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

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 the Company, a wholly-owned U.S. subsidiary of The Toronto-Dominion Bank (TD – rated AA with a Stable trend), reflect its important role in TD’s North American strategy and DBRS’s expectation that TD has the resources and motivation to support TD Banknorth if needed. The ratings also take into account the Company’s robust deposit franchise in attractive markets and sound asset quality relative to other large banking peers. These strengths are somewhat offset by recent post-conversion systems challenges the Company experienced as part of the integration of Commerce Bancorp, Inc. and TD Banknorth, Inc., margin compression, and weak capitalization at the holding company.

As a result of TD Banknorth’s position in TD’s overall franchise, DBRS has assigned a SA1 designation to the Company, which implies strong and predictable support from the parent. As a supported rating with a SA1 designation, TD Banknorth’s rating will move in tandem with TD’s long-term debt ratings, which currently have a Stable trend. DBRS is confident of TD’s support as TD has placed its logo on all U.S. signage, the current TD Banknorth CEO came from the TD organization and TD has committed numerous resources in terms of both people and capital in helping manage and grow the U.S. operations. Furthermore, through the first nine months of TD’s fiscal year, TD Banknorth’s adjusted earnings (excludes merger integration costs) accounted for a significant 21% of Group adjusted earnings. TD management will continue to focus on U.S. expansion through both organic growth as well as additional banking acquisitions.

Before the full force of the recession was known, TD expected the combined U.S. franchise to contribute approximately $1.2 billion CAD (this excludes merger and integration expenses) to Group earnings in fiscal year 2009. Through three quarters, it appears adjusted earnings will come close, but fall short. Nevertheless, given the operating environment, DBRS believes the financial results have been solid. DBRS notes that both loans and deposits have grown nicely over the past year demonstrating that franchise strength is intact. With a core deposits to net loans ratio of 186%, deposits more than fund the loan portfolio and liquidity remains robust.

While the bulk of the integration of the legacy Commerce and TD Banknorth franchises went well, the recent post systems conversion did not go as planned. Specifically, the Company experienced delays related to the overnight batch processing of transactions. This caused disruptions to customer accounts as account activities were not posted in a timely manner. During the disruption, several competitors have targeted TD Bank customers. Historically, TD Bank has built a reputation as the leader in customer service and satisfaction. This systems integration issue could have a negative impact on the brand and more importantly on future growth prospects. DBRS will closely monitor the situation to see if the integration issue harms the bank in terms of lost client relationships and a potential outflow of deposits. DBRS notes that the new platform is now up and running properly and should provide a best-in-class platform to serve customers. Traditionally, service has been top-notch as evidenced by winning a prestigious industry award four years running for ranking the highest in customer service. As such, DBRS believes the Company will feel some short-term pain, but will eventually revert back to its historically strong organic growth capabilities.

Asset quality remains under pressure given the recession, but the Company continues to compare favorably to other large banks in terms of overall levels of nonperforming assets (NPAs) and net charge-offs (NCOs). Specifically, NPAs rose to 1.73% of total loans and other real estate owned (OREO) in the second quarter, from 1.45% in the previous quarter and 0.82% in Q2 2008. Meanwhile, annualized NCOs decreased modestly to 0.73% of average loans for the second quarter from 0.79% in the prior quarter. DBRS notes that the most problematic loan exposures like residential for-sale housing and credit cards only represent a combined 4% of the total loan portfolio, which can easily be absorbed through the Company’s earnings power. DBRS believes that the Company’s asset quality will remained pressured over the intermediate-term, but should continue to outperform peers.

To achieve economic benefits in acquiring Commerce, TD went through an internal restructuring. As a result of the restructuring and the Commerce acquisition, the holding company has regulatory ratios below “well-capitalized” guidelines. However, all bank subsidiaries remain “well-capitalized”. Furthermore, TD has strong capital and can act as a source of strength in the unlikely event help is needed.

TD Banknorth Inc., a bank holding company headquartered in Portland, Maine, had $131.4 billion in assets at June 30, 2009.

Notes:

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.