Wednesday, January 24, 2007

TD Banknorth Q4 2006 Earnings

RBC Capital Markets, 24 January 2007

Investment Opinion

• Earnings Summary: 4Q06 operating cash earnings declined by 18% year-over-year, but were flat sequentially.

• Modest Margin Pressure: BNK's margin decreased 6 basis points sequentially to 3.95% due to higher deposit and borrowing costs. Modest margin pressure is expected to persist over the next couple of quarters.

• Mixed Loan Growth Trends: Commercial business loans contracted by 1.3% sequentially, commercial real estate loans were flat, consumer loans increased 5.1% and residential mortgage loans contracted by 4.3%. We expect only moderate commercial and consumer loan growth over the next several quarters due to extremely competitive pricing for high quality lending opportunities.

• Mixed Deposit Trends Also Reported: Total deposits contracted 1.8% sequentially. Core deposits declined 3.1%, and CDs served as a partial offset, increasing 2.0% sequentially. Deposit gathering is expected to remain intensely competitive for the remainder of 2007, in our view.

• Asset Quality Deteriorated: Non-performing assets increased by 41% sequentially to $132.4 million, and net charge-offs jumped 79% to $11.3 million. These are sizable increases, but at 0.33% of total assets and 0.22% of average loans, NPAs and NCOs remain at very manageable levels, in our opinion. Further increases in NPAs and NCOs are likely over the next several quarters, but we think the deterioration should be viewed as a return to more normalized levels.

• Adjustments: We suspended our 2007 EPS estimate due to the fact that the TD Bank Financial Group is expected to complete its acquisition of TD Banknorth by the end of 1Q07. We do not expect TD Banknorth to report another quarter as a stand-alone entity.

• Rating: The stock trades at a fractional discount to the cash acquisition price of $32.33 per share, justifying our Sector Perform rating..
Bloomberg, Sean B. Pasternak, 24 January 2007

TD Banknorth Inc., the U.S. consumer banking unit of Toronto-Dominion Bank, said fourth-quarter profit rose 50 percent on increased deposits from its purchase of Hudson United Bancorp.

Net income climbed to $83.4 million, or 36 cents a share, from $55.6 million, or 32 cents, a year ago, the Portland, Maine-based bank said today in a statement.

TD Banknorth, along with larger rivals Bank of America Corp. and Wachovia Corp., have used acquisitions to increase deposits and counter declining profit margins as interest rates rise. Average deposits climbed 34 percent to C$27.3 billion, mostly because of Hudson United, acquired in February.

``Pressure on margins has been a theme for a lot of the regional banks,'' said Kevin Timmons, an analyst at Albany, New York-based CL King & Associates, before the results were released.

TD Banknorth's net interest margin, the difference between what it earns in loans and pays on deposits, fell to 3.95 percent from 3.96 percent a year ago.

TD Banknorth shares rose 2 cents to $32.19 at 4:10 p.m. trading on the New York Stock Exchange and are little changed this year. Toronto-Dominion rose 80 cents, or 1.2 percent, to C$69.60 on the Toronto Stock Exchange.

Bharat Masrani, who takes over as chief executive officer in March, said that competition for loans and deposits ``continues to be intense'' and that the bank will focus on increasing deposits and fee income through its existing branches. TD Banknorth competes in New York and New England against lenders including Sovereign Bancorp Inc. and Bank of America.

TD Banknorth is looking at cost-cutting measures that would reduce operating expenses by 5 percent to 8 percent, and may result in a one-time charge, Masrani told investors on a conference call today.

``We have come across a lot of opportunities in our review to become more efficient,'' Masrani said today in a telephone interview.

Toronto-Dominion, Canada's second-biggest bank, agreed in November to buy the 43 percent of TD Banknorth it doesn't already own for $3.2 billion in cash. Toronto-Dominion Chief Executive Officer Edmund Clark said that he wants to ``transform'' TD Banknorth, which has been struggling with higher expenses and declining interest margins. Profit has declined in five of the last seven quarters.

Non-interest expenses climbed 33 percent to $287.8 million in the quarter because of costs related to the Hudson United purchase. TD Banknorth set aside $15.5 million for bad loans, more than double a year ago.

Excluding one-time items, profit was 51 cents a share, in line with the average estimate of 12 analysts surveyed by Bloomberg News.

Clark said TD Banknorth will offer a wider variety of deposit and asset-management products, while putting acquisitions on hold. The transaction is expected to close in March or April.

``You have to build a bank before you can build a better bank,'' Clark said Jan. 17 at an investor conference in Toronto. ``We have to prove we can take that asset and make it more money than it is today.''

Toronto-Dominion said today that it expects to have first- quarter profit of C$64 million ($54 million) from its investment in TD Banknorth when it reports results on Feb. 22.

Toronto-Dominion's U.S. earnings will probably increase 31 percent in the fiscal quarter, based on reported results from TD Banknorth and TD Ameritrade Holding Corp., an online brokerage, Genuity Capital Markets analyst Sumit Malhotra wrote today in a report.