DBRS Confirms TD Banknorth Inc. at AA (low), Stable Trend

DBRS has today confirmed the ratings of TD Banknorth Inc. (TD Banknorth or the Company) and its banking subsidiary, including TD Banknorth’s Issuer & Senior Debt rating of AA (low). The trend for all ratings remains Stable. The rating confirmation follows a detailed review of the Company’s operating results, financial fundamentals and future prospects.

The ratings of TD Banknorth, a wholly owned subsidiary of The Toronto-Dominion Bank (TD – rated AA), reflect its important role in TD’s overall North American strategy and its sound community-focused banking franchise, which features a robust core deposit base. The ratings also consider the risk related to the integration of the unique customer service-focused business model of Commerce Bancorp (Commerce), as well as below-peer earnings and weak capitalization at the holding company level.

TD Banknorth, which accounted for 12% of TD’s year-to-date adjusted earnings and more than 23% of total assets, has a DBRS support assessment of SA1. As a result, TD Banknorth’s rating is based on TD’s Deposits & Senior Debt rating of AA. The SA1 designation reflects DBRS’s expectation that TD will provide strong and predictable support to TD Banknorth. Besides sharing the brand name, TD has consistently demonstrated its commitment to TD Banknorth by funding numerous acquisitions in order to build out its U.S. franchise, which is now among the 20 largest in the United States by assets. As growth opportunities in Canada may be more limited, TD will be relying on TD Banknorth for further growth in the U.S. markets. Despite a slowing U.S. economy, management has increased guidance by C$50 million since the deal was announced in October 2007 and now expects TD Banknorth’s earnings to exceed C$750 million in 2008. As the integration of Commerce proceeds, the Company expects earnings of at least C$1.2 billion in 2009.

With the acquisition of Commerce, TD Banknorth has created a robust deposit franchise that operates in an attractive footprint across New England and the mid-Atlantic, as well as a small presence in Florida. Core deposits-to-net loans was an impressive 187% at the end of March 2008, which compares very favorably with almost all U.S. banks. This strong deposit franchise underpins TD Banknorth’s strong liquidity profile and gives the Company a competitive advantage given the tight credit markets. Going forward, DBRS believes that TD Banknorth faces the difficult dual challenge of retaining Commerce’s service-sensitive customers and migrating Commerce’s service-oriented business model to TD Banknorth. Mitigating these concerns, DBRS notes that TD Banknorth is very experienced in integrating acquired banks and had started rolling out extended hours and improved customer service at the legacy TD Banknorth branches prior to the Commerce acquisition. Furthermore, TD sees itself as being the most convenient bank in Canada, so the Canadian and U.S. business models are similar, which should help in creating a unified brand.

To achieve economic benefits in acquiring Commerce, TD underwent an internal restructuring. As a result of the restructuring and the Commerce acquisition, TD Banknorth now has negative regulatory and tangible equity capital ratios at the intermediate holding company level. DBRS notes that the banking subsidiaries remain well capitalized and expects TD to support TD Banknorth in the unlikely event support is needed.

Asset quality within the loan portfolio has held up relatively well and is in line with those of its similarly rated peers. Like most banks, TD Banknorth has seen deterioration within its residential construction portfolio. Within the $29.7 billion commercial loan portfolio, approximately $1.8 billion, or 6%, is related to residential for-sale housing, with only very small exposures located in more troubled regions such as Florida. Non-performing assets (NPAs) actually declined to 0.79% of total loans and other real estate owned (OREO) in the first quarter of 2008 from 0.96% in the previous quarter. Meanwhile, net charge-offs (NCOs) increased to 0.62% from 0.30% for the same time period, primarily in the residential construction portfolio. DBRS believes that modest further erosion in TD Banknorth’s asset quality is likely given the confluence of sustained weakness in the housing sector and a recessionary economy.

TD Banknorth Inc., a bank holding company with its headquarters in Portland, Maine, had $118.2 billion in assets at March 31, 2008.

Note:
All figures are in U.S. dollars unless otherwise noted.