Sitting on a pile of cash from an initial public offering six years ago, NewAlliance Bancshares seemed poised to make a big acquisition.

So it came as a surprise to many in the banking world Thursday when the company announced that it is being acquired by First Niagara Financial Group for $1.5 billion in a deal that would create one of the top 25 U.S.-based commercial banks.

NewAlliance's chief executive, Peyton Patterson, said the deal would help accelerate her company's acquisition plans, as the combined institution would have more buying power than either bank would have on its own. But it was unclear what her role would be in the new company; John Koelmel is to remain First Niagara's CEO. (See related story.) And the announcement left some observers wondering if NewAlliance may have paired up too soon.

"The big question about this deal is whether or not NewAlliance had run its race," said John Carusone, president of Bank Analysis Center Inc. in Hartford, Conn. "It is surprising; I thought they had a few more miles to run. It must have been quite a spirited board conversation in making this decision."

Expectations for the $8.7 billion-asset NewAlliance, of New Haven, have been high since it went public in 2004, raking in $1 billion in capital. The company has long talked about expanding from its Connecticut market down the "Amtrak" corridor, through New Jersey, Delaware and into Baltimore — an area considered ripe for consolidation.

"Given the amount of excess capital that they had, myself and I think most folks that follow the name were expecting them to do not just one but probably a series of deals to deploy that capital," said Jason O'Donnell, an analyst with Boenning & Scattergood Inc. "So the fact that they went ahead and sold is a bit of a surprise."

NewAlliance was formed when New Haven Savings Bank, a mutual thrift, went public and used the proceeds from the stock sale to acquire two community banks, instantly tripling its assets to more than $6 billion.

It has spent $800 million to acquire two more banks, one in 2006 and one in 2007. As of June 30 the company had a leverage ratio of 11.17%, twice as much capital as it needs to be considered well capitalized.

Matthew Kelley, an analyst with Sterne, Agee & Leach Inc., said NewAlliance achieved "decent growth" from the time of its IPO, expanding from $6 billion $8.7 billion in assets today. And he credits NewAlliance with smart pricing in the deals it has made.

Yet expectations were high for its stock, given all the capital NewAlliance needed to deploy, he said. The murky outlook for earnings in an uncertain economic and regulatory environment likely nudged it into the seller category.

"You could see that it was going to be difficult in the years ahead to even duplicate the earnings power that they've had over the prior five years," Kelley said. "I think that NewAlliance assessed the situation and saw risks in their ability to achieve adequate returns for shareholders over time on a stand-alone basis. And it's a decision that I think many more are going to come to in the year ahead."

Patterson said the deal had nothing to do with financial performance, and everything to do with opportunity. She said in a conference call Thursday with reporters that the combination would create a "superregional powerhouse."

"The reason for doing this now was not that we couldn't stay it alone," she said. "But what we saw in First Niagara was an excellent partner to be able to accelerate really our own individual plans on the acquisition front."

The deal will realize NewAlliance's "potential for all stakeholders in a way that we couldn't achieve as quickly on our own," Patterson said.

Whatever NewAlliance's motivation, analysts agreed the combination would be a powerful one. The deal, which must be approved by regulators and shareholders, would create an institution with assets of more than $29 billion, including more than $14 billion in loans, and $18 billion in deposits.

"The buyer is a Northeast banking juggernaut," Carusone said. "The partnership is filled full of good chemistry."

NewAlliance shareholders would get 1.1 shares of First Niagara common stock and $2 in cash for each NewAlliance share they own. At Wednesday's closing price, this comes to $14.09 per NewAlliance share, a 24% premium.

First Niagara said NewAlliance's branch network will lay a foundation for the Buffalo bank's growth in New England.

That market's "demographics are very, very strong … that's why we've pushed further east, not west," Koelmel said on the call.

NewAlliance has $4.9 billion in loans and $5.1 billion in deposits. Its 88 branches, serving eight counties from Greenwich, Conn., to Springfield, Mass., are expected to be rebranded as First Niagara locations. NewAlliance's headquarters in New Haven is slated to become First Niagara's New England regional market center. The deal is expected to close in the second quarter of 2011.

O'Donnell said the success of the deal, from the perspective of NewAlliance shareholders, will hinge on whether earnings grow or stagnate. "If they're successful in accreting their earnings over the next two years … then I think ultimately NewAlliance shareholders will have made out well," he said.

This will be First Niagara's fourth major acquisition in the past three years. The earlier purchases boosted its assets from $8 billion in June 2007 to $20.5 billion in June 2010.

It acquired Greater Buffalo Savings Bank in February 2008; 57 branches in western Pennsylvania from the former National City Corp. in September 2009; and Harleysville National Corp. Harleysville, Pa., in April 2010.

Jeff Marsico, an executive vice president at Kafafian Group in Parsippany, N.J., said First Niagara's recent track record is reminiscent of another bank in another time. "First Niagara is building something that eerily resembles Sovereign Bank," he said. "They are covering a wide swath of territory here. I just hope they have the benefits of learning from others' mistakes."

The $90 billion-asset Sovereign, now part of Banco Santander SA, was built through acquisition from a $500 million-asset thrift over two decades, but was besieged by integration and credit problems, Marsico said. "The growth objectives at that size become much bigger. Once you hitch your wagon to the growth star, you are almost compelled to do acquisitions to keep going."

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