Second-quarter results reported Thursday by TD Banknorth Inc. and Hudson United Bancorp may have buttressed the case for the merger deal they announced this month.
Hudson United, of Mahwah, N.J., has been struggling with its business strategy of late, and expenses rose faster than revenue in the quarter. But William J. Ryan, TD Banknorth's chairman and chief executive, doesn't see that as an issue.
"If they have some weaknesses in the way they ran their company, we think that is our strength," he told investors and analysts Thursday morning during a conference call after TD Banknorth's earnings announcement.
On July 12, when the $1.9 billon deal was announced, Mr. Ryan said that he planned to cut Hudson United's expenses by 25%. During Thursday's call he said that he had met with Hudson United's management on Wednesday and had come away feeling even better about the deal than when it was announced.
"I have to tell you," Mr. Ryan said, that "we feel very comfortable that the challenges that we see in front of us are things that we think we have the skill sets to work with Hudson United on and solve."
Hudson United's profit rose 9.7% from a year earlier, to $34.7 million, lifted by a one-time gain of $11.4 million from releasing tax reserves into earnings. According to Thomson First Call, per-share earnings of 78 cents beat the average analyst estimate by 12 cents.
The $9.2 billion-asset company took charges of $6.5 million related to the reduction of the value of its investment in landfill gas projects and $1.7 million for beefing up its marketing efforts for boosting deposits. Though revenue fell 4.6%, to $117.2 million, expenses were up 10.2%, to $76.9 million.
Its core business operations did well, and the marketing campaign seems to have paid off.
Deposit and loan growth was "outstanding," said Kenneth T. Neilson, Hudson United's chairman, president and chief executive, in a press release. The loan book was up 5.4% from the first quarter, to $5.1 billion, and deposits rose 4.9%, to $6.6 billion, driven mainly by time deposits.
Some analysts were less enthusiastic. "Asset quality deteriorated modestly, and the balance-sheet growth was not quite what we had been expecting," said Joseph Fenech, who covers the company for Sandler O'Neill & Partners LP
The task before TD Banknorth is considerable, said Mark Fitzgibbon, who follows the Portland, Maine, company as Sandler's director of research.
"Getting the Hudson United people to think like Banknorth people and be able to get rid of a lot of the junky assets and liabilities" will take some time. "We are cautious of the deal."
The sale is expected to close early next year, and Mr. Neilson is expected to leave. Matthew Kelley of Moors & Cabot Inc. said he expects TD Banknorth to make more changes to Hudson United's management ranks.
TD Banknorth's $95.6 million profit was virtually flat from a year earlier because of a balance-sheet restructuring and one-time charges. One-time items also hurt, including a $3.5 million charge related to the January acquisition of BostonFed Bancorp Inc. of Burlington, Mass., and the March sale to Toronto-Dominion Bank of 51% of what was then Banknorth Group Inc.
TD Banknorth also took a $19.8 million charge related to changes to its accounting because of the Toronto-Dominion deal and realized a $9.6 million gain from the adjustment of its derivative portfolio.
Per-share earnings of 51 cents missed the average of analysts' estimates by 1 cent, according to First Call.
TD Banknorth's net interest margin, however, jumped 16 basis points as a result of the second-quarter restructuring of its balance sheet.
But Mr. Ryan said the quarter's highlight was commercial loan growth. Aggressive hiring of loan officers in recent quarters led net interest income to rise 10%, to $252.6 million. Noninterest income rose 29.1%, to $117.3 million.
"Commercial and consumer loan growth was up 14% for the quarter," Mr. Ryan said. "If you take out the acquisition of BostonFed, it was still up 10% for the quarter," and commercial loans were up 12% excluding acquisitions, he added.
Now, Mr. Ryan said, the company will focus more on gathering deposits. Deposits of $20 billion were up 3% from a year earlier but flat from the first quarter, because the company did not compete aggressively on interest rates for certificates of deposits. The year-over-year increase was entirely a result of the BostonFed acquisition, Mr. Ryan said.
But TD Banknorth is going to be more aggressive on its money market account rates, Mr. Ryan said, and will continue to focus on opening new checking accounts. Noninterest deposits were up 8% from the first quarter, to $4.6 billion, and the increase came entirely from new customers, Mr. Ryan said.
"We won't pay an absurd rate," he said. "We're going to concentrate on the money market accounts, the checking account, probably have a high-rate checking product that will offer 2.5% or 3%" for a limited time and "stay away from the CDs."
Shares of TD Banknorth fell 0.6% on Thursday in a down market. Hudson United's fell 0.3%.
