Toronto Dominion Bank today reported a 17 17% increase in third-quarter profit. As well, the bank announced that it will acquire 51% of U.S.-based Banknorth Group Inc. in a cash and stock deal worth US$3.8 billion.

TD said net income for the quarter ended July 31 was $584 million, or 86¢ per share, up from $501 million, or 73¢ per share in the year-ago period.

Stripping out certain items, profit was 91¢.

The bank also raised its quarterly dividend to 36¢ from 34¢.That’s the second increase this year.

Retail earnings climbed 14%, as low interest rates boosted mortgage sales. Wholesale banking income jumped by 21%.

Stronger credit quality allowed the bank to record a $17 million reversal of credit losses, compared with a provision of $59 million in the year-ago quarter. The bank also released an additional $100 million that had been set aside to cover provisions.

Return on equity was 18.4%, up from 17.1% in the year-ago quarter.

Separately, the bank announced it will acquire 51% of U.S.-based Banknorth Group Inc. in a US$3.8 billion cash and stock deal,.

Under the terms of the agreement, each Banknorth shareholder will receive a package of US$12.24 in cash, 0.2351 of a TD common share and 0.49 shares of the new Banknorth stock, which will continue to be listed on the New York Stock Exchange.

TD will initially be adding up to five members to the board in addition to the current 14 Banknorth directors.

Bill Ryan will join TD’s board and remain chairman, president and CEO of Banknorth, which is headquartered in Portland, Maine.

The deal is expected to close in February 2005, pending regulatory and shareholder approval.

Ratings agencies have already offered their opinions on the merits of the transaction.

Standard & Poor’s Ratings Services today affirmed its ratings on the Toronto-Dominion Bank following the company’s announcement that it plans to acquire a controlling interest in Banknorth Group Inc. The outlook on TD is stable.

S&P notes that TD Bank will use Banknorth, which has been in an acquisition mode during the past few years, as its principal vehicle for retail and commercial banking in the U.S. market. This is very important from a strategic point of view given the limited growth opportunities available in Canada, it says.

“With respect to the acquisition, Standard & Poor’s does not expect this transaction to generate substantial operating synergies, especially in terms of cost savings,” said Standard & Poor’s credit analyst Lidia Parfeniuk. “Furthermore, we view this transaction as being more of a financial investment rather than a strategic acquisition for the time being. On the positive side, the success of this incremental growth strategy could allow TD Bank to achieve a stronger foothold in the larger, more diverse U.S. market in the future.”

Dominion Bond Rating Service has placed all TD’s long-term ratings “Under Review with Developing Implications” with Stable trends.

DBRS says that its preliminary opinion is that all long-term ratings will be confirmed, the “Under Review with Developing Implications” recognizes that this is a meaningful transaction and that DBRS does not presently rate Banknorth Group Inc.

It notes that the deal strengthens TD’s position to make future acquisitions in the U.S. through Banknorth, which has a history of successful acquisitions and integrations under the existing management team. This deal will face low integration risk as TD and Banknorth operations will not be combined, senior management at Banknorth will remain intact, and projected earnings are not based on generating revenue and expense synergies.

“One of the primary challenges facing TD is the management of a large minority shareholder position in Banknorth despite having effective control through representatives on Banknorth’s board of directors,” DBRS said.

Moody’s Investors Service has also affirmed its ratings of TD, noting that the bank benefits from a sizable market presence and strong recurring earnings in its Canadian banking franchise.

“While this transaction causes some increase in TD’s financial leverage, Moody’s expects the bank’s domestic earnings capacity will enable the bank to reduce its leverage in the medium-term.”