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

DBRS has today confirmed the ratings of TD Banknorth Inc. (TD Banknorth or the Company) at AA (low) and R-1 (middle). DBRS has also confirmed the rating of TD Banknorth’s related entities as indicated below. The rating action follows a detailed review of the Company’s operating results and financial fundamentals. The trend on all ratings remains Stable.

TD Banknorth’s ratings are based on the ownership by the financially strong Toronto Dominion Bank Financial Group (TD – rated AA), a sound banking franchise with a healthy core deposit base, and solid asset quality. The confirmed ratings also take into account the Company’s need to rationalize its operating platform, less robust organic growth of loans and deposits, and below-peer capitalization.

On April 20, 2007, Banknorth became a wholly owned subsidiary of TD. Implicit in the ratings is DBRS’s expectation that TD has the resources and motivation to support Banknorth, in the unlikely event that financial support is necessary. Without the support of its parent, Banknorth would likely be rated at a lower level. That said, the Company is the principal U.S. operating bank subsidiary of TD and currently accounts for approximately 10% of consolidated assets and 5% of net income (before amortization of tangibles).

DBRS characterizes the Company’s deposit franchise as significant with greater than 10% market share in 60% of its 35 MSAs. Banknorth has a leading deposit market share in Maine and significant second-tier state market shares in Massachusetts, Connecticut, New Hampshire and Vermont.

DBRS notes that asset quality continues to remain strong and credit costs continue to compare favorably to its peer banks for the past five years. In Q1 2007, however, the Company reported elevated levels of NPAs from its residential construction portfolio, primarily in the Mid-Atlantic region, due to a slowdown in the housing market. TD Banknorth continues to have an elevated exposure to the commercial real estate sector. DBRS notes, however, that the Company’s disciplined underwriting standards including conservative loan-to-value ratios, well secured positions, strict capital-based product loan limits and ample debt coverage somewhat mitigate this concentration.

TD Banknorth’s profitability improved in 2006 and Q1 2007 compared to 2005 levels. This improved profitability along with strong loan and deposit growth was primarily driven by the Hudson United Bancorp and Interchange Financial acquisitions. The Company, however, was challenged by the difficult operating environment that negatively impacted its net interest margins. In addition, TD Banknorth’s financial statements continue to have a material amount of charges related to acquisitions and discontinued operations.

DBRS believes that TD Banknorth needs to rationalize its existing operating network, which has been built via acquisition and whose profitability has been below peer levels for the past few years as management fully integrates the newly acquired institutions and promotes the TD Banknorth brand. TD Banknorth’s management is currently focusing on leveraging TD’s expertise in products and services while reducing expense levels.

Although TD Banknorth’s loans and deposits have expanded by approximately 40% annually over the past two years, growth excluding acquisitions has been in the low to mid single-digit range. Management is focused on enhancing organic growth; however, DRBS believes that this will be a significant challenge given the difficult operating environment, its highly competitive newer markets and its legacy acquisition-based culture.

Capital ratios have been declining over the past few years with tangible equity most impacted at 4.8% of tangible assets at March 31, 2007. This likely reflects TD’s propensity for managing capital at the highest corporate entity for the sake of efficiency.

TD Banknorth, a diversified financial services company headquartered in Portland, Maine, with offices in nine Northeastern states, reported $41 billion in assets and $29 billion in deposits at March 31, 2007.

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