Considering America's torrid rate of bank mergers and acquisitions over the past few decades, it may be surprising that this had never happened before. Regardless, NewAlliance Bancshares
On April 1, 2004, New Haven Savings Bank issued $1 billion in stock, merged with Alliance Bancorp (the holding company for Tolland Bank) and Connecticut Bancshares (the holding company for Savings Bank of Manchester), and changed its name to NewAlliance Bancshares.
All that activity makes for some hairy analysis -- as did the fiscal-year change from March 31 to Dec. 31. The foolish investor within me could get excited about the bigger numbers on the balance sheet, but the Foolish side of me wanted to know whether there was something more about NewAlliance that made it stand out from the sea of other banking and financial services companies. In other words, was there -- and is there now -- any reason to believe that NewAlliance will outperform its peers over the next five or 10 years?
A community-based business model
For starters, NewAlliance is emulating the community-banking business model that has worked quite well for BB&T
NewAlliance promises to make community involvement an integral part of its business plan, and it appears to have gotten off to a good start. In conjunction with the IPO, the company assigned $40 million worth of stock ($26 million after taxes) to the NewAlliance Foundation, which supports organizations that work in education, the arts, health and human services, and other community endeavors. Other significant donations have included $27 million to support affordable housing in greater New Haven, Conn., and $10 million to the NewAlliance Community Development organization. Of course, it doesn't take a Foolish investor to know that corporate commitments often do not come to fruition. In NewAlliance's case, this may just be an attempt to appease the community following the unpopular transition from mutual ownership to a publicly traded company.
Also notable is the banking industry's apparent respect for NewAlliance's management. An annual survey by the prominent U.S. Banker magazine ranked Chief Executive Officer Peyton R. Patterson as the "second most powerful woman in banking." Her peers atop this list include the executives of Citigroup
Turning to the non-glossy pages
Any prudent analysis of an investment must include a look at the actual 10-K. These are the pages that are usually printed on cheaper paper and lack the pretty pictures and gloss that are typical of the first few pages of most annual reports.
All banks are adapting to the flattening yield curve as it closes the gap between interest earned from loans and the rates paid on deposit accounts. This means that some barometers of performance, such as return on assets and net interest margin, have generally worsened, both at NewAlliance and across the industry. NewAlliance's latest quarterly statement (dated Sept. 31) reports only a minor drop in these numbers from the previous year, so I would not count that as a strike against the company.
To NewAlliance's credit, non-interest income (from service fees and income from insurance and wealth management products) is increasing, while a mere 0.29% of total loans is classified as non-performing, a drop from the year-ago quarter. That attests to NewAlliance's strong loan portfolio.
Now the not-so-nice news. While NewAlliance's headlines boast of the third quarter's 50% increase in earnings, the bank expects to fall short of its goal to increase non-residential lending by 10%. Meanwhile, anemic deposit growth and a low ROE of 5.48% (NewAlliance core component New Haven Savings Bank historically returned only around 5% on shareholders' equity) should quickly cool the Foolish investor's enthusiasm.
In addition, last year's efficiency ratio of greater than 70% illustrates the costliness of completing mergers. A lower ratio indicates greater control of expenses; most banks fall in the range of 30% to 60%. However, it is a good to see that this ratio has dropped significantly to 63% for the most recent quarter.
No doubt, the daily details of completing a three-way merger will distract management from working toward long-term objectives -- including a transition away from consumer-focused thrift banking and toward more commercially oriented services. Is it wise to maintain this pace of merger activity during such a transition, especially when the core business apparently needs greater focus? Perhaps the executives at NewAlliance are more focused on building a tempting takeover candidate rather than growing a strong bank worthy of investment in its own right.
Regardless, earlier this year, NewAlliance acquired Trust Company of Connecticut and more recently agreed to buy Cornerstone Bancorp, another Connecticut-based bank. This pattern of growth looks to continue, since the company includes in its latest 10-Q a "disciplined acquisition strategy" as its No. 1 operating objective.
Bank on it? Well .
As for this Foolish investor, I admire NewAlliance's plan to be a true community bank, but I'll park my money elsewhere until NewAlliance's core business shows greater strength. The company's deposit and loan portfolios need to show more growth from new accounts and generated business, rather than from acquisitions. If management is effectively reinvesting funds and controlling costs, we should see ROE increasing and a steady or falling efficiency ratio.
While NewAlliance should eventually transition just fine, in the interim there are likely more attractive -- and predictable -- places to invest your money. No doubt, NewAlliance is ripe for takeover once a restriction against acquiring the company is lifted in a few years. I'll wait and see ... and look forward, later on, to taking a second look at this bank.
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Fool contributor Jason Ramage looks forward to hearing your feedback. He does not have a financial interest in the companies mentioned in this article.