering U.S. economy, more
economists are expecting the Fed to sit tight until at least 2011.
Speaking on the sidelines of the Seoul conference Monday, two Fed officials gave upbeat views of
the U.S. economy, saying the eurozone crisis, while clouding the outlook, is so far not big enough
to throw off the U.S. recovery or impact Fed policy, according to news wire reports.
The situation in financial markets in Europe does add uncertainty, but at the moment I look for
the recovery in the U.S. to continue to improve and I dont see any changes in my outlook, said
Charles Evans, president of the Federal Reserve Bank of Chicago, according to Reuters.
Charles Plosser, president of the Federal Reserve Bank of Philadelphia, said he did not see any
developments in Europe as significant enough to force the central bank to change its policy,
according to Reuters.
I dont anticipate at this point that the United States in particular will see a double dip into
recession, he said, but obviously the financial turmoil in Europe raises some clouds.
Neither Evans nor Plosser has voting rights on the Feds interest rate-setting panel, the
Federal Open Market Committee. In its latest statement on April 28, the panel said it would hold
rates at the extremely low level for an extended period.
Page 15 of 19
In his remarks, Bernanke said that emerging economies have become increasingly important to the
financial system and global trading, and that they also have a key role to play in the important
efforts to reduce global imbalances in trade and capital flows.
European Central Bank President Jean-Claude Trichet echoed that sentiment in his own video address
to the South Korean audience.
Emerging countries were severely affected by the financial crisis, but as a group remained a
source of strength for the world economy, he said.
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4. |
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ECB Warns Write-Downs Could Reach $239 Billion
Euro-Zone Banks Still Suffering Debt Stress; This Is Big
By David Enrich and Stephen Fidler
June 1, 2010 Wall Street Journal |
In the latest indication that European banks are in ill health, the European Central Bank warned
late Monday that euro-zone banks face 195 billion euros ($239.26 billion) in write-downs this year
and the next due to an economic outlook that remained clouded by uncertainty.
The ECB news, part of its semiannual financial-stability report, comes on the heels of a campaign
by governments and central banks to ease sovereign-debt problems in southern Europe. The efforts
have failed to calm worries that a banking crisis may be forming on the Continent. That has led to
escalating pressure on regulators and governments to do more.
European governments already have cobbled together a 110 billion euro bailout for Greece and a 750
billion euro rescue for other weak economies of the euro zone. The ECB in May launched a series of
initiatives to help banks, including the purchases of government debt from banks and the renewal of
a program to give cheap six-month loans to banks, while the U.S. Federal Reserve reactivated a swap
line to provide European banks with dollars.
The moves helped provide some stability to the banks, but Europes intertwined banking system
remains stressed. Investors have hammered the sector, banks are stashing near-record amounts of
deposits at the ECB 305 billion euros as of Friday instead of lending the funds to other
institutions, risk-wary U.S. financial institutions are reducing their exposure to euro-zone banks,
and U.S. government officials are pushing their case for Europe to disclose publicly the results of
stress tests for euro-zone banks.
ECB Vice President Lucas Papademos defended the central banks response to the banking crisis and
said results of European Union-wide stress tests of banks should be completed in July, providing
further details on the capacity of the regions banks to withstand shocks. The results of stress
tests last year of individual banks werent released publicly. Some European countries are opposed
to the public release of results.
European banks collectively hold hundreds of billions of euros of public and private debt in
countries such as Greece, Spain and Portugal. Much of the private debt is tied to depressed
real-estate markets, especially in Spain, and with growth prospects anemic, the pressure on
outstanding bank loans isnt expected to diminish anytime soon.
Page 16 of 19
The actions taken so far, while large in scale, may not be enough, said Philippe Morel, a senior
partner at Boston Consulting Group in Paris. Whats at risk is the banking system and the ability
of banks to provide financing to the economy.
Like the financial crisis two years ago that was sparked by the unraveling of the U.S.
subprime-mortgage industry, Europes banking problems originated in a tiny patch of the global
economy: Greece.
But the problems run deeper than the highly publicized fiscal woes facing Greece, prompting similar
concerns about Portugal, Ireland and Spain. Credit-ratings firms have reduced these countries
rankings and have warned about possible future downgrades, with Fitch reducing Spains triple-A
rating by one notch on Friday.
All told, more than 2 trillion euros of public and private debt from Greece, Spain and Portugal is
sitting on the balance sheets of financial institutions outside the three countries, according to a
Royal Bank of Scotland report last week. Investors, bankers and government officials are worried
that as that debt loses value, banks across Europe could be saddled with losses.
Make no mistake: This is big, said Jacques Cailloux, RBSs chief European economist and the
reports author. Were talking about systemic risk [and] the potential for contagion.
Concerns also are mounting about how European banks will finance themselves in coming years. The
banks have hundreds of billions of euros in debt maturing by 2012, analysts and bankers say.
Replacing those funds could be difficult and costly, given fierce competition for deposits and
skittishness among bond investors. The situation has alarmed bankers and government officials, and
it helped fuel last weeks selloff in bank stocks.
With funding scarce, some banks are becoming more dependent on the ECB. The central bank has doled
out more than 800 billion euros in loans to banks, nearing its all-time high, according to UBS
analysts. The ECB warned Monday that the continued reliance of some midsize banks on credit from
the central bank remains a cause for concern.
The U.S. and U.K. moved aggressively in 2008 and 2009 to replenish their banks capital buffers,
sometimes with taxpayer funds.
Most of Europe didnt follow suit, because their banking systems were largely spared the carnage of
their Anglo-American counterparts. But as a result, most European banks today have thinner capital
cushions and heavier debt loads than their U.S. and U.K. rivals, leaving them vulnerable to an
economic slowdown.
Some European banks have less capital and more leverage than their U.S. counterparts and . . . the
crisis in Europe seems to have lagged behind that in the U.S. in both the writing off of losses and
in the speed of raising more capital, said Angel Gurria, secretary-general of the Organization for
Economic Cooperation and Development, in a speech in May.
OECD figures show that a selection of major U.S. banks are operating with leverage ratios the
ratio of assets to common equity of between 12 and 17. By comparison, the same ratio for a group
of major European banks ranged from 21 to 49, according to the OECD.
European policy makers have been trying to address that disparity by working on a global overhaul
of banking regulations, to be enacted in 2012, that would require banks to hold
Page 17 of 19
more capital and liquidity. But the regulatory fixes arent going to solve the problem right now,
said Michael Ben-Gad, an economics professor at City University London.
European governments and central bankers had hoped bailing out Greece and launching a liquidity
program would relieve immediate pressure on other governments and the banking sector. But that
hasnt happened, and new pressures could arise soon. The ECB last summer doled out 442 billion
euros in one-year loans to euro-zone banks. Those loans come due June 30, potentially causing banks
to scramble for a fresh source of cash this month.
European officials face calls from the banking industry, the investment community and foreign
government leaders, including U.S. Treasury Secretary Timothy Geithner, to redouble efforts to
stabilize the banking system through new initiatives.
RBSs Mr. Cailloux argues that the ECB should expand its recently launched program to buy
government bonds and should broaden the effort to include private-sector debt as well.
That could ease concerns that banks will suffer heavy losses, potentially blowing holes in their
balance sheets, on their portfolios of sovereign and corporate bonds tied to some European
economies. But such a move also could expose the central bank to potential losses.
The ECB had no comment on calls to increase the size of the bond-buying program.
Top
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Page 19 of 19