NewAlliance Bancshares, Inc. Q1 2009 Earnings Call Transcript

NewAlliance Bancshares, Inc. (NAL)

Q1 2009 Earnings Call Transcript

April 29, 2009 10:00 am ET

Executives

Jude Falango – First VP, IR

Peyton Patterson – Chairman, President and CEO

Don Chaffee – EVP and Chief Credit Officer

Merrill Blanksteen – EVP, CFO and Treasurer

Analysts

Mark Fitzgibbon – Sandler O'Neill Asset Management

Amanda Larsen – Raymond James

Collyn Gilbert – Stifel Nicolaus

Presentation

Operator

Hello and welcome to the New Alliance Bancshares first quarter 2009 earnings conference call. All participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today’s presentation (Operator instructions).

Now I’d like to turn the conference over to Ms Jude Falango, First Vice President, Investor Relations.

Jude Falango

Good morning. Statements in this conference call if any concerning future results, performance, expectations, or intentions are forward-looking statements. Actual results, performance, or developments may differ materially from forward-looking statements as a result of known or unknown risks, uncertainties, and other factors including those identified from time to time in the company’s filings with the SEC press releases and other communications. The company intends forward-looking statements to be covered by the Litigation Reform Act of 1995 and is including this statement for purposes of Safe Harbor provisions. Listeners are cautioned not to place undue reliance on forward-looking statements which speak only as of the date of this conference call.

Now I’ll turn the call over to Peyton R. Patterson, Chairman and Chief Executive Officer.

Peyton Patterson

Good morning and thank you for joining our first quarter earnings call. I am joined today by Merrill Blanksteen, our chief financial officer; and Don Chaffee, our chief credit officer who will be happy to take your questions at the end of my remarks. I am also pleased to welcome Gene Kirby who will serve as President of NewAlliance Bank. Gene joins us from SunTrust Bank in Atlanta, Georgia where he spent the last 24 years.

I am happy to report that NewAlliance continues to operate from a position of strength as evidenced by the 20% increase in our earnings on a linked quarter basis. This positive earnings momentum points to the strength of our business model, our prudent risk management focus, and the distinct value proposition we provide in the marketplace. Our first quarter results reflect the four priorities we established at the beginning of 2009 namely to strengthen balance sheet profitability, improve core banking fee income, maintain superior credit quality, and improve operating efficiency. Overall higher revenues coupled with lower expenses and a stable provision produced net income of $11.6 million or $0.12 per share, up $2 million or $0.02 per share over the linked quarter. Compared to the first quarter a year ago, net income was down $1.3 million or $0.01 per share. Net interest income was up nearly $200,000 over last quarter and nearly $2 million from a year ago. Average earning assets increased $64 million on a linked quarter basis and $270 million over last year. Total deposits grew by $214 million on a linked quarter basis and over $400 million year over year.

Turning to the net interest margin, one of our priorities in 2009 is to increase balance sheet profitability with a focus on core account growth and improved loan pricing. It is important to note that along with the increased deposit balances we have seen our cost of deposits decline as the mix improved. In fact our total cost of deposits dropped to 1.97% for the month of March compared to 2.24% in December, an improvement of 27 basis points. Importantly our focus on managing deposit rates and working to improve our deposit mix helped to mitigate the absence of the FHLB Boston dividend in the first quarter which negatively impacted the NIM by 4 basis points from the fourth quarter of 2008. Net of all these impacts, our NIM was down only 1 basis point to 2.58 from 2.59 at year end and up 2 basis points from the first quarter a year ago.

In non-interest income, the big story was record income of approximately $2 million from the gain on sale of fixed rate mortgages originated in the first quarter. This compared to income from these sales of approximately $200,000 in both the linked quarter and the same period a year ago with so many homeowners taking advantage of the opportunity to refinance to a lower fixed rate mortgage we have adjusted our strategy to reflect current market opportunities to originate these loans for sale. We recorded nearly 900 mortgage loans in the first quarter and expect to capitalize on this trend throughout 2009 although we do not forecast that we will realize gains at this magnitude in future quarters.

In our wealth management area NewAlliance Investments, our brokerage arm added $2.3 million to revenues compared to $1.6 million in the linked quarter and $2.5 million in the first quarter of 2008. Trust fees however were down due to the decline in assets under management. The positive service charges were however off $679,000 from the first quarter of 2008 and off $835,000 from the linked quarter as the impact of the recession on consumer spending continues. The bank’s securities portfolio continues to be in a strong unrealized gain position. Therefore we were able to realize a $1.9 million gain on sales of securities to offset $748,000 in losses on limited partnerships and a $475,000 write-down on mortgage servicing rights related to faster prepayments on loan serviced for others.

Now turning to expenses, another of our 2009 priorities was to improve operating efficiency this year and to offset increased regulatory expenses that we anticipated and we provided guidance to that effect. I am happy to say that in the first quarter we were able to do just that that as in total non-interest [ph] expense dropped $1.3 million on a linked quarter basis and $2 million from the same quarter a year ago. The primary factor contributing to the decline in expenses was salary and employee benefit expenses were down by $1.5 million or 6.5% from the linked quarter and down $2.5 million or 10.4% from the first quarter of 2008.

This was primarily due to the expenses associated with the FAS 123R costs on the initial 2005 option grant which ended in the fourth quarter of 2008. From the profit improvement project that I mentioned last year, we booked $600,000 in consulting expenses in the first quarter related to that project. FDIC insurance premiums also increased on a linked quarter basis and from a year ago by $768,000 and $761,000 respectively. Those expenses will move higher in the second quarter based on previously announced assessment charges.

Asset quality remained fairly stable as our loan loss provision at $4.1 million for the quarter was consistent with the prior three quarters as were charge-offs in the overall level of reserves. Don Chaffee our chief credit officer will speak to the specifics a bit later. Given customers’ comfort with the strength and stability of NewAlliance Bank combined with our active strategy to grow core deposits, we continue to experience strong deposit growth. Core deposits now represent 64% of total deposits, up from 60% at year end. In total, deposits have grown nicely and we have reduced our loan to deposit ratio from 112% to 106% over the last 12 months. Specifically, total deposits for the quarter were up $214 million or 5% over the linked quarter and up over $400 million or over 9% from the first quarter of 2008.

Compared to last year’s first quarter, core deposits rose $472 million or 19% and they were up $310 million or 12% on a linked quarter basis. At the same time, higher cost CDs were down nearly $100 million or 6% on a linked quarter basis and down $67 million or 4% from the first quarter last year. Within the poor account categories both savings and money market balances showed dramatic growth up $320 million or 18% on a linked quarter basis and $508 billion or 31% over a year ago as evidence of consumers’ flight to safety.

The brisk mortgage origination activity we began in 2008 continued into 2009 as many traditional competitors stayed on the sidelines. This has allowed us the opportunity to originate loans at higher spreads and take advantage of more fee income coming from the sale of fixed rate residential loans. As a result, mortgage originations were $288 million or $203 million over the linked quarter and up $135 million over the first quarter 2008, all originated in our markets with strict underwriting standards. With a reduction in conforming fixed mortgage rates caused by government purchases of mortgage securities, we were able to modify our mortgage strategy in the first quarter to an (inaudible) mode as consumer preferences for adjustable portfolio loans were reduced.

Therefore the residential portfolio is only up slightly due to the fact that we originate our fixed rate mortgages for sale. Specifically this quarter we originated $157 million in mortgages for sale and that allowed us to record non-interest income of approximately $2 million on this activity. We expect this business to continue to be strong throughout the year. Our mortgage originations were predominantly refinancing and more than 80% of those were from non NewAlliance mortgage customers as our relative position in the market has improved. Consumer loans were up $3 million or half of one percent mostly in home equity loans.

Growth in this portfolio is modest however since many borrowers are refinancing into fixed rate first mortgages and consolidating their home equity loans. While we remain an active commercial lender, given the state of the economy, we are finding fewer opportunities in the short term, so commercial mortgages were essentially flat and commercial loans were down by $17 million or about 4% from the linked quarter. The total loan portfolio as a result was down modestly from year end due to customer prepayment and the sale of fixed rate mortgage loans.

Now I would like to turn our attention to credit quality in the first quarter. I will ask Don Chaffee, our chief credit officer to make some remarks.

Don Chaffee

Thanks Peyton, hello everybody, it is nice to be here to talk to you about my passion, which is credit. Given the environment we are really pleased that our total delinquencies were only 1.33%, up 11 basis points from last quarter. But I wanted to point out they actually decreased 11 basis points from February, which we view as a very good sign. The 30-day bucket is down for the quarter by 13 basis points indicating that the pipeline is not refilling [ph] as fast.

Non-performing loans increased to 102 basis points up from 77 points at the end of Q4. Most of the increase was in residential where we have very good LTV coverage. The total NPLs for residential are 85 basis points. Our net charge-offs were $3.4 million or 27 basis points annualized. Last quarter net charge-offs were $3.1 million. $1.8 million of the quarterly charge-offs were write downs to a few remaining condominium projects. You may remember that I pointed out to you on road shows with Merrill that 58% of our losses have been coming from that smaller condominium portfolio.

I mentioned to you also that this portfolio has been reduced and it is now down to $45.3 million, only 92 basis points of the total. Within this portfolio the problem loans as I said are the condominiums which are now down to 17.2. The total NPLs for this portfolio are $6.2 million. We have established specific reserves and have already charged off the projects where we have identified any losses so we feel the problem is small and contained. The rest of the CRE portfolio has very good delinquencies at 1.28% and net charge-offs for the quarter were only $503,000. For the quarter we made a precision as Peyton said of $4.1 million, our reserve stands at $50.6 million or 1.03%. So you can see the coverage is adequate for the losses embedded in the portfolio.

I will briefly review some of the other portfolios which we feel are looking pretty good. Keep in mind the 51% of the portfolio is one to four family residential loans, 98% owner occupied with very low delinquencies i.e. 1.14% and for the quarter only 7 basis points in losses annualized. Our home equity portfolio of $740 million continues to have outstanding results with only 41 basis points in delinquency well below state and national averages and actually down 18 basis points from last quarter. The net losses for the quarter were 2 basis points annualized.

C&I delinquencies came in at 2.7% with net charge-offs of 53 basis points annualized, not bad for being in the 16 month of a recession. Our historical conservative underwriting has served us well during this period however as I have consistently advised investors we will not be immune to increasing delinquencies and provisions. Having a clean balance sheet with strong capital levels is giving us a competitive advantage in this environment. Thanks Peyton.

Peyton Patterson

Thank you Don. Before turning the call over to your questions, I am pleased to report that yesterday our Board of Directors declared a dividend of $0.07 per share for the quarter. This is even with the dividend declared in the last quarter. Ordinarily I have not mentioned our dividends in these calls but in these extraordinary times 122 banks cut or abandoned their dividends last year and another 100 have done the same in the first quarter of this year. I am making the point that new alliance has the strength to maintain its dividend and we retain the flexibility to increase the dividend when we feel conditions warrant the change. This brings me to my last comment which is on capital management obviously a popular industry topic. NewAlliance remains as we all know very well capitalized. There is obviously no need for TARP funds our PCE ratio is at 10.10%. Our Tier 1 leverage capital ratio is at 11.02% and our Tier 1 risk based capital ratio is at 18.88%.

On that note, I would now be very happy to take your questions.

Question-and-Answer Session

Operator

Thank you (Operator instructions) our first question will come from Mark Fitzgibbon from Sandler O'Neill Asset Management. Please go ahead sir.

Mark Fitzgibbon – Sandler O'Neill Asset Management

It is from Sandler O’Neill, thank you. First Peyton you had mentioned you had a fairly large linked quarter increase in investment management brokerage and insurance fees. Was the increase of function of sort of the first quarter renewals on the insurance business or were there other components to that as well?

Peyton Patterson

No, hi Mark. No, that was really a reflection of our cross-selling of fixed annuity products to not only NewAlliance Bank deposit customers with the prospects in the marketplace which as you know provide a very nice attractive rate particularly with CD rates as low as they are at this point.

Mark Fitzgibbon – Sandler O'Neill Asset Management

Okay. And then secondly probably for Don, the largest rise in non-performers I guess was in that residential book, was that concentrated in any particular market in your footprint was it in Fairfield County or was it elsewhere?

Don Chaffee

It is pretty well spread out and I know there is an interest out there at Fairfield County so I did a little bit of extra work on it. Our total portfolio is approximately $690 million and the total delinquency rate which includes the non-performers is 13 basis points, up from 7 basis points at year end. I also know that everybody seems to be very interested in Wall Street folks. We have a total of 22 loans to Wall Street folks meaning specific investment banking firms, they are all current, the weighted average LTV is 57% and that is updated.

The original LTV was 49 and the FICO was 782. In the loans that we put into portfolio in the first quarter as Peyton mentioned we have been taking advantage of selling the fixed rate to the agencies for fees. But the loans that we actually put in portfolio had a LTV of 50% and a FICO of 780. When we underwrite higher loan amounts, we not only look at FICO and LTV, we look at assets and reserves and we want to make sure that the loan is not just dependent upon some guy getting a recent bonus that you can average in and get to a (inaudible) show that Fannie Mae might think it is okay but we want to see a real historical buildup of wealth when we do longer or larger loan amounts.

Mark Fitzgibbon – Sandler O'Neill Asset Management

Okay, thank you and then last question, Peyton you guys are one of the few companies out there with a lot of excess capital, what are your thoughts right now on acquisitions and could you perhaps share with us what types and size of deals you might consider?

Peyton Patterson

Yes as we all know NewAlliance is known for the capital that we have preserved over the years but obviously these unprecedented times provide opportunities to do acquisition, Mark I mean we will look to a number of venues whether it is purchasing franchises from some larger competitors potentially like the first Niagara transaction we look to do FDIC assisted transactions, it is really less about the size but more about the earnings accretion, the IRR and really what it would do to build out our franchise and I think we are uniquely in a position to do that, not only as a lot of the smaller banks we have seen announce legal earnings but some of the acquirers that have been in the market may not be in the position they have been in to do deals themselves.

Mark Fitzgibbon – Sandler O'Neill Asset Management

Geographically do you have a preference to go North or South?

Peyton Patterson

We want to go where there is an attractive, accretive deal to do. As you know, I have always said we want to be affiliated with a destination point, whether that is Boston to New York but obviously coming from Connecticut we are in a nice position to be able to go in either direction.

Mark Fitzgibbon – Sandler O'Neill Asset Management

Thank you.

Peyton Patterson

Thank you.

Operator

Our next question will come from Amanda Larsen from Raymond James. Please go ahead.

Amanda Larsen – Raymond James

Hi everyone.

Peyton Patterson

Good morning.

Amanda Larsen – Raymond James

I wanted to know about how much borrowings were you able to repay with the extra core deposits and at what rates were you able to hit [ph] on the borrowings versus the rates that core deposits came on and then the effect on the margin if you had a number for that at all?

Don Chaffee

Borrowings we paid down have a cost of over 4% I would say some place around 4.25% and we are looking at a reduction of about $25 million quarter to quarter in borrowings. Those are obviously replaced with our less expensive deposits at this point as I would guess probably 2% on average.

Amanda Larsen – Raymond James

Okay and then just one other question on the write downs on MSR as an investment, you talked about it briefly, Peyton did in the beginning, I just wanted to know if this is something that could be recurring on either one of those write downs?

Don Chaffee

The MSRs we have written down in the last two quarters we did a write-down in December and again in March, we used current prepayment rates when we do those adjustments, I cannot guarantee there won’t be another one although we are using fairly high prepayment rates right now and mortgage servicing rights around our books at about 67 basis points, so that is a fairly conservative valuation. So I would think we are near the end of that issue if not there. The invested to limited partnerships those securities are on a mark-to-market basis, they are accounted for in the equity method because of our ownership percentage and those are STICs primarily so they are in venture type investments, they tend to be volatile. They tend to be volatile. The valuations reflect the movement in the market I would hope the worst is behind us there but again it is hard to predict that. The book value on those is only in the neighborhood of $5 million so we expect tremendous exposure there.

Amanda Larsen – Raymond James

Okay, that’s all, thanks so much.

Peyton Patterson

Thank you.

Operator

Our next question will come from Collyn Gilbert from Stifel Nicolaus. Please go ahead.

Collyn Gilbert – Stifel Nicolaus

Thanks good morning.

Peyton Patterson

Good morning.

Collyn Gilbert – Stifel Nicolaus

First Don, I just want to clarify a point, two points that you made, you said and I missed it you said something decreased from February when you were talking about the credit metrics, was that net charge-offs or was that – you also said the 30-day bucket was down also and I think that was from your end, I just wanted clarification on those two points.

Don Chaffee

Well first of all let me say hi to you.

Collyn Gilbert – Stifel Nicolaus

Hello.

Don Chaffee

I did mention that I thought it was a good sign that our total delinquencies although they were up from last quarter they decreased a 11 basis points from February and as you know in credit you look for these early warning indicators that plus the fact that the early buckets are not refilling as indicated, there was a 13 basis points drop in the 30-day bucket so the combination of those two made me a lot happier credit guy.

Collyn Gilbert – Stifel Nicolaus

Is there anything you could point to as to why that would be the case?

Don Chaffee

That is a very difficult question to answer. Our suspicion is that with the unemployment rate rising that we will see continued upward pressure in delinquencies but I can also tell you that it does not happen in a straight line fashion. If you look at these curves over the years like I have, you will see some months up, some months down but basically the trend line is up. I can also tell you though that very specifically folks did get some tax money back and that tends to be a seasonal effect in this portfolio so I suspect that that is part of it.

Collyn Gilbert – Stifel Nicolaus

Okay that is helpful. And then again another point of clarification, when you had mentioned the $690 million in resi real estate was that your exposure to Fairfield County?

Don Chaffee

Yes that is the total exposure and it has got 13 basis points in delinquency and we could not be happier with that number. It is because we really have low LTVs that are under writing time and we really look for reserves and good FICOs for us. Si we have been very cautious and it has been so far good for us.

Collyn Gilbert – Stifel Nicolaus

Okay and then when you quoted the average LTV at 57% was that on that bucket of 22 loans to Wall Street or was that for the whole portfolio?

Don Chaffee

That was on the bucket of loans for Wall Street but it is fairly indicative of Fairfield County. We will – on my road show, you know my famous Spiderman Chart where I try to break out the percentage of the portfolio, the FICO scores and the LTV you are going to see some upward drifting as I have mentioned to you before in our current weighted, updated LTV. It still remains a very healthy number but the combination of the old portfolio refinancing off because of the refi boom and then the new stuff coming on although this quarter actually was pretty good but in general there will be some upward drift in those LTVs.

Collyn Gilbert – Stifel Nicolaus

Okay. And then Peyton maybe if you could just talk a little bit about what you think the organic loan growth capabilities are, obviously some of the portfolios are kind of in run down or prepayment mode but what do you think we could look for this year in terms of loan growth?

Peyton Patterson

Collyn we are not giving guidance on some of our percentage in actual growth point of view but our crystal ball would say that on the consumer side meaning the resi mortgage and also home equity side that momentum into the second quarter remains very brisk. Consumers’ demand for fixed rate remains the product of choice so we anticipate as we said that the gains on sales numbers to be healthy for us. I think on the commercial side, I think that is a little bit of the unknown, C&I originations are doing well but we are very cautious on the commercial side. Application volumes remain at a fairly steady state.

We are very careful on the quality behind those applications and we are really ready to be conservative while we see what is going on in the marketplace. I would also just add one point while you know a number of the banks in the Northeast have missed earnings expectations I would just point out that Connecticut and Massachusetts continue to lag the country in terms of the unemployment rate what Don alluded to before and I think if you couple our unemployment rate at let’s say 7.4% versus the country as a whole over 8%, we are seeing that in our credit quality going forward. So hopefully that answers your question.

Collyn Gilbert – Stifel Nicolaus

Yes, that’s helpful, thank you. And then just one final question for you Merrill, on the NIM maybe if you could give some thoughts on the outlook there, I guess the implications of the great core deposit growth that you saw it is certainly a low price and potential roll over on the liability side what we could expect of a NIM?

Merrill Blanksteen

Well given that we – last quarter was 75 basis points reduction in the Fed cut (inaudible) and only lost 1 basis point, I think you can see we had some pretty good momentum going on on the NIM underlying that. I still think there are opportunities going forward we are not going to lose, we can’t lose any – as we told the dividend can’t drop below 0 and the Fed can’t reduce rates any more. So we have a pretty optimistic outlook now on the NIM.

Collyn Gilbert – Stifel Nicolaus

Okay, that was all I had, thank you.

Peyton Patterson

Thank you.

Operator

We have no further questions. I would like to turn the conference back over to Ms Patterson for any closing remarks.

Peyton Patterson

Great thank you. In closing, I would like to say that we believe that our strategy is working and we are positioned well for the future. I would underscore our focus on continuing to build our core earnings and capitalizing on the position of strength we are proud to be in. Our capital strength and credit quality continue to serve us well during this difficult economy and allow us to leverage our community banking model to gain market share and solidify our strong ties to our local communities. And we remain cautiously optimistic as we look to the rest of 2009. I would like to say thank you once again for your continued interest in NewAlliance.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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