TD Banknorth Inc. said Monday that it would use purchase accounting for the March 1 sale of a majority stake to Toronto-Dominion Bank, so the earnings it reports this year will be dramatically lower than under the historical method it had hoped to use.
The Portland, Maine, company discussed the accounting issue in April, but the Securities and Exchange Commission had not weighed in. On Monday the company said the SEC had asked it to use purchase accounting. The former Banknorth Group Inc. reincorporated after Toronto-Dominion acquired a 51% stake.
As TD Banknorth predicted April 25, when it reported preliminary first-quarter earnings under both methods, purchase accounting lowered the figure by $8.2 million, to $34.1 million.
It said Monday that it now expects to earn 51 cents a share in the second quarter, 11 cents below Monday morning's median estimate compiled by Thomson First Call. It also said that it expects to earn $2.16 a share for the full year. The average of analysts' estimates is $2.49.
William J. Ryan, TD Banknorth's chairman, president, and chief executive, expressed disappointment on the conference call but told investors: "The economics of our company have not changed as a result of having to do purchase accounting. We don't plan on operating the company any differently than we did before."
The SEC had required TD Banknorth to use the fair-value methodology for totaling its assets and liabilities as of March 1. Its preliminary first-quarter earnings results had used both historical and purchase accounting.
Mr. Ryan was more upbeat about 2005. Cash per-share earnings are expected to rise 2 to 4 cents, to a range of $2.55 to $2.59.
"We're hoping the market will accept cash earnings from us," Mr. Ryan said.
Under purchase accounting methodology, TD Banknorth's first-quarter profits fell 62%, to $34.1 million, or 18 cents a share. It blamed losses associated with its previously announced balance sheet deleveraging, merger and consolidation costs, a higher loss on derivatives, and the amortization of certain assets.
The accounting decision also meant that TD Banknorth's assets rose $3.8 billion in the quarter, to $32.1 billion, and that liabilities rose $401 million, to $25.7 billion. As previously announced, total loans rose 18%, to $19.6 billion.
Analysts said that TD Banknorth's main operations are still performing well but that its valuation will probably suffer in the near term.
"The core bank is doing fine," said Anthony R. Davis of BankAtlantic Bancorp's Ryan Beck & Co. "I continue to be impressed with trends in asset quality and the loan growth. The issue today is the valuation."
Mark Fitzgibbon of Sandler O'Neill & Partners LP said that to investors, the news "makes the company look less attractive. There is a decent contingency of people that don't look at cash earnings. My knee-jerk reaction is that it's bad for the stock price."
Mr. Davis said TD Banknorth needs time to rebuild its capital levels and boost its stock price before considering acquisition opportunities.
But it seems doubtful the company will wait very long. On Monday, Mr. Ryan reiterated the motivation for doing a deal with TD in the first place. "The reason for joining TD Bank was to have a parent that was much larger than us and had more capital available to them for acquisitions," he said.
He said that he expects M&A activity to pick up in the second half and that the company would be interested at that time in pursuing acquisitions.
Shares of TD Banknorth have risen 2.5% since March 1. On Monday the stock rose 1.4%.
