NewAlliance Reports in Line – Analyst Blog

New Alliance Bancshares Inc.’s (NAL) second quarter 2010 earnings came in at 15 cents per share, in line with the Zacks Consensus Estimate. This compares favorably with earnings of 14 cents in the prior quarter and 13 cents in the year-ago quarter.

 

Earnings for the reported quarter included the gain on limited partnership, net of taxes of 1 cent per share. Taking this into consideration, earnings stood at 16 cents per share, down 5.9% from the prior quarter, but up 60% from the prior-year quarter.

 

The results improved primarily due to an extraordinary revenue impetus, a strong growth in deposits, robust loan originations and improved net interest margin (NIM). Besides, NewAlliance continued to maintain a solid capital position during the quarter. However, higher provision for loan losses and increased non-interest expense were the downsides.

 

Behind the Headlines

 

Net income was $16.3 million, down 0.6% from $16.4 million in the prior quarter, but up 61.4% from $10.1 million in the prior-year quarter. Excluding a gain related to limited partnership, net of tax of $1.7 million, net income stood at $14.6 million for the reported quarter.

 

NewAlliance’s revenues were $71 million, a 0.4% increase over the prior quarter and 11.8% over the year-ago quarter. Revenues also beat the Zacks Consensus Estimate of $69 million.

 

Net interest income climbed 3.8% sequentially and 15.4% year over year to $57.7 million. Net interest margin (NIM) for the quarter improved 5 basis points (bps) sequentially and 39 bps year over year to 3.02%. 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 12 bps sequentially and 76 bps year over year.

 

Total deposits spiked up 1.6% from the prior quarter and 5.6% from the prior-year quarter to 5.13 billion in the quarter. Loan originations totaled $534.9 million, up 37.2% sequentially and 32.6% from the year-ago quarter.

 

Non-interest income declined 11.9% sequentially and 2.0% year over year to $13.3 million. Including $2.6 million of total net gains or losses on securities and limited partnerships, non-interest income was $15.9 million, up 3.2% sequentially and 3.9% year over year.

 

Non-interest expenses inched up 3.3% sequentially but fell 1.8% year over year to $43.6 million. Sequential increase was due to an increase of 8.1% in salaries and employee benefits expenses.

 

Capital Evaluation

 

As of June 30, 2010, NewAlliance remained well capitalized with tangible common equity ratio of 11.11% compared with 11.10 % as of March 31, 2010 and 10.49% as of June 30, 2010. Also, Tier 1 leverage capital ratio was 11.17% compared with 11.34% as of March 31, 2010 and 10.88% as of June 30, 2009.

 

Evaluation of Credit Quality

 

The overall credit quality of NewAlliance deteriorated during the quarter. Net charge-offs were up 13 bps sequentially and 6 bps year over year to 0.39% of average loans. Non-performing assets increased 1 bps sequentially and 16 bps year over year to 0.81% of total assets.

 

The allowance for loan losses fell 2 bps sequentially but rose 5 bps year over year to 1.11% of total loans. The provision for loan losses climbed 14.6% sequentially and 10.0% year over year to $5.5 million.

 

Profitability Ratios

 

NewAlliance’s profitability ratio was impressive during the quarter. Return on equity (ROE) improved 160 bps year over year to 4.49% and return on assets (ROA) increased 29 bps year over year to 0.76%.

 

Book value per share as of June 30, 2010 was $13.93 compared with $13.61 as of March 31, 2010, and $13.18 as of June 30, 2009. Tangible book value came in at $8.62 per share as of June 30, 2010, compared with $8.32 as of March 31, 2010, and $7.87 as of June 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 August 19, 2010, to shareholders of record as of August 9, 2010.

 

While NewAlliance is expected to benefit from its strong capital position and growth in core deposits relative to its peers, increasing credit costs will keep earnings under pressure.

 

NewAlliance currently retains a Zacks #4 Rank, which translates into a short-term Sell rating. However, considering the fundamentals, we are maintaining our Neutral recommendation on the stock in the long term.