New Alliance Bancshares Inc.’s (NAL) third quarter 2010 earnings came in at 17 cents per share, just a penny ahead of the Zacks Consensus Estimate. Results were up 13% from the prior quarter and 31% from the prior-year quarter.
Earnings for the reported quarter leave out $4.6 million of merger-related expenses (pre-tax). Taking this into consideration, New Alliance reported a net income of 14 cents per share compared with 13 cents in the year-ago quarter.
The results improved primarily due to an extraordinary revenue impetus, lower provision for loan losses, a decent growth in deposits, robust loan originations and improved net interest margin (NIM). Besides, NewAlliance continued to maintain a strong capital position during the quarter. However, lower non-interest income and increased non-interest expenses were the downside.
Quarter in Detail
Net income was $13.9 million, up 10% from $12.6 million in the prior quarter. Excluding merger-related expenses, net income stood at $16.9 million for the reported quarter.
NewAlliance’s revenues were $75 million, up 2% sequentially and 10% year over year. Revenues also beat the Zacks Consensus Estimate of $73 million.
Net interest income climbed 5% sequentially and 17% year over year to $60.3 million. Net interest margin (NIM) for the quarter improved 6 basis points (bps) sequentially and 37 bps year over year to 3.08%. The increase in net interest income and net interest margin is directly related to the reduction in costs associated with borrowings and deposits. The cost of deposits decreased 1 bp sequentially and 54 bps year over year. The cost of borrowings decreased 35 bps sequentially and 106 bps year over year.
Total deposits increased 3% from the prior-year quarter to $5.14 billion. Loan originations totaled $597.6 million, up 12% sequentially and 67% year over year.
Non-interest income declined 8% sequentially and 11% year over year to $14.6 million. Non-interest income for the reported quarter included a non-recurring gain of approximately $2.6 million from investments in a limited partnership due to an initial public offering.
Non-interest expenses inched up 15% sequentially and 19% year over year to $50.2 million. Non-interest expense for the reported quarter included $4.6 million in merger-related expenses and $1.3 million in non-recurring retirement related expenses. Higher salaries and employee benefits were also partly responsible for the increase in non-interest expenses.
Capital Level
As of September 30, 2010, NewAlliance remained well capitalized with a tangible common equity ratio of 11.09% compared with 11.11% as of June 30, 2010 and 10.82% as of September 30, 2009. Also, Tier 1 leverage capital ratio was 11.05% compared with 11.17% as of June 30, 2010 and 10.97% as of September 30, 2009.
Credit Quality
The overall credit quality of NewAlliance was mixed during the quarter. Net charge-offs were down 4 bps sequentially and 8 bps year over year to 0.35% of average loans. Nonperforming assets were flat sequentially but up 20 bps year over year to 0.81% of total assets.
The allowance for loan losses fell 3 bps sequentially but remained flat year over year at 1.08% of total loans. The provision for loan losses decreased 27% sequentially and 26% year over year to $4.0 million.
Profitability Ratios
NewAlliance’s profitability ratios deteriorated during the quarter. Return on equity (ROE) decreased 70 bps sequentially to 3.79% and return on assets (ROA) decreased 12 bps sequentially to 0.64%.
Book value per share as of September 30, 2010 was $14.02 compared with $13.93 as of June 30, 2010 and $13.39 as of September 30, 2009. Tangible book value came in at $8.72 per share as of September 30, 2010, compared with $8.62 as of June 30, 2010, and $8.09 as of September 30, 2009.
Dividend Update
Concurrent with the earnings release, the board of directors of NewAlliance announced a quarterly dividend of 7 cents per share. The dividend will be paid on November 16, 2010, to shareholders of record as on November 5, 2010.
On August 19, 2010, the company entered into a merger deal with First Niagara Financial Group Inc. (FNFG). The transaction is expected to close by the end of the second quarter of 2011. Based on the closing price of First Niagara shares on August 19, the deal values NewAlliance at $14.09 per share, a 24% premium on the closing price on the same day.
While NewAlliance is expected to benefit from its strong capital position and growth in core deposits, we believe that increasing credit costs and significant exposure to residential real estate and commercial real estate loans will keep earnings under pressure. However, some of these concerns of NewAlliance will end after its acquisition by First Niagara.
Based on better-than-expected results, we expect earnings estimate revisions to take an upward direction in the coming days.
NewAlliance currently retains a Zacks #3 Rank, which translates into a short-term “Buy” rating. However, considering the fundamentals, we are maintaining our long-term “Neutral” recommendation on the stock.
NEWALLIANCE BCS (NAL): Free Stock Analysis Report
Zacks Investment Research
