Rating agency DBRS has confirmed the ratings of TD Banknorth Inc., following 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 TD Bank Financial Group, a sound banking franchise with a healthy core deposit base, and solid asset quality,” DBRS says.

It notes, however, that the 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, Banknorth became a wholly owned subsidiary of TD. DBRS says its ratings factor in the expectation that TD has the resources and motivation to support Banknorth, in the unlikely event that it required financial support. Without the support of its parent, Banknorth would likely be rated at a lower level, it notes.

As for the bank’s business, DBRS characterizes the company’s deposit franchise as significant. It 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 the first quarter of 2007, however, DBRS says, “the company reported elevated levels of [non-performing assets] 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, it adds.

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, it says. “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,” it says.

“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,” DBRS adds.

TD Banknorth’s management is currently focusing on leveraging TD’s expertise in products and services while reducing expense levels, the rating agency observes. “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,” it says.