Thursday, July 27, 2006

TD Banknorth Q2 2006 Earnings

  
Scotia Capital, 27 July 2006

• TD Banknorth reported Q2/06 operating earnings of US$0.56 per share, versus US$0.55 in the previous quarter and US$0.63 a year earlier, in line with consensus estimates of US$0.55 per share.

• Reported earnings were US$0.41 per share and included the following after-tax charges: US$0.11 per share for the amortization of intangible assets and US$0.04 per share for merger and restructuring costs.

• Operating EPS were negatively impacted by earnings dilution from the acquisition of HU. The bank issued 62 million shares in conjunction with the HU acquisition which closed on January 31, 2006 with weighted average diluted shares increasing 31% year over year at the end of the second quarter.

• Operating earnings declined 11% YOY, with operating revenue increasing 23% YOY, and operating expenses increasing 27% YOY.

• BNK issued approximately 62 million shares related to the acquisition of HU (including the sale of 29.6 million shares to TD). As a result of this share issuance, partly offset by the repurchase of 8.5 million shares, the number of weighted average shares outstanding on a diluted basis was 228.8 million in Q2/06 compared to 210.4 million in the previous quarter and 174.3 million a year earlier. Thus weighted average diluted shares outstanding increased 31% YOY and 9% QOQ.

• BNK's contribution to TD Bank is estimated at C$68 million or C$0.09 per share in Q3/06, compared with $59 million or C$0.08 per share in the previous quarter.

Margin Compression Easing?

• Net interest margin (NIM) for the quarter improved to 4.07% from 3.83% in the previous quarter but declined from 4.12% a year earlier. The increase in net interest margin from the first quarter reflected the impact of the Company's balance sheet deleveraging program.

• The bank expects margin compression to remain a challenge but perhaps not to the samedegree that it has been. Management stated on the conference call that if loan growth is healthy they may have to pay up a bit to get deposits in the third and fourth quarters. However, they said that they intend to maintain the net interest margin at 4%.

Solid Commercial Loan Growth; Consumer Loans and Deposits Flat

• Average loans increased 27% YOY mainly due mainly to the HU acquisition. Organic loan growth was approximately 8% YOY with strength in commercial loans and consumer loans relatively flat. On a QOQ basis, loan growth was a modest 1.2% (4.8% annualized) due to competitive pressures. Thus, loan growth appears to be slowing.

• Average deposits increased 34% YOY due to the HU acquisition. However, organic deposit growth was 2% YOY and deposits were unchanged QOQ, primarily due to continued competitive deposit pricing.

Total Revenues Increase 23% YOY; Expenses Increase 27% YOY

• Total operating revenues (excluding securities gains/losses, and losses on derivatives) increased 23% YOY to US$433.9 million versus US$353.6 million a year earlier.

• Total operating expenses (excluding amortization of intangibles, merger and restructuring costs, and prepayment penalties) increased 27% YOY to US$232 million from US$183.3 million.

Operating Expenses under Control?

• Non-interest revenues increased to US$127 million from US$101 million (excluding securities gains/losses, and losses on derivatives) a year earlier, primarily due to the HU acquisition. • Non-interest expenses increased 27% YOY (excluding amortization of intangibles, merger and restructuring costs, and prepayment penalties) to US$232 million due to increased Hudson United-related operating expenses.

• Organic non-interest expense (excluding amortization of intangibles, merger and restructuring costs, and prepayment penalties) increased by 6% or US$12.4 billion from the previous quarter. Advertising and marketing expenses increased $1.8 million or 22% QOQ.

• Management expects expenses to grow in the 0%-5% range and expects that in the next few quarters it will be closer to 0% than 5%. While management commented that there could be some additional cost saves associated with HU in the third quarter, they will probably be offset by increased marketing expenses.

Loan Loss Provisions

• Loan Loss provisions (LLPs) were US$8.7 million or 0.14% of loans compared to US$6.9 million or 0.11% of loans in the previous quarter and US$3.6 million or 0.07% of loans a year earlier.

• Total non-performing loans (NPLs) in the second quarter were US$86.9 million or 0.34% of total loans compared to US$78.6 million or 0.31% of total loans in the previous quarter and US$70.1 million or 0.35% of total loans a year earlier.

• Non-performing assets (NPAs) were US$89.1 million or 0.22% of total assets versus US$90.7 million or 0.22% in the previous quarter and US$73.9 millions or 0.23% a year earlier.

Tier 1 Capital Ratio at 7.9%

• Tier 1 risk-based capital ratio was 7.9% versus 7.7% in the previous quarter and 8.3% a year earlier. Total risk-based capital ratio was 11.0%, versus 11.7% in the previous quarter and 10.1% a year earlier.

Acquisition of Interchange Financial Services Corporation

• On April 13th, BNK announced its intention to acquire Interchange Financial Services Corporation (IFCJ-NASDAQ) of New Jersey for US$480.6 million cash.

• The cash for the transaction will be financed mainly through the sale of 13 million BNK common shares to TD at a price of US$31.17 per share.

• The transaction is expected to close early in the first quarter of 2007.

Recommendation

• Our 2006 and 2007 earnings estimates for TD are C$4.50 per share and C$5.00 per share, respectively.

• Our 12-month share price target on TD is $70 representing 15.6 x our 2006 cash earnings estimate.
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RBC Capital Markets, 27 July 2006

• Earnings Summary: 2Q06 operating cash earnings declined by 11% year-over-year, but improved 1.8% sequentially.

• Margin Improvement: BNK's margin jumped 24 basis points sequentially to 4.07% due to the positive impact of ongoing balance sheet de-leveraging. Modest margin pressure is still expected over the next couple of quarters.

• Loan Growth Trends: Commercial business and consumer loans increased 3.6% and 4.8% sequentially, which more than offset a planned reduction in residential mortgage loans of -1.4%. We expect strong commercial and consumer loan growth to continue over the near-term.

• Strong Core Fee Income Growth: Core fee income increased 6.9% sequentially, driven by strong deposit service, merchant banking and loan fees off a seasonally weak first quarter. We think 8-10% core fee income growth should continue.

• Asset Quality Held Steady: Non-performing assets declined by 1.7% sequentially to $89.1 million, and held steady sequentially at 0.22% of total assets. Reserves remained healthy at 1.07% of total loans vs. 1.08% at the end of the prior quarter. We expect asset quality to remain stable for the remainder of 2006.

• Adjustments: We increased our 2006 operating cash earnings estimate to $2.24 from $2.23 P/S, lowered our 2007 cash EPS estimate to $2.46 from $2.48, and upped our 12-month price target to $30 from $27 per share (now valuing on 2007E cash EPS instead of 2006E).

• Thoughts On The Stock: The second quarter earnings report was encouraging for those of us expecting BNK to return to more normalized double-digit EPS growth in 2007. But, at 12x our current 2007 cash EPS estimate, we view the stock as fairly valued, and we view the company as an ongoing acquirer. Therefore, we would continue to avoid the stock.

• Rating: TD Banknorth trades in-line with our revised fundamental price target of $30 per share, justifying our Sector Perform rating with Average risk, in our opinion.
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BMO Capital Markets, 26 July 2006

TD Banknorth reported earnings for the second quarter this morning. Cash EPS were US$0.56 versus street estimates of US$0.55. The modest upside surprise came from a combination of somewhat better revenues (due to margins) and tight expense control. A slightly lower tax rate offset a slightly high loan loss. Overall, these results are marginally ahead of forecast (see additional comments from Lana Chan in BMO Capital Markets U.S. Research). Management indicated that the Hudson United conversion (which occurred during the second quarter) went extremely well. Following the press release, TD disclosed this morning that this would translate into a contribution of $68 million for TD in its third quarter results, compared to $59 million in the second quarter. This was in line with our expectations. We believe that TD shares offer good value here. AMTD is in good shape while BNK continues to plod along. We also believe that the core franchises in Canada are in good shape and will produce solid results in the short term.
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Bloomberg, 26 July 2006

TD Banknorth Inc., the U.S. banking arm of Toronto-Dominion Bank, said second-quarter profit fell less than analysts expected as an increase in commercial loans countered higher merger costs. The stock had its biggest one-day jump in five months.

Net income fell 2.3 percent to $93.4 million, or 41 cents a share, from $95.6 million, or 55 cents a share a year earlier, the Portland, Maine-based bank said today. Revenue rose 17 percent to $433.9 million.

Loans increased 27 percent and deposits soared 34 percent after TD Banknorth completed its $1.9 billion purchase of Mahwah, New Jersey-based Hudson United Bancorp to expand in New York and New Jersey.

"Over the long term, they'll be able to leverage it better than the previous management" at Hudson, said Lee Calfo, director of bank research at Cohen Brothers & Co. in Philadelphia. "They're clearly much more visible than they used to be with the signage and with the advertising."

Chief Executive Officer William Ryan, 62, has been making acquisitions in the U.S. northeast with the help of Toronto-Dominion, which bought a controlling stake of TD Banknorth last year. TD Banknorth agreed in April to buy Interchange Financial Services Corp. of Saddle Brook, New Jersey, for $467.5 million.

Excluding one-time items, the bank earned 56 cents a share, topping the 55-cent-a-share average estimate of 12 analysts polled by Thomson Financial.

Shares of TD Banknorth rose 72 cents, or 2.5 percent, to $29.67 at 4:05 p.m. trading on the New York Stock Exchange, the biggest one-day jump since Feb. 1.

The U.S. Federal Reserve's 17 straight interest-rate boosts have forced TD Banknorth to pay higher rates on deposits, which lowered margins this quarter for banks including Wachovia Corp., BB&T Corp. and Fifth Third Bancorp. TD Banknorth's net interest margin fell to 4.07 percent from 4.12 percent a year ago. Margins rose from 3.83 percent in the first quarter.

"I think there is another rate increase out there, so the margin compression will continue for this year," Ryan said today in a telephone interview. "It's certainly going to be here for another quarter or two."

Ryan said that continued margin pressure will likely lead to acquisition opportunities this year for TD Banknorth.

"There are some smaller banks that will decide that competing against everybody else is just too hard to do," Ryan said. "We're ready to acquire another bank, if we thought there was one that was a good fit."

To support the Hudson United purchase, TD Banknorth will increase its advertising budget to between $10 million and $12 million a quarter, up from an average of $30 million to $33 million a year.

Most of the new advertising will take place in metropolitan New York and New Jersey, where the lender has combined advertising with Toronto-Dominion and TD Ameritrade, the third- biggest online brokerage.

"The first thing you have to do if you're new in a market is get your market share up to a level you're comfortable with," Ryan said. "You can't do that unless people know who you are."

TD Banknorth set aside $9 million for bad loans, up from $3.7 million a year ago. Merger costs almost tripled to C$9.6 million.

Toronto-Dominion, Canada's second-largest bank by assets, said today that its U.S. consumer banking profit will be C$68 million ($59.7 million) in the fiscal third quarter. The Toronto-based bank is scheduled to report earnings on Aug. 24.
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