NewAlliance Bancshares Inc.’s (NAL) third-quarter earnings came in at 13 cents per share, two cents ahead of the Zacks Consensus Estimate. This also compares favorably with earnings of 11 cents per share in the year-ago quarter.
 
The upside was primarily due to strong growth in core deposits, organic loan originations and improved net interest margin (NIM). Also, gains from mortgage banking activity and loan sales were strong during the quarter.
 
Net income for the quarter was $12.6 million, compared to $10.9 million in the prior-year quarter.
 
Net interest income increased 3.7% sequentially and 7.7% year over year to $51.8 million. NIM for the quarter improved 8 basis points (bps) sequentially as well as year over year to 2.71%. The increase in net interest income and the net interest margin is directly related to the reduction in costs associated with borrowings and deposits. The cost of deposits has continued to decrease over the last three quarters and has decreased by over 23% compared to the prior year quarter while the average balance of interest bearing core deposits has increased by $775.4 million from the prior year quarter.
 
Non-interest income increased 7.6% sequentially and 22.7% year over year to $16.4 million. The year-over-year increases were due primarily to depositor service charges. In addition, wealth management fees showed a significant improvement on a linked quarter basis. Non-interest expenses for the reported quarter increased 4.9% sequentially and 2.1% year over year to $42.2 million. The company expects 2009 expense levels to be in line with the 2008 levels.
 
At the end of the quarter, the company remained well capitalized with Tier 1 leverage ratio of 10.97% compared to 10.88% at June 30, 2009, and 11.03% at Sept 30, 2008.
 
Overall credit quality was mixed during the quarter. Net charge-offs were up 10 bps sequentially and 20 bps year over year to 0.43% of average loans. However, non-performing assets improved 4 bps sequentially but deteriorated 17 bps year over year to 0.61% of total assets. The allowance for loan losses increased 2 bps sequentially and 9 bps year-over-year to 1.08% of total loans. The provision for loan losses increased 8.7% sequentially and 29.4% year over year to $5.4 million.
 
Profitability ratios were impressive during the quarter. Return on equity (ROE) improved 68 bps sequentially and 44 bps year over year to 3.57% and return on assets (ROA) improved 12 bps sequentially and 6 bps year over year to 0.59%.
 
Book value came in at $13.39 per share at the end of the quarter, compared to $13.18 at June 30, 2009 and $13.08 at Sept 30, 2008. Tangible book value came in at $8.09 per share at quarter end, compared to $7.87 at June 30, 2009 and $7.72 at Sept 30, 2008.
 
While NewAlliance is expected to benefit from its strong capital position and credit quality relative to its peers, increasing credit costs will keep earnings under pressure. Therefore, we are maintaining our Neutral recommendation on the shares.
Read the full analyst report on “NAL”
Zacks Investment Research