NewAlliance Bancshares (NAL)

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NewAlliance Bancshares 10-Q 2009

Documents found in this filing:

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2009.

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ____________ to __________.

Commission File Number: 001-32007

NEWALLIANCE BANCSHARES, INC.
(Exact name of registrant as specified in its charter)


	DELAWARE	52-2407114

	(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

	195 Church Street, New Haven, Connecticut	06510

	(Address of principal executive offices)	(Zip Code)

(203) 789-2767

(Registrant’s telephone number, including area code)



(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ X ] Yes [ ] No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was requires to submit and post such files). [ ] Yes [ ] No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.


	Large accelerated filer X				Accelerated filer

	Non-accelerated filer				Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [ X ] No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

	Common Stock (par value $.01)				106,788,252

	Class				Outstanding at August 6, 2009

TABLE OF CONTENTS

Part I – FINANCIAL INFORMATION
		Page No.


Item 1.	Financial Statements (Unaudited)

	Consolidated Balance Sheets at June 30, 2009 and December 31, 2008	3

	Consolidated Statements of Income for the three and six months ended June 30, 2009 and 2008	4

	Consolidated Statement of Changes in Stockholders’ Equity for the six months ended June 30, 2009	5

	Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008	6

	Notes to Unaudited Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	53

Item 4.	Controls and Procedures	53

Item 4T.	Controls and Procedures	54


Part II – OTHER INFORMATION


Item 1.	Legal Proceedings	54

Item 1A.	Risk Factors	54

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	58

Item 3.	Defaults Upon Senior Securities	58

Item 4.	Submission of Matters to a Vote of Security Holders	58

Item 5.	Other Information	58

Item 6.	Exhibits	59



SIGNATURES

NewAlliance Bancshares, Inc.
Consolidated Balance Sheets

	June 30,			December 31,
(In thousands, except per share data) (Unaudited)	2008			2008

Assets
Cash and due from banks, noninterest bearing	$	85,070		$	98,131
Short term investments		62,000			55,000

Cash and cash equivalents		147,070			153,131
Investment securities available for sale (note 5)		2,291,350			1,928,562
Investment securities held to maturity (note 5)		288,104			309,782
Loans held for sale (includes $53,145 measured at fair value at June 30, 2009)		54,479			5,361
Loans, net (note 6)		4,799,956			4,912,874
Federal Home Loan Bank of Boston stock		120,821			120,821
Premises and equipment, net		57,499			59,419
Cash surrender value of bank owned life insurance		138,375			136,868
Goodwill (note 7)		527,167			527,167
Identifiable intangible assets (note 7)		39,603			43,860
Other assets (note 8)		117,016			101,673

Total assets	$	8,581,440		$	8,299,518


Liabilities
Deposits (note 9)
Non-interest bearing	$	523,618		$	494,978
Savings, interest-bearing checking and money market		2,823,566			2,178,593
Time		1,515,322			1,774,259

Total deposits		4,862,506			4,447,830
Borrowings (note 10)		2,212,609			2,376,496
Other liabilities		99,077			93,976

Total liabilities		7,174,192			6,918,302

Commitments and contingencies (note 14)

Stockholders’ Equity
Preferred stock, $0.01 par value; authorized 38,000 shares; none issued		-			-
Common stock, $0.01 par value; authorized 190,000 shares; issued 121,486 shares at June 30, 2009 and December 31, 2008		1,215			1,215
Additional paid-in capital		1,245,496			1,245,679
Unallocated common stock held by ESOP		(90,551	)		(92,380	)
Unearned restricted stock compensation		(15,574	)		(18,474	)
Treasury stock, at cost (14,697 shares at June 30, 2009 and 14,427 shares at December 31, 2008)		(203,533	)		(200,428	)
Retained earnings		476,253			467,580
Accumulated other comprehensive loss (note 16)		(6,058	)		(21,976	)

Total stockholders’ equity		1,407,248			1,381,216

Total liabilities and stockholders’ equity	$	8,581,440		$	8,299,518

See accompanying notes to consolidated financial statements.

NewAlliance Bancshares, Inc.
Consolidated Statements of Income

	Three Months Ended					Six Months Ended
	June 30,					June 30,

(In thousands, except per share data) (Unaudited)	2009			2008		2009			2008

Interest and dividend income
Residential real estate loans	$	33,782		$	34,512	$	68,376		$	67,790
Commercial real estate loans		17,448			18,291		35,065			37,177
Commercial business loans		5,527			6,819		11,239			14,185
Consumer loans		8,596			9,547		17,304			19,833
Investment securities		28,613			28,686		56,575			59,080
Federal funds sold and other short-term investments		116			190		278			474
Federal Home Loan Bank of Boston stock		-			1,135		-			2,855

Total interest and dividend income		94,082			99,180		188,837			201,394


Interest expense
Deposits		21,277			24,805		44,118			54,803
Borrowings		22,878			26,127		46,799			52,337

Total interest expense		44,155			50,932		90,917			107,140


Net interest income before provision for loan losses		49,927			48,248		97,920			94,254

Provision for loan losses		5,000			3,700		9,100			5,400

Net interest income after provision for loan losses		44,927			44,548		88,820			88,854


Non-interest income
Depositor service charges		6,953			6,708		12,906			13,340
Loan and servicing income, net		357			264		176			645
Trust fees		1,392			1,678		2,651			3,348
Investment management, brokerage & insurance fees		1,564			1,844		3,814			4,376
Bank owned life insurance		899			1,291		1,770			2,820
Other-than-temporary impairment losses on securities		(2,522	)		-		(2,522	)		-
Less: Portion of loss recognized in other comprehensive income (before taxes)		1,896			-		1,896			-

Net impairment losses on securities recognized in earnings		(626	)		-		(626	)		-
Net gain on sale of securities		2,243			87		4,109			1,225

Net securities gain		1,617			87		3,483			1,225
Mortgage banking activity & loan sale income		1,481			656		3,500			913
Other		1,028			1,991		1,254			3,518

Total non-interest income		15,291			14,519		29,554			30,185


Non-interest expense
Salaries and employee benefits (notes 11 & 12)		21,607			22,935		42,838			46,624
Occupancy		4,644			4,320		9,399			9,214
Furniture and fixtures		1,453			1,654		2,929			3,340
Outside services		4,455			4,471		9,805			8,744
Advertising, public relations, and sponsorships		1,056			2,036		2,269			3,745
Amortization of identifiable intangible assets		2,129			2,364		4,257			4,728
Merger related charges		22			23		24			78
FDIC insurance premiums		5,893			182		6,838			366
Other		3,146			3,332		6,427			6,716

Total non-interest expense		44,405			41,317		84,786			83,555


Income before income taxes		15,813			17,750		33,588			35,484

Income tax provision (note 13)		5,705			5,968		11,890			10,768

Net income	$	10,108		$	11,782	$	21,698		$	24,716


Basic earnings per share (note 17)	$	0.10		$	0.12	$	0.22		$	0.25
Diluted earnings per share (note 17)		0.10			0.12		0.22			0.25
Weighted-average shares outstanding (note 17)
Basic		99,278			100,113		99,266			100,195
Diluted		99,311			100,282		99,310			100,215
Dividends per share	$	0.070		$	0.070	$	0.140		$	0.135

See accompanying notes to consolidated financial statements.

NewAlliance Bancshares, Inc.
Consolidated Statement of Changes in Stockholders’ Equity

								Unallocated												Accumulated
	Common		Par Value		Additional			Common												Other			Total
For the Six Months Ended June 30, 2009	Shares		Common		Paid-in			Stock Held			Unearned			Treasury			Retained			Comprehensive			Stockholders’
(In thousands, except per share data) (Unaudited)	Outstanding		Stock		Capital			by ESOP			Compensation			Stock			Earnings			Income (Loss)			Equity


Balance December 31, 2008	107,059		$	1,215	$	1,245,679		$	(92,380	)	$	(18,474	)	$	(200,428	)	$	467,580		$	(21,976	)	$	1,381,216

Dividends declared ($0.14 per share)																		(14,075	)					(14,075	)
Allocation of ESOP shares, net of tax						(216	)		1,829															1,613
Treasury shares acquired (note 15)	(270	)													(3,105	)								(3,105	)
Restricted stock expense												2,900												2,900
Stock option expense						131																		131
Book (over) tax benefit of stock-based compensation						(98	)																	(98	)
Cumulative effect of FSP No. FAS 115-2 and 124-2 adoption, net of $0.6 million tax effect (note 5)																		1,050			(1,050	)		-

Comprehensive income:
Net income																		21,698						21,698
Other comprehensive income, net of tax (note 16)																					16,968			16,968

Total comprehensive income																								38,666

Balance June 30, 2009	106,789		$	1,215	$	1,245,496		$	(90,551	)	$	(15,574	)	$	(203,533	)	$	476,253		$	(6,058	)	$	1,407,248

See accompanying notes to consolidated financial statements.

NewAlliance Bancshares, Inc.
Consolidated Statements of Cash Flows


	Six Months Ended
	June 30,

(In thousands) (Unaudited)	2009			2008

Cash flows from operating activities
Net income	$	21,698		$	24,716
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses		9,100			5,400
Loss (gain) on OREO		193			(68	)
Restricted stock compensation expense		2,900			3,681
Stock option compensation expense		131			2,175
ESOP expense		1,613			1,664
Amortization of identifiable intangible assets		4,257			4,728
Net amortization/accretion of fair market adjustments from net assets acquired		(1,673	)		(2,502	)
Net amortization/accretion of investment securities		1,892			(1,483	)
Change in deferred income taxes		240			277
Depreciation and amortization of premises and equipment		3,253			3,524
Net gain on securities		(3,483	)		(1,225	)
Mortgage banking activity and loan sale income		(3,500	)		(913	)
Proceeds from sales of loans held for sale		280,195			52,222
Loans originated for sale		(325,813	)		(58,682	)
Loss on sale of fixed assets		19			7
Net loss (gain) on limited partnerships		659			(646	)
Increase in cash surrender value of bank owned life insurance		(1,770	)		(2,820	)
Increase in other assets		(181	)		(2,408	)
Increase (decrease) in other liabilities		5,101			(3,250	)

Net cash (used) provided by operating activities		(5,169	)		24,397

Cash flows from investing activities
Purchase of securities available for sale		(747,883	)		(293,967	)
Purchase of securities held to maturity		(21,451	)		(58,995	)
Proceeds from maturity, sales, calls and principal reductions of securities available for sale		386,276			481,166
Proceeds from maturity, calls and principal reductions of securities held to maturity		43,503			35,865
Proceeds from sales of fixed assets		32			659
Net decrease (increase) in loans held for investment		102,268			(216,809	)
Proceeds from sales of other real estate owned		2,310			517
Proceeds from bank owned life insurance		263			-
Purchase of premises and equipment		(1,342	)		(3,111	)

Net cash used by investing activities		(236,024	)		(54,675	)

Cash flows from financing activities
Net increase (decrease) in customer deposit balances		414,752			(42,700	)
Net (decrease) increase in short-term borrowings		(52,018	)		31,639
Proceeds from long-term borrowings		142,000			345,000
Repayments of long-term borrowings		(252,324	)		(275,492	)
Book (over)/under tax benefit of stock-based compensation		(98	)		107
Acquisition of treasury shares		(3,105	)		(11,082	)
Dividends paid		(14,075	)		(13,786	)

Net cash provided by financing activities		235,132			33,686

Net (decrease) increase in cash and cash equivalents		(6,061	)		3,408

Cash and equivalents, beginning of period		153,131			160,879

Cash and equivalents, end of period	$	147,070		$	164,287

Supplemental information
Cash paid for
Interest on deposits and borrowings	$	92,142		$	108,957
Income taxes paid, net		11,447			11,087
Noncash transactions
Loans transferred to other real estate owned		1,560			-

See accompanying notes to consolidated financial statements.

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

1.		Summary of Significant Accounting Policies

		Financial Statement Presentation
		The consolidated financial statements of NewAlliance Bancshares, Inc. (the “Company”) have been prepared in conformity with accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. All significant intercompany transactions and balances have been eliminated in consolidation. Amounts in prior period financial statements are reclassified whenever necessary to conform to the current year presentation. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2008.

		The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates.

		Material estimates that are particularly susceptible to significant near-term change relate to the determination of the allowance for loan losses, the obligation and expense for pension and other postretirement benefits, and estimates used to evaluate asset impairment including investment securities, income tax contingencies and deferred tax assets and liabilities and the recoverability of goodwill and other intangible assets.

		As of August 7, 2009, the date in which the financial statements were issued, management has determined that no subsequent events have occurred following the balance sheet date of June 30, 2009 which require recognition or disclosure in the financial statements.

2.		Recent Accounting Pronouncements

		In June 2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162” (“SFAS No. 168”). The objective of SFAS No. 168 is to replace FASB Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles” and to establish the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. SFAS No. 168 will be effective for financial statements issued for reporting periods that end after September 15, 2009 and once effective, it will supersede all accounting standards in U.S. GAAP, aside from those issued by the SEC. Management does not anticipate that the adoption of SFAS No. 168 will have a material impact on the Company’s consolidated financial statements.

		In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140” (“SFAS No. 166”). SFAS No. 166 revises SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” and will require entities to provide more information about sales of securitized financial assets and similar transactions, particularly if the seller retains some risk in the assets. SFAS No. 166 eliminates the concept of a qualifying special-purpose entity, changes the requirements for the derecognition of financial assets, and enhances the disclosure requirements for sellers of the assets. SFAS No. 166 will be effective for the fiscal year beginning after November 15, 2009. The Company anticipates that the adoption of SFAS No. 166 will not have a material impact on the financial statements.

		In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS No. 165”). SFAS No. 165 establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. In particular, the statement sets forth (1) the period after the balance sheet date during which management of a reporting entity will evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (2) the circumstances under which an entity will recognize events or transactions occurring after the balance sheet date in its financial statements; and (3) the disclosures that an entity will make about events or transactions that occurred after the balance sheet date. The new standard is effective for financial statements issued for interim and annual periods ending after June 15, 2009. The adoption of SFAS No. 165 did not have a material impact on the Company’s consolidated financial statements.

		In April 2009, the FASB issued FASB Staff Position (“FSP”) No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” (“FSP No. FAS 157-4”). FSP FAS No. 157-4 amends FASB Statement No. 157, “Fair Value Measurements” (“SFAS No. 157”) and provides additional guidance for estimating fair value in accordance with SFAS No. 157 when the volume and level of

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

		activity for the asset or liability have significantly decreased and also includes guidance on identifying circumstances that indicate a transaction is not orderly for fair value measurements. This FSP shall be applied prospectively with retrospective application not permitted. This FSP was effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company did not elect early application of this FSP and the adoption of the FSP for the period ending June 30, 2009 did not have a material impact on the Company’s consolidated financial statements.

		In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP No. FAS 115-2”). FSP No. FAS 115-2 amends SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” SFAS No. 124, “Accounting for Certain Investments Held by Not-for-Profit Organizations,” and EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets,” to make the other-than-temporary impairments guidance more operational and to improve the presentation of other-than-temporary impairments in the financial statements. This FSP replaced the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired debt security until recovery with a requirement that management assert it does not have the intent to sell the security, and it is more likely than not it will not have to sell the security before recovery of its cost basis. When an other-than-temporary impairment exists under this stated assertion, the amount of impairment related to the credit loss component would be recognized in earnings while the remaining amount would be recognized in other comprehensive income. This FSP provides increased disclosure about the credit and noncredit components of impaired debt securities that are not expected to be sold and also requires increased and more frequent disclosures regarding expected cash flows, credit losses, and an aging of securities with unrealized losses. Although this FSP does not result in a change in the carrying amount of debt securities, it does require that the portion of an other-than-temporary impairment not related to a credit loss for a held-to-maturity security be recognized in a new category of other comprehensive income and be amortized over the remaining life of the debt security as an increase in the carrying value of the security. FSP No. FAS 115-2 does not amend existing recognition and measurement guidance for other-than-temporary impairments of equity securities. This FSP was effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company did not elect early application of this FSP. The adoption of this FSP for the period ending June 30, 2009 resulted in a $1.0 million cumulative effect adjustment, net of taxes, to increase retained earnings and decrease accumulated other comprehensive income as of April 1, 2009 for the non-credit component of debt securities for which other-than-temporary impairment was previously recognized. Refer to Note 5 of the Notes to the Unaudited Consolidated Financial Statements for further information on the Company’s adoption of this FSP.

		In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments (“FSP No. FAS 107-1”). FSP No. FAS 107-1 amends the disclosure requirements in FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments,” (“SFAS No. 107”) to require disclosures about fair value of financial instruments whether or not measured on the balance sheet at fair value in interim financial statements as well as in annual financial statements. Prior to this FSP, fair values for these assets and liabilities were only disclosed annually. This FSP applies to all financial instruments within the scope of SFAS No. 107 and requires all entities to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments. This FSP was effective for interim periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. This FSP does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, this FSP requires comparative disclosures only for periods ending after initial adoption. The adoption of the FSP for the period ending June 30, 2009 did not have a material impact on the Company’s consolidated financial statements. Refer to Note 3 of the Notes to the Unaudited Consolidated Financial Statements for the interim disclosures required by this FSP.

		In December 2008, the FASB issued FSP No. FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets.” This FSP amends FASB Statement No. 132(R), “Employers’ Disclosures about Pensions and Other Postretirement Benefits” to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. Pursuant to the FSP, the added disclosures include: (1) how investment allocation decisions are made by management, (2) major categories of plan assets, and (3) significant concentrations of risk. Additionally, the FSP requires an employer to disclose information about the valuation of plan assets similar to that required under SFAS No. 157. Those disclosures include: (1) the level within the fair value hierarchy in which fair value measurements of plan assets fall, (2) information about the inputs and valuation techniques used to measure the fair value of plan assets, and (3) a reconciliation of the beginning and ending balances of plan assets valued using significant unobservable inputs. The new disclosures are required to be included in financial statements for fiscal years ending after December 15, 2009. Management believes that the FSP will not have a material impact on the Company’s consolidated financial statements.

		In April 2008, the FASB issued FSP FAS No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP No. FAS 142- 3”). FSP No. FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

		No. 142”). The intent of FSP FAS No. 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141 (revised 2007), “Business Combinations” and other applicable accounting literature. FSP No. FAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption of FSP No. 142-3 did not have a material impact on the Company’s consolidated financial statements.

		In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161”). SFAS No. 161 changes the disclosure requirements regarding derivative instruments and hedging activities and specifically requires (i) qualitative disclosures about objectives and strategies for using derivatives, (ii) quantitative disclosures about fair value amounts of, and gains and losses on, derivative instruments, and (iii) disclosures about credit risk-related contingent features in derivative agreements. The new standard is effective for financial statements issued for fiscal years beginning after November 15, 2008, with early application encouraged. The adoption of SFAS No. 161 did not have a material impact on the Company’s consolidated financial statements.

		In February 2008, the FASB issued FSP No. FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP No. FAS 157-2”), which delays the January 1, 2008 effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The adoption of FSP No. FAS 157-2 did not have a material effect on the Company’s consolidated financial statements.

		In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141(R)”) which replaces SFAS No. 141, “Business Combinations.” SFAS No. 141(R) retains the fundamental requirements in SFAS No. 141 that the acquisition method of accounting be used for all business combinations and for an acquirer to be identified for each business combination. SFAS No. 141(R) requires among other things, that acquisition-related transaction and restructuring costs will be expensed rather than treated as part of the cost of the acquisition; the acquiring entity in a business combination to recognize all the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to provide certain disclosures that will allow users of the financial statements to understand the nature and financial effect of the business combination. SFAS No. 141(R) became effective on January 1, 2009. The adoption of SFAS No. 141 (R) would apply prospectively to any future business combinations and is expected to have a significant effect on NewAlliance’s consolidated financial statements, when a business combination occurs.

3.		Fair Value Measurements

		Fair value estimates are made as of a specific point in time based on the characteristics of the financial instruments and relevant market information. In accordance with SFAS No. 157, the fair value estimates are measured within the fair value hierarchy. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under SFAS No. 157 are described below:

				Basis of Fair Value Measurement


		Level 1		Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

		Level 2		Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability;

		Level 3		Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

When available, quoted market prices are used. In other cases, fair values are based on estimates using present value or other valuation techniques. These techniques involve uncertainties and are significantly affected by the assumptions used and judgments made regarding risk characteristics of various financial instruments, discount rates, estimates of future cash flows, future expected loss experience and other factors. Changes in assumptions could significantly affect these estimates. Derived fair value estimates cannot be substantiated by comparison to independent markets and, in certain cases, could not be realized in an immediate sale of the instrument.

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

		Fair value estimates are based on existing financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not financial instruments. Accordingly, the aggregate fair value amounts presented do not purport to represent the underlying market value of the Company.

		SFAS No. 159, Fair Value Option
		SFAS No. 159 allows for the irrevocable option to elect fair value accounting for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis that may otherwise not be required to be measured at fair value under other accounting standards. The Company elected the fair value option as of January 1, 2009 for its portfolio of mortgage loans held for sale pursuant to forward loan sale commitments originated after January 1, 2009 in order to reduce certain timing differences and better match changes in fair values of the loans with changes in the value of the derivative forward loan sale contracts used to economically hedge them. As a result of the surge of refinances resulting from the drop in mortgage rates within the industry, the balance of loans held for sale and derivative contracts relating to those loans have increased significantly. The election under SFAS No. 159 relating to mortgage loans held for sale does not result in a transition adjustment to retained earnings and instead changes in the fair value have an impact on earnings as a component of noninterest income.

		As of June 30, 2009, mortgage loans held for sale pursuant to forward loan sale commitments had a fair value of $53.1 million, which includes a negative fair value adjustment of $581,000.

		Assets and Liabilities Measured at Fair Value on a Recurring Basis The following table details the financial instruments carried at fair value on a recurring basis as of June 30, 2009 and December 31, 2008 and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:

	June 30, 2009

			Quoted Prices in
			Active Markets				Significant
			for Identical		Significant		Unobservable
			Assets		Observable Inputs		Inputs
(In thousands)	Total		(Level 1)		(Level 2)		(Level 3)


Securities Available for Sale
Marketable equity securities	$	13,076	$	1,176	$	11,900	$	-
Bonds and obligations		205,708		178,595		27,113		-
Auction rate certificates		24,914		-		-		24,914
Trust preferred equity securities		29,981		-		27,194		2,787
Mortgage-backed securities		2,017,671		-		2,017,671		-

Total Securities Available for Sale	$	2,291,350	$	179,771	$	2,083,878	$	27,701
Mortgage Loans Held for Sale		53,145		-		53,145		-
Derivative Assets related to mortgage banking activities		1,107		-		1,107		-


	December 31, 2008

			Quoted Prices in
			Active Markets				Significant
			for Identical		Significant		Unobservable
			Assets		Observable Inputs		Inputs
(In thousands)	Total		(Level 1)		(Level 2)		(Level 3)

Securities Available for Sale
Marketable equity securities	$	19,135	$	1,135	$	18,000	$	-
Bonds and obligations		257,340		228,668		28,672		-
Auction rate certificates		23,479		-		-		23,479
Trust preferred equity securities		31,266		-		28,119		3,147
Mortgage-backed securities		1,597,343		-		1,597,343		-

Total Securities Available for Sale	$	1,928,563	$	229,803	$	1,672,134	$	26,626

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

The following table presents additional information about assets measured at fair value on a recurring basis for which the Company utilized Level 3 inputs to determine fair value. There were no Level 3 assets measured on a recurring basis during the six months ended June 30, 2008.

	Securities Available for Sale

	For the Three			For the Six
	Months Ended			Months Ended

(In thousands)	June 30, 2009			June 30, 2009


Balance at beginning of period	$	28,543		$	26,626
Transfer into Level 3		-			-
Total gains (losses) - (realized/unrealized):
Included in earnings		-			-
Included in other comprehensive income		(772	)		1,159
Purchases, issuances, and settlements		-			-
Discount accretion		4			7
Principal payments		(74	)		(91	)

Balance at end of period	$	27,701		$	27,701

		The following is a description of the valuation methodologies used for instruments measured at fair value.

		Securities Available for Sale: Included in the available for sale category are both debt and equity securities. The Company utilizes Interactive Data Corp., a third-party, nationally-recognized pricing service (“IDC”) to estimate fair value measurements for 98.8% of its investment securities portfolio. The pricing service evaluates each asset class based on relevant market information considering observable data that may include dealer quotes, reported trades, market spreads, cash flows, the U.S. Treasury yield curve, the LIBOR swap yield curve, trade execution data, market prepayment speeds, credit information and the bond’s terms and conditions, among other things. The fair value prices on all investment securities are reviewed for reasonableness by management through an extensive process. This review process includes an analysis of changes in the LIBOR / swap curve, the treasury curve, mortgage rates and credit spreads as well as a review of the securities inventory list which details issuer name, coupon and maturity date for unusual market price fluctuations. The review resulted in no adjustments to the IDC pricing. Also, management assessed the valuation techniques used by IDC based on a review of their pricing methodology to ensure proper hierarchy classifications. As a result of the adoption of FSP No. FAS 157-4, the Company reviewed the activity for all available for sale securities for which the transaction may not be orderly or reflective of a significant level of activity and volume. The Company’s available for sale debt securities include auction rate certificates which were valued through means other than quoted market prices due to the Company’s conclusion that the market for the securities was not active. The adoption did not have a material impact on the Company’s consolidated financial statements. The fair value for the auction rate securities are based on Level 3 inputs in accordance with SFAS No. 157. The major categories of securities available for sale are:

			•		Marketable Equity Securities: Included within this category are exchange-traded securities, including common and preferred equity securities, measured at fair value based on quoted prices for identical securities in active markets and therefore meet the Level 1 criteria. Also included are auction rate preferred securities rated AAA, which are priced by IDC at par and are classified as Level 2 of the valuation hierarchy.

			•		Bonds and obligations: Included within this category are highly liquid government obligations that are measured at fair value based on quoted prices for identical securities in active markets and therefore are classified within Level 1 of the fair value hierarchy. Also included in this category are mortgage mutual funds, municipal obligations and corporate obligations where the fair values are estimated by using pricing models (i.e. matrix pricing) with observable market inputs including recent transactions and/or benchmark yields or quoted prices of securities with similar characteristics and are therefore classified within Level 2 of the valuation hierarchy.

			•		Auction Rate Certificates: The Company owns auction rate certificates which are pools of government guaranteed student loans issued by state student loan departments. Due to the lack of liquidity in the auction rate market, the Company obtained a price from the market maker that factored in credit risk and liquidity premiums to determine a current fair value market price. The auction rate certificates fall into the classification of Level 3 within the fair value hierarchy. These securities were not priced by the pricing service.

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

			•		Trust preferred equity securities: Included in this category are two pooled trust preferred securities and “individual name” trust preferred securities of financial companies. One of the pooled trust preferred securities is not priced by IDC and is classified within Level 3 of the valuation hierarchy while the remaining securities are at Level 2 and are priced by IDC. The Company calculates the fair value of the Level 3 pooled trust preferred security based on a cash flow methodology that uses the Bloomberg AA rated bank yield curve to discount the cash flows. Additionally, the low level of the three month LIBOR rate, the general widening of credit spreads and the reduced level of liquidity in the fixed income markets, were all factors in the determination of the current fair value market price. Therefore, this pooled trust preferred security is classified within Level 3 of the valuation hierarchy. The fair value of the remaining trust preferred securities priced by IDC are based upon matrix pricing factoring in observable benchmark yields and issuer spreads and are, therefore, classified within Level 2 of the valuation hierarchy.

			•		Mortgage-Backed Securities: The Company owns residential mortgage-backed securities. As there are no quoted market prices available, the fair values of mortgage backed securities are based upon matrix pricing factoring in observable benchmark yields and issuer spreads and are therefore classified within Level 2 of the valuation hierarchy.

		Mortgage Loans Held for Sale: Fair values were estimated utilizing quoted prices for similar assets in active markets. Any change in the valuation of mortgage loans held for sale is based upon the change in market interest rates between closing the loan and the measurement date. As the loans are sold to the secondary market, the market prices are obtained from Freddie Mac and represent a delivery price which reflects the underlying price Freddie Mac would pay the Company for an immediate sale on these mortgages.

		Derivatives: Derivative instruments related to loans held for sale are carried at fair value. Fair value is determined through quotes obtained from actively traded mortgage markets. Any change in fair value for rate lock commitments to the borrower is based upon the change in market interest rates between making the rate lock commitment and the measurement date and, for forward loan sale commitments to the investor, is based upon the change in market interest rates from entering into the forward loan sales contract and the measurement date. Both the rate lock commitments to the borrowers and the forward loan sale commitments to investors are undesignated derivatives pursuant to the requirements of SFAS No. 133, however, the Company has not designated them as hedging instruments. Accordingly, they are marked to fair value through earnings.

		At June 30, 2009, the effects of fair value measurements for interest rate lock commitment derivatives and forward loan sale commitments were as follows (mortgage loans held for sale are shown for informational purposes only):

	June 30, 2009

	Notional or
	Principal		Fair Value
(In thousands)	Amount		Adjustment


Rate Lock Commitments	$	41,112	$	65
Forward Sales Commitments		91,827		1,042
Mortgage Loans Held for Sale		53,726		(581	)

		The Company sells the majority of its fixed rate mortgage loans with original terms of 15 years or more on a servicing released basis and receives a servicing released premium upon sale. The servicing value has been included in the pricing of the rate lock commitments and loans held for sale. The Company estimates a fallout rate of approximately 10% based upon historical averages in determining the fair value of rate lock commitments. Although the use of historical averages is based upon unobservable data, the Company believes that this input is insignificant to the valuation and, therefore, has concluded that the fair value measurements meet the Level 2 criteria. The collection of upfront fees from the borrower is the driver of the Company’s low fallout rate. If this practice were to change, the fallout rate would most likely increase and the Company would reassess the significance of the fallout rate on the fair value measurement.

		Prior to January 1, 2009, the mortgage loans held for sale and the derivatives associated with those loans had balances of notional amounts and fair value adjustments that did not have a material impact on the financial statements.

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

		Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
		The following tables detail the financial instruments carried at fair value on a nonrecurring basis as of June 30, 2009 and December 31, 2008 and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:

	June 30, 2009

			Quoted Prices in
			Active Markets				Significant
			for Identical		Significant		Unobservable
			Assets		Observable Inputs		Inputs
(In thousands)	Total		(Level 1)		(Level 2)		(Level 3)


Loan Servicing Rights	$	2,352	$	-	$	-	$	2,352
Impaired Loans		10,082		-		-		10,082



	December 31, 2008

			Quoted Prices in
			Active Markets				Significant
			for Identical		Significant		Unobservable
			Assets		Observable Inputs		Inputs
(In thousands)	Total		(Level 1)		(Level 2)		(Level 3)

Loan Servicing Rights	$	3,001	$	-	$	-	$	3,001
Impaired Loans		8,284		-		-		8,284

		The following is a description of the valuation methodologies used for instruments measured at fair value.

		Loan Servicing Rights: A loan servicing right asset represents the amount by which the present value of the estimated future net cash flows to be received from servicing loans are expected to more than adequately compensate the Company for performing the servicing. The fair value of servicing rights is estimated using a present value cash flow model. The most important assumptions used in the valuation model are the anticipated rate of the loan prepayments and discount rates. Adjustments are only recorded when the discounted cash flows derived from the valuation model are less than the carrying value of the asset. As such, measurement at fair value is on a nonrecurring basis. Although some assumptions in determining fair value are based on standards used by market participants, some are based on unobservable inputs and therefore are classified in Level 3 of the valuation hierarchy.

		Impaired Loans: Impaired loans for which the Company expects to receive less than the contracted balance are written down to fair value. Consequently, measurement at fair value is on a nonrecurring basis. These loans are written down through a specific reserve within the Bank’s total loan loss reserve allowance. The fair value of these assets are classified within Level 3 of the valuation hierarchy and are estimated based on collateral values supported by appraisals.

		SFAS 107, Disclosures about Fair Value of Financial Instruments
		The following methods and assumptions were used by management to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value.

		Cash and cash equivalents: Carrying value is assumed to represent fair value for cash and due from banks and short-term investments, which have original maturities of 90 days or less.

		Investment securities: Refer to the above discussion on securities

		Federal Home Loan Bank of Boston stock: FHLB Boston stock is a non-marketable equity security which is assumed to have a fair value equal to its carrying value.

		Loans held for sale: The fair value of performing residential mortgage loans held for sale is estimated using quoted market prices provided by government-sponsored entities as described above. The fair value of SBA loans is estimated using quoted market prices from a secondary market broker.

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

		Accrued income receivable: Carrying value is assumed to represent fair value.

		Loans: The fair value of the net loan portfolio is determined by discounting the estimated future cash flows using the prevailing interest rates and appropriate risk adjustments as of period-end at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair value of nonperforming loans is estimated using the Bank’s prior credit experience.

		Derivative Assets: Refer to the above discussion on derivatives.

		Deposits: The fair value of demand, non-interest bearing checking, savings and certain money market deposits is determined as the amount payable on demand at the reporting date. The fair value of time deposits is estimated by discounting the estimated future cash flows using rates offered for deposits of similar remaining maturities as of period-end.

		Borrowed Funds: The fair value of borrowed funds is estimated by discounting the future cash flows using market rates for similar borrowings.

		The following are the carrying amounts and estimated fair values of the Company’s financial assets and liabilities as of June 30, 2009:

	June 30, 2009

		Carrying		Estimated
(In thousands)		Amounts		Fair Value

Financial Assets
Cash and due from banks	$	85,070	$	85,070
Short-term investments		62,000		62,000
Investment securities		2,579,454		2,591,145
Loans held for sale		54,479		54,479
Loans, net		4,799,956		4,839,053
Federal Home Loan Bank of Boston stock		120,821		120,821
Accrued income receivable		34,617		34,617
Derivative assets		1,107		1,107
Financial Liabilities
Interest and non-interest bearing checking, savings and money market accounts	$	3,347,184	$	3,347,184
Time deposits		1,515,322		1,539,839
Borrowed funds		2,212,609		2,230,299


4.		Derivative Financial Instruments

		In the ordinary course of business, the Company uses various derivative financial instruments to service the financial needs of customers and to reduce its exposure to fluctuations in interest rates. The Company considers its strategic use of derivatives to be a prudent method of managing interest-rate sensitivity, as it prevents earnings from being exposed to undue risk posed by changes in interest rates. The Company accounts for derivatives and hedging activities in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Certain Hedging Activities,” as amended, which requires that all derivative instruments be recorded on the statement of condition at their fair values. The Company does not enter into derivative transactions for speculative purposes, does not have any derivatives designated as hedging instruments, nor is party to a master netting agreement as of June 30, 2009.

		Loan Commitments and Forward Loan Sale Commitments: The Company enters into contractual commitments, interest rate lock commitments with borrowers, to finance residential mortgage loans. Primarily to mitigate the interest rate risk on these commitments, the Company also enters into “mandatory” and “best effort” forward loan sale delivery commitments with investors. The interest rate lock commitments and the forward loan delivery commitments meet the definition of a derivative in SFAS No. 133, however, the Company has not designated them as hedging instruments. Upon closing the loan, the loan commitment expires and the Company records a loan held for sale subject to the same forward loan sale commitment. Prior to January 1, 2009, the Company accounted for loans held for sale at the lower or cost or fair value in accordance with SFAS No. 65, “Accounting for Certain Mortgage Banking Activities.” Fluctuations in the fair value of loan commitments, loans held for

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

		sale, and forward loan sale commitments generally move in opposite directions, and the net impact of the changes in these valuations on net income is generally inconsequential to the financial statements.

		The decrease in mortgage rates at the end of 2008 through June 30, 2009 has resulted in a large increase in mortgage loan refinances and hence, the Company’s committed loans and forward loan sale commitments have significantly increased. The Company has elected the fair value option pursuant to SFAS No. 159 for loans held for sale originated after January 1, 2009 and therefore, those loans held for sale will be recorded in the statement of condition at fair value with any gains and losses recorded in earnings. See Footnote 3, Fair Value Measurements, for additional information.

		The following table summarizes the Company’s derivative positions at and for the six months ended June 30, 2009:

	Notional or		Fair Value
(In thousands)	Principal Amount		Adjustment (1)

Interest Rate Lock Commitments		41,112		65
Forward Sales Commitments		91,927		1,042


(1) An immaterial portion of these amounts was attributable to changes in instrument-specific credit risk.

		The following two tables present the fair values of the Company’s derivative instruments and their effect on the Statement of Income:

		Fair Values of Derivative Instruments

Asset Derivatives

Liability Derivatives

June 30, 2009

Balance Sheet

(In thousands)

Location

Fair Value

Location

Fair Value

Derivatives not designated as hedging instruments under Statement 133

Interest rate contracts

Other Assets

1,107

Other Liabilities

Total derivatives not designated as hedging instruments under Statement 133

1,107

Effect of Derivative Instruments on the Statement of Income

For the Three Months

For the Six Months

Ended

June 30, 2009

(In thousands)

Location of Gain or (Loss) Recognized in Income on Derivatives

Amount of Gain or (Loss) Recognized in Income on Derivatives

Derivatives not designated as hedging instruments under Statement 133

Interest rate contracts

Non-interest income

807

1,107

Total derivatives not designated as hedging instruments
under Statement 133

807

1,107

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

5.		Investment Securities

		The following table presents the amortized cost, gross unrealized gains, gross unrealized losses and estimated fair values of investment securities at June 30, 2009 and December 31, 2008.

	June 30, 2009									December 31, 2008

			Gross		Gross							Gross		Gross
	Amortized		unrealized		unrealized			Fair		Amortized		unrealized		unrealized			Fair
(In thousands)	cost		gains		losses			value		cost		gains		losses			value

Available for sale
U.S. Treasury obligations	$	597	$	-	$	-		$	597	$	596	$	1	$	-		$	597
U.S. Government sponsored
enterprise obligations		180,436		2,417		(290	)		182,563		228,844		4,586		(81	)		233,349
Corporate obligations		8,159		-		(181	)		7,978		8,178		-		(232	)		7,946
Other bonds and obligations		16,328		166		(1,923	)		14,571		17,654		128		(2,333	)		15,449
Auction rate certificates		27,950		-		(3,036	)		24,914		28,000		-		(4,521	)		23,479
Marketable equity securities		12,953		123		-			13,076		19,039		103		(8	)		19,134
Trust preferred equity securities		49,332		-		(19,351	)		29,981		47,708		-		(16,443	)		31,265
Private label mortgage-backed securities		27,819		-		(4,828	)		22,991		33,027		-		(7,891	)		25,136
Mortgage-backed securities		1,941,223		55,603		(2,147	)		1,994,679		1,543,403		30,019		(1,215	)		1,572,207

Total available for sale		2,264,797		58,309		(31,756	)		2,291,350		1,926,449		34,837		(32,724	)		1,928,562

Held to maturity
Mortgage-backed securities		278,099		11,415		-			289,514		299,222		8,832		(38	)		308,016
Other bonds		10,005		276		-			10,281		10,560		186		-			10,746

Total held to maturity		288,104		11,691		-			299,795		309,782		9,018		(38	)		318,762

Total securities	$	2,552,901	$	70,000	$	(31,756	)	$	2,591,145	$	2,236,231	$	43,855	$	(32,762	)	$	2,247,324

		The securities portfolio is reviewed on a monthly basis for the presence of other-than-temporary impairment (“OTTI”). During the second quarter new OTTI guidance, FSP No. FAS 115-2, was adopted which, for debt securities, requires that credit related OTTI be recognized in earnings while non-credit related OTTI be recognized in other comprehensive income (“OCI”). If an equity security is deemed other-than-temporarily impaired, the full impairment is considered to be credit-related and a charge to earnings would be recorded. The new guidance also required that previously recorded impairment charges which did not relate to a credit loss should be reclassified from retained earnings to accumulated other comprehensive income (“AOCI”). For the quarter ended June 30, 2009, the Company reclassified the non-credit related portion of a previously recorded OTTI loss and recorded a current OTTI loss in accordance with FSP No. FAS 115-2, both of which are described below.

		A credit related OTTI loss in the amount of $626,000 was recorded against the Company’s position in an adjustable rate mortgage mutual fund that holds positions in non-agency mortgage-backed securities. During the current quarter, the fund experienced its first realized loss on a mortgage investment. Additionally, the fund began disclosing the full portfolio details on a monthly basis during the second quarter. Consequently, management determined that the dollar amount of securities carrying a rating of CCC or lower had increased since the previous quarter-end. This decrease in the credit quality of the securities coupled with the loss recognized by the fund, resulted in management’s determination that the fund was other-than-temporarily impaired. The non-credit related OTTI was $1.9 million and was recognized in OCI. The fund has a current book value of $8.3 million and is not expected to be sold.

		During 2008, one of the “individual name” trust preferred securities was deemed to be other-than-temporarily impaired and a charge of $1.6 million was recorded in the third quarter. Upon the adoption of FSP No. FAS 115-2, the Company recorded a cumulative effect adjustment that increased retained earnings and decreased AOCI by $1.6 million, or $1.0 million, net of tax. Additionally, the amortized cost for this security increased by $1.6 million as the entire impairment charge recorded in 2008 was non-credit related. At June 30, 2009 this security had an amortized cost of $4.7 million and an unrealized loss of $1.3 million.

		The following tables present the fair value of investments with continuous unrealized losses for less than one year and those that have been in a continuous loss position for more than one year as of June 30, 2009 and December 31, 2008. Of the securities summarized, 38 issues have unrealized losses for less than twelve months and 37 have unrealized losses for twelve months or more at June 30, 2009. This compares to a total of 145 issues that had an unrealized loss at December 31, 2008.

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

	June 30, 2009

	Less Than One Year				More Than One Year				Total

	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(In thousands)	value		losses		value		losses		value		losses

U. S. Government sponsored enterprise obligations	$	27,803	$	276	$	708	$	14	$	28,511	$	290
Corporate obligations		1,021		3		6,956		178		7,977		181
Other bonds and obligations		6,343		1,923		-		-		6,343		1,923
Auction rate certificates		-		-		24,914		3,036		24,914		3,036
Marketable equity securities		-		-		-		-		-		-
Trust preferred equity securities		3,360		1,334		26,612		18,017		29,972		19,351
Private label mortgage-backed securities		2,355		242		20,636		4,586		22,991		4,828
Mortgage-backed securities		281,529		2,147		-		-		281,529		2,147

Total securities with unrealized losses	$	322,411	$	5,925	$	79,826	$	25,831	$	402,237	$	31,756



	December 31, 2008

	Less Than One Year				More Than One Year				Total

	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(In thousands)	value		losses		value		losses		value		losses

U. S. Government sponsored enterprise obligations	$	5,278	$	81	$	-	$	-	$	5,278	$	81
Corporate obligations		7,945		232		-		-		7,945		232
Other bonds and obligations		6,659		2,333		-		-		6,659		2,333
Auction rate certificates		23,479		4,521		-		-		23,479		4,521
Marketable equity securities		520		8		-		-		520		8
Trust preferred equity securities		25,031		11,311		6,234		5,132		31,265		16,443
Private label mortgage-backed securities		25,136		7,891		-		-		25,136		7,891
Mortgage-backed securities		148,432		1,253		-		-		148,432		1,253

Total securities with unrealized losses	$	242,480	$	27,630	$	6,234	$	5,132	$	248,714	$	32,762


		Management believes that no individual unrealized loss as of June 30, 2009 represents a credit related other-than-temporary impairment, based on its detailed monthly review of the securities portfolio. Among other things, the other-than-temporary impairment review of the investment securities portfolio focuses on the combined factors of percentage and length of time by which an issue is below book value as well as consideration of issuer specific (present value of cash flows expected to be collected, issuer rating changes and trends, credit worthiness and review of underlying collateral), broad market details and the Company’s intent to sell the security or if it is more likely than not that the Company will be required to sell the debt security before recovering its cost. The Company also considers whether the depreciation is due to interest rates or credit risk. The following paragraphs outline the Company’s position related to unrealized losses in its investment securities portfolio at June 30, 2009.

		The unrealized losses reported on mortgage-backed securities primarily relate to AAA rated securities issued by private institutions. Widening in non-agency mortgage spreads is the primary factor for the unrealized losses reported on AAA rated securities issued by private institutions. The unrealized loss is concentrated in four private-label mortgage-backed securities which are substantially paid down, well seasoned and of an earlier vintage that have not been significantly affected by high delinquency levels or vulnerable to lower collateral coverage as seen in later issued pools. None of the securities are backed by subprime mortgage loans and none have suffered losses. These securities are still paying principal and interest and are expected to continue to pay their contractual cash flows. Management’s review of the above factors and issuer specific data concluded that these private-label mortgage-backed securities are not other-than-temporarily impaired. All of the Company’s mortgage-backed securities relate to residential mortgages.

		The unrealized losses on other bonds and obligations relates to the non-credit related OTTI loss on a position in an adjustable rate mortgage mutual fund that holds positions in non-agency mortgage-backed securities that are facing negative mark to market pressures due to widening spreads in non-agency mortgage products and experienced declines in credit ratings and was not due to customer redemptions or forced selling of the investments. The fund recorded its first loss which factored into management’s determination that the fund was other-than-temporarily impaired. As discussed above, a credit related OTTI loss of $626,000 was recorded through earnings. The fund carries a market value to book value ratio of 76.7%, a weighted average underlying investment credit rating of A+ and it continues to pay normal monthly dividends. There is no intent to sell nor is it more likely than not that the Company will be required to sell these securities and has therefore concluded that the remaining unrealized loss is non-credit related as of June 30, 2009.

		The unrealized losses on auction rate certificates relate to certificates issued by a Wall Street underwriting firm and are pools of government-guaranteed student loans that are issued by state student loan departments. In the first half of 2008, the auction

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

		process for auction rate certificates began to freeze resulting from the problems in the credit markets. In 2008, the underwriter entered into a settlement agreement with several state regulatory agencies, whereby they have agreed to repurchase these certificates from both their retail and institutional customers at par. The institutional buy-back of these securities is scheduled on or around June 30, 2010. These securities are currently rated AAA and are still paying their contractual cash flows and are expected to continue to pay their contractual cash flows. Management has therefore concluded that no other-than-temporary impairment exists as of June 30, 2009.

		Trust preferred securities are comprised of two pooled trust preferreds with an amortized cost of $6.8 million, of which $4.8 million is rated AA and $2.0 million is rated BB. The remaining $42.6 million are comprised of twelve “individual names” issues with the following ratings: $15.5 million rated A+ to A-, $9.7 million rated BBB+ to BBB and $17.4 million rated B to BB+. The unrealized losses reported for trust preferred equity securities relate to the financial and liquidity stresses in the fixed income market and not to any credit impairment of the issuers as the present value of cash flows expected to be collected is not less than the amortized cost basis of the securities. Although the ratings on some issues have been reduced since December 31, 2008, all are currently paying the contractual principal and interest payments. A detailed review of the two pooled trust preferred and the “individual names” trust preferred equity securities was completed. This review included an analysis of collateral reports, stress default levels and financial ratios of the underlying issuers and concluded that there was no other-than-temporary impairment at the end of the period.

		The Company has no intent to sell nor is it more likely than not that the Company will be required to sell any of the securities contained in the table for a period of time necessary to recover the unrealized losses, which may be until maturity.

		The following table presents the changes in the credit loss component of the amortized cost of debt securities available for sale that have been written down for other-than-temporary impairment loss and recognized in earnings. The credit loss component represents the difference between the present value of expected future cash flows and the amortized cost basis of the security prior to considering credit losses.

	Three months ended		Six months ended
	June 30,		June 30,

(In thousands)	2009		2009

Balance, beginning of period	$	-	$	-
Additions:
Initital credit impairments which were not previously recognized as a component of earnings		626		626
Subsequent credit impairments		-		-
Reductions:
Securities sold		-		-

Balance, end of period	$	626	$	626


As of June 30, 2009, the amortized cost and fair values of debt securities and short-term obligations, by contractual maturity, are shown below. Expected maturities may differ from contracted maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available for Sale				Held to Maturity

(In thousands)	Amortized cost		Fair value		Amortized cost		Fair value

June 30, 2009
Due in one year or less	$	115,709	$	113,482	$	1,750	$	1,765
Due after one year through five years		102,771		104,055		7,205		7,441
Due after five years through ten years		4,001		4,068		550		575
Due after ten years		60,321		38,998		500		500

Mortgage-backed securities		1,969,042		2,017,670		278,099		289,514

Total debt securities	$	2,251,844	$	2,278,273	$	288,104	$	299,795


Securities with a fair value of $933.1 million and $1.12 billion at June 30, 2009 and December 31, 2008, respectively, were pledged to secure public deposits, repurchase agreements and Federal Home Loan Bank of Boston (“FHLB”) borrowings.

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

The following tables present information related to realized gains and losses on sales of securities available for sale during the three and six months ended June 30, 2009 and 2008.

	Debt Securities						Equity Securities

	Three Months Ended June 30,

(In thousands)	2009			2008			2009		2008

Realized gains	$	2,243		$	1,180		$	-	$	27
Realized losses		-			(21	)		-		(1,099	)



	Debt Securities						Equity Securities

	Six Months Ended June 30,

(In thousands)	2009			2008			2009		2008

Realized gains	$	4,142		$	2,516		$	-	$	27
Realized losses		(33	)		(21	)		-		(1,297	)


6.	Loans

	The composition of the Company’s loan portfolio is as follows:

		June 30,			December 31,
	(In thousands)	2009			2008

	Residential real estate	$	2,462,290		$	2,524,638
	Commercial real estate		1,064,973			1,077,200
	Construction
	Residential		19,062			21,380
	Commercial		131,037			143,610
	Commercial business		435,556			458,952
	Consumer
	Home equity and equity lines of credit		719,417			714,444
	Other		19,123			22,561

	Total consumer		738,540			737,005

	Total loans		4,851,458			4,962,785
	Allowance for loan losses		(51,502	)		(49,911	)

	Total loans, net	$	4,799,956		$	4,912,874


	At June 30, 2009 and December 31, 2008, the Company’s residential real estate loan, residential construction loan, home equity loan and equity lines of credit portfolios are entirely collateralized by one to four family homes and condominiums, the majority of which are located in Connecticut and Massachusetts. The commercial real estate loan and commercial construction portfolios are collateralized primarily by multi-family, commercial and industrial properties located predominately in Connecticut and Massachusetts. A variety of different assets, including accounts receivable, inventory and property, and plant and equipment, collateralize the majority of the commercial business loan portfolio. The Company does not originate or directly invest in subprime loans.

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

The following table provides a summary of activity in the allowance for loan losses.

	At or For the Three Months				At or For the Six Months
	Ended June 30,				Ended June 30,

(In thousands)	2009		2008		2009		2008

Balance at beginning of period	$	50,635	$	45,414	$	49,911	$	43,813
Provisions charged to operations		5,000		3,700		9,100		5,400
Charge-offs
Residential real estate loans		990		-		1,489		51
Commercial real estate loans		1,493		-		1,996		-
Commercial construction loans		264		1,000		2,046		1,000
Commercial business loans		1,346		504		2,151		774
Consumer loans		254		205		413		351

Total charge-offs		4,347		1,709		8,095		2,176

Recoveries
Residential real estate loans		103		3		137		6
Commercial real estate loans		-		11		-		23
Commercial construction loans		-		-		-		-
Commercial business loans		84		343		291		663
Consumer loans		27		36		158		69

Total recoveries		214		393		586		761

Net charge-offs		4,133		1,316		7,509		1,415

Balance at end of period	$	51,502	$	47,798	$	51,502	$	47,798


Nonperforming Assets

Nonperforming assets include loans for which the Company does not accrue interest (nonaccrual loans), loans 90 days past due and still accruing interest, renegotiated loans due to a weakening in the financial condition of the borrower and other real estate owned. There were no accruing loans included in the Company’s nonperforming assets as of June 30, 2009 and December 31, 2008. As of June 30, 2009 and December 31, 2008, nonperforming assets were:

	June 30,		December 31,
(In thousands)	2009		2008

Nonaccrual loans	$	54,872	$	38,331
Other real estate owned		992		2,023

Total nonperforming assets	$	55,864	$	40,354

Troubled debt restructured loans included in nonaccrual loans above	$	2,746	$	-


7.	Goodwill and Identifiable Intangible Assets

	The changes in the carrying amount of goodwill and identifiable intangible assets for the six months ended June 30, 2009 are summarized as follows:
							Total
				Core Deposits			Identifiable
				and Customer			Intangible
	(In thousands)	Goodwill		Relationship			Assets

	Balance, December 31, 2008	$	527,167	$	43,860		$	43,860
	Amortization expense		-		(4,257	)		(4,257	)

	Balance, June 30, 2009	$	527,167	$	39,603		$	39,603


	Estimated amortization expense for the year ending:
	Remaining 2009				4,244			4,244
	2010				7,811			7,811
	2011				7,556			7,556
	2012				7,556			7,556
	2013				7,461			7,461
	Thereafter				4,975			4,975

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

The components of identifiable intangible assets are core deposit and customer relationships and had the following balances at June 30, 2009:

	Original				Balance
	Recorded		Cumulative		June 30,
(In thousands)	Amount		Amortization		2009


Core deposit and customer relationships	$	86,908	$	47,305	$	39,603


8.	Other Assets

	Selected components of other assets are as follows:
		June 30,		December 31,
	(In thousands)	2009		2008

	Deferred tax asset, net	$	21,000	$	30,339
	Accrued interest receivable		34,617		35,285
	Investments in limited partnerships and other investments		8,548		9,171
	Receivables arising from securities transactions		36,085		9,892
	All other		16,766		16,986

	Total other assets	$	117,016	$	101,673


9.	Deposits

	A summary of deposits by account type is as follows:
		June 30,		December 31,
	(In thousands)	2009		2008

	Savings	$	1,913,169	$	1,463,341
	Money market		520,902		346,522
	NOW		389,495		368,730
	Demand		523,618		494,978
	Time		1,515,322		1,774,259

	Total deposits	$	4,862,506	$	4,447,830


10.	Borrowings

	The following is a summary of the Company’s borrowed funds:
				December 31,
	(In thousands)	June 30, 2009		2008

	FHLB advances (1)	$	2,057,720	$	2,190,914
	Repurchase agreements		132,511		159,530
	Mortgage loans payable		1,243		1,317
	Junior subordinated debentures issued to affiliated trusts (2)		21,135		24,735

	Total borrowings	$	2,212,609	$	2,376,496

		(1)		Includes fair value adjustments on acquired borrowings, in accordance with SFAS No. 141, “Business Combinations,” of $4.4 million and $5.8 million at June 30, 2009 and December 31, 2008, respectively. The acquisition fair value adjustments (premiums) are being amortized as an adjustment to interest expense on borrowings over their remaining terms using the level yield method.
		(2)		Includes fair value adjustments on acquired borrowings, in accordance with SFAS No. 141, “Business Combinations,” of $0 and $100,000 at June 30, 2009 and December 31, 2008, respectively. The trusts were organized to facilitate the issuance of “trust preferred” securities. The Company acquired these subsidiaries when it acquired Alliance Bancorp of New England, Inc. and Westbank Corporation, Inc. The affiliated trusts are wholly-owned subsidiaries of the Company and the payments of these securities are irrevocably and unconditionally guaranteed by the Company.

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

		Federal Home Loan Bank of Boston (“FHLB”) advances are secured by the Company’s investment in FHLB stock, a blanket security agreement and other eligible investment securities. This agreement requires the Bank to maintain as collateral certain qualifying assets, principally mortgage loans. Investment securities currently maintained as collateral are all U.S. Agency hybrid adjustable rate mortgage-backed securities. At June 30, 2009 and December 31, 2008, the Bank was in compliance with the FHLB collateral requirements. At June 30, 2009, the Company could immediately borrow an additional $297.0 million from the FHLB, inclusive of a line of credit of approximately $20.0 million. Additional borrowing capacity of approximately $1.12 billion would be available by pledging additional eligible securities as collateral. The Company also has borrowing capacity at the Federal Reserve Bank of Boston’s discount window, which was approximately $122.0 million as of June 30, 2009, all of which was available on that date. Repurchase agreement lines of credit with three large broker-dealers totaled $100.0 million at June 30, 2009, with availability of $75.0 million. At June 30, 2009, all of the Company’s $2.05 billion outstanding FHLB advances were at fixed rates ranging from 1.82% to 8.17%. The weighted average rate for all FHLB advances at June 30, 2009 was 4.33%.

11.		Pension and Other Postretirement Benefit Plans

		The Company provides various defined benefit and other postretirement benefit plans (postretirement health and life insurance benefits) to substantially all employees hired prior to January 1, 2008. The Company also has supplemental retirement plans (the “Supplemental Plans”) that provide benefits for certain key executive officers. Benefits under the supplemental plans are based on a predetermined formula and are reduced by other benefits. The liability arising from these plans is being accrued over the participants’ remaining periods of service so that at the expected retirement dates, the present value of the annual payments will have been expensed. Due to the retirement of an executive officer, the Company expects to record additional expense of approximately $1.2 million for the supplemental executive retirement plans in the fourth quarter of 2009.

		The following table presents the amount of net periodic pension cost for the three months ended June 30, 2009 and 2008.

							Supplemental
							Executive				Other Postretirement
	Qualified Pension						Retirement Plans				Benefits

(In thousands)	2009			2008			2009		2008		2009			2008

Service cost - benefits earned during the period	$	809		$	787		$	112	$	134	$	55		$	49
Interest cost on projected benefit obligation		1,430			1,363			194		177		89			93
Expected return on plan assets		(1,741	)		(1,798	)		-		-		-			-
Amortization:								-				-
Transition		-			-			-		-		13			13
Prior service cost		13			13			2		2		-			-
Loss (gain)		204			-			-		-		(43	)		(20	)

Net periodic benefit cost	$	715		$	365		$	308	$	313	$	114		$	135



The following table represents the amount of net periodic pension cost for the six months ended June 30, 2009 and 2008.

							Supplemental
							Executive				Other Postretirement
	Qualified Pension						Retirement Plans				Benefits

(In thousands)	2009			2008			2009		2008		2009			2008

Service cost - benefits earned during the period	$	1,617		$	1,575		$	225	$	269	$	109		$	98
Interest cost on projected benefit obligation		2,861			2,726			389		353		179			186
Expected return on plan assets		(3,482	)		(3,595	)		-		-		-			-
Amortization:
Transition		-			-			-		-		26			26
Prior service cost		26			25			3		3		-			-
Loss (gain)		408			-			-		-		(86	)		(40	)

Net periodic benefit cost	$	1,430		$	731		$	617	$	625	$	228		$	270

In connection with its conversion to a state-chartered stock bank, the Company established an employee stock ownership plan (“ESOP”) to provide substantially all employees of the Company the opportunity to become stockholders. The ESOP borrowed $109.7 million of a $112.0 million line of credit from the Company and used the funds to purchase 7,454,562 shares of common stock in the open market subsequent to the subscription offering. The loan will be repaid principally from the Bank’s

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

		discretionary contributions to the ESOP over a remaining period of 25 years. The unallocated ESOP shares are pledged as collateral on the loan.

		At June 30, 2009, the loan had an outstanding balance of $98.7 million and an interest rate of 4.0%. The Company accounts for its ESOP in accordance with Statement of Position (“SOP”) 93-6, “Employers’ Accounting for Employee Stock Ownership Plans.” Under SOP 93-6, unearned ESOP shares are not considered outstanding and are shown as a reduction of stockholders’ equity as unearned compensation. The Company will recognize compensation cost equal to the fair value of the ESOP shares during the periods in which they are committed to be released. To the extent that the fair value of the Company’s ESOP shares differs from the cost of such shares, this difference will be credited or debited to equity. The Company will receive a tax deduction equal to the cost of the shares released to the extent of the principal paydown on the loan by the ESOP. As the loan is internally leveraged, the loan receivable from the ESOP to the Company is not reported as an asset nor is the debt of the ESOP shown as a liability in the Company’s financial statements. Dividends on unallocated shares are used to pay the ESOP debt. The ESOP compensation expense for the three and six months ended June 30, 2009 was approximately $779,000 and $1.5 million respectively. For the three and six months ended June 30, 2008, the ESOP compensation expense was approximately $817,000 and $1.5 million, respectively. The amount of loan repayments made by the ESOP is used to reduce the unallocated common stock held by the ESOP.

		The ESOP shares as of June 30, 2009 were as follows:


Shares released for allocation		1,287,253
Unreleased shares		6,167,309

Total ESOP shares		7,454,562

Market value of unreleased shares at June 30, 2009 (in thousands)	$	70,924

12.		Stock-Based Compensation

		The Company provides compensation benefits to employees and non-employee directors under its 2005 Long-Term Compensation Plan (the “LTCP”) which was approved by shareholders. The Company accounts for stock-based compensation using the fair value recognition provisions of revised SFAS No. 123 (“SFAS No. 123R”), “Share Based Payment”, which was adopted using the modified prospective transition method effective January 1, 2006. Under SFAS No. 123R, the fair value of stock option and restricted stock awards, measured at grant date, is amortized to compensation expense on a straight-line basis over the vesting period or over the requisite service period for awards expected to vest.

		The LTCP allows for the issuance of up to 11.4 million Options or Stock Appreciation Rights and up to 4.6 million Stock Awards or Performance Awards. During the quarter ended June 30, 2009, a mix of stock options, restricted stock and performance-based restricted shares were awarded to employees.

		Option Awards
		Options awarded to date are for a term of ten years and total approximately 9.5 million shares. Substantially all of these options were awarded on the original award date of June 17, 2005 and these 2005 option awards had the following vesting schedule: 40% vested at year-end 2005 and 20% vested at year-end 2006, 2007 and 2008, respectively. Subsequent awards have vesting periods of either three or four years. The Company assumed a 4.1% average forfeiture rate on options granted subsequent to June 17, 2005 as the majority of the options were awarded to senior level management. Compensation expense recorded on options for the three and six months ended June 30, 2009 was $78,000 and $132,000, respectively, or after tax expense of approximately $50,000 and $86,000, respectively. Compensation expense for the three and six months ended June 30, 2008 was $1.0 million and $2.2 million, respectively, or after tax expense of approximately $682,000 and $1.4 million, respectively, was recorded. Under the terms of the LTCP, additional awards are likely to be granted, which will increase the amount of expense in future periods.

		Options to purchase 411,130 shares were granted to employees during the six months ended June 30, 2009 and options to purchase 79,250 shares were granted during the six months ended June 30, 2008. Using the Black-Scholes option pricing model, the weighted-average grant date fair value was $2.37 and $1.96 per share for the options which were granted in 2009 and 2008, respectively. The weighted-average related assumptions for the six months ended June 30, 2009 and 2008 are presented in the following table.

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

	2009		2008

Risk-free interest rate	2.63	%	2.86	%
Expected dividend yield	2.15	%	2.12	%
Expected volatility	19.31	%	16.19	%
Expected life (years)	6.25		6.25

		•	The risk-free interest rate was determined using the U.S. Treasury yield curve in effect at the time of the grant.
		•	The dividend yield is calculated on the current dividend and strike price at the time of the grant.
		•	The expected volatility assumption is based on the Company’s stock price history, which for 2009 was 60 months and for 2008 was 48 months.
		•	The expected life for options granted during the six months ended June 30, 2009 and 2008 was determined by applying the simplified method as allowed by Staff Accounting Bulletin No. 107.

A summary of option activity as of June 30, 2009 and changes during the period ended is presented below.

					Weighted-
			Weighted-		Average	Aggregate
			Average		Remaining	Intrinsic
			Exercise		Contractual	Value
	Shares		Price		Term	($000)

Options outstanding at beginning of year	8,422,666		$	14.40
Granted	411,130			13.01
Exercised	-			-
Forfeited/cancelled	(2,262	)		13.59
Expired	(221,375	)		14.39

Options outstanding at June 30, 2009	8,610,159		$	14.33	6.22	$	-

Options exercisable at June 30, 2009	8,003,064		$	14.40	5.98	$	-

The following table summarizes the nonvested options during the six months ended June 30, 2009.

			Weighted-average
			Grant-Date
	Shares		Fair Value

Nonvested at January 1, 2009	247,494		$	2.60
Granted	411,130			2.37
Vested	(49,267	)		2.37
Forfeited / Cancelled	(2,262	)		2.18

Nonvested at June 30, 2009	607,095		$	2.46

		Restricted Stock and Performance-Based Restricted Stock Awards
		To date, approximately 3.7 million shares of restricted stock have been awarded under the LTCP. The majority of these shares were awarded in 2005 and these 2005 awards have a vesting schedule of 15% per year for six years and 10% in the seventh year. Subsequent awards have vesting schedules of three years, four years, or cliff vest after three years. During the quarter ended June 30, 2009, in addition to restricted stock awards, the Company also granted performance-based restricted awards. The vesting for these newly issued performance-based awards is conditional upon fulfillment of a market condition and on meeting a service period. Of the 190,298 shares of restricted stock awarded during the six months ended June 30, 2009, 65,149 shares were performance-based.

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

		Performance-based restricted stock shares were awarded to executive management and other key members of senior management. The actual number of performance shares to be earned will be based on performance criteria over a three-year performance period beginning May 29, 2009 and ending May 31, 2012. Performance shares vest based on total shareholder return (TSR) (defined as share price appreciation from the beginning of the performance period to the end of the performance period, plus the total dividends paid on the common stock during the period) for the group of banks and thrifts listed on the SNL Thrift Index versus the Company’s TSR (the “TSR Percentage”). The performance shares, if earned, will vest on May 31, 2012. A Monte Carlo simulation model was used to provide a grant date fair value for the performance-based shares.

		Expense for the performance-based awards is recognized over the service period similar to the recognition of the expense associated with the other restricted stock awards that only have a service condition. Total compensation expense for the three months ended June 30, 2009 and 2008 was approximately $1.2 million and $1.8 million or after tax expense of approximately $946,000 and $1.3 million, respectively. For the six months ended June 30, 2009 and 2008, compensation expense was $2.9 million and $3.7 million or after tax expense of approximately $2.2 million and $2.7 million was recorded. The Company anticipates that it will record expense of approximately $6.1 million, $6.3 million, $4.5 million and $407,000 in calendar years 2009 through 2012, respectively. Under the terms of the LTCP, additional awards are likely to be granted, which will increase the amount of expense recognized in future periods.

		The following table summarizes the nonvested restricted stock and performance-based restricted stock awards during the six months ended June 30, 2009.

			Weighted-average
			Grant-Date
	Shares		Fair Value

Nonvested at January 1, 2009	1,656,933		$	14.33
Granted	190,298			14.95
Vested	(486,424	)		14.00
Forfeited / Cancelled	(165,699	)		14.38

Nonvested at June 30, 2009	1,195,108		$	14.42

13.		Income Taxes

		The Company had transactions in which the related tax effect was recorded directly to stockholders’ equity or goodwill instead of operations. Transactions in which the tax effect was recorded directly to stockholders’ equity included the tax effects of unrealized gains and losses on available for sale securities and excess tax benefits related to the vesting of restricted stock. Deferred taxes charged to goodwill were in connection with prior acquisitions. The Company had a net deferred tax asset of $21.0 million and $30.3 million at June 30, 2009 and December 31, 2008, respectively.

		As of June 30, 2009 and December 31, 2008, the Company has a valuation allowance of $9.2 million and $9.0 million, respectively, against charitable contribution carryforwards that are expected to expire in 2009 unused. The increase in the valuation allowance for the six months ended June 30, 2009 was $200,000. Management estimates that a total $400,000 increase in the valuation allowance is needed in 2009. As the increase in the valuation allowance results from changes in judgment concerning current year’s estimated income, the $400,000 increase is treated as an adjustment to the annual effective tax rate. Therefore management expects that the valuation allowance will increase by $200,000 over the remainder of the year.

		As of June 30, 2009 and December 31, 2008, the Company has a valuation allowance of $938,000 and $815,000, respectively, against capital loss carryforwards. Management estimates that a total $222,000 increase in the valuation allowance is needed in 2009. As the increase in the valuation allowance results from a current year loss item, the total $222,000 increase is treated as an adjustment to the annual effective tax rate and therefore will be recognized ratably over the remainder of the year.

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

The components of income tax expense are summarized as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,

(In thousands)	2009			2008			2009		2008

Current tax expense
Federal	$	5,826		$	7,709		$	11,326	$	10,433
State		136			39			324		58

Total current		5,962			7,748			11,650		10,491

Deferred tax expense, net of valuation reserve
Federal		(257	)		(1,780	)		240		277
State		-			-			-		-

Total deferred		(257	)		(1,780	)		240		277

Total income tax expense	$	5,705		$	5,968		$	11,890	$	10,768

The allocation of changes in net deferred tax assets involving items charged to income, items charged directly to shareholders’ equity and items charged to goodwill is as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,

(In thousands)	2009			2008			2009		2008

Deferred tax asset allocated to:
Stockholders’ equity, tax effect of net unrealized gain on investment securities available for sale, net of valuation allowance	$	3,344		$	(3,905	)	$	8,521	$	(3,107	)
Stockholders’ equity, tax impact of adoption of EITF Issue No. 06-04		-			-			-		(572	)
Reclass as a result of adoption of FSP No. FAS 115-2 and 124-2		578			-			578		-
Goodwill		-			-			-		(256	)
Income		(257	)		(1,780	)		240		277

Total change in deferred tax assets, net	$	3,665		$	(5,685	)	$	9,339	$	(3,658	)

The Company adopted the provisions of FIN 48, “Accounting for Uncertainty in Income Taxes”, on January 1, 2007. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

	June 30,
(In thousands)	2009

Balance, beginning of period	$	421
Additions for tax positions of current year		-
Additions for tax positions of prior year		9
Reductions for tax positions of prior year		-

Balance, end of period	$	430

		Included in the balance at June 30, 2009 are $430,000 of tax positions for which the ultimate deductibility is highly uncertain and for which the disallowance of the tax position would affect the annual effective tax rate. The Company anticipates that $30,000 of the unrecognized tax benefits will reverse in the next twelve months due to statute expirations. The Company recognizes interest and penalties accrued related to unrecognized tax benefits as a component of income tax expense. As of June 30, 2009, the Company has accrued approximately $71,000 in interest and penalties.

		The Company is generally no longer subject to federal, state or local income tax examinations by tax authorities for the years before 2005. In the third quarter of 2008, the IRS commenced an examination of the 2006 and 2007 tax years for Westbank. In the second quarter of 2009, the IRS commenced an examination of the 2006 and 2007 tax years for the Company. As of June 30, 2009, the IRS has not proposed any significant adjustments to Westbank’s or the Company’s tax returns for these tax years.

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

14.		Commitments and Contingencies

		The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist primarily of commitments to extend credit and standby letters of credit. Commitments to extend credit are agreements to lend to customers as long as there is no violation of any terms or covenants established in the contract. Commitments generally have fixed expiration dates or other termination clauses that may require payment of a fee. The Company monitors customer compliance with commitment terms. Since many of the commitments could expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. These commitments consist principally of unused commercial and consumer lines of credit. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of an underlying contract with a third party. The credit risks associated with commitments to extend credit and standby letters of credit are essentially the same as those involved with extending loans to customers and are subject to normal credit policies. Collateral may be obtained based on management’s assessment of the customer’s creditworthiness.

The table below summarizes the Company’s commitments and contingencies discussed above.

	June 30,		December 31,
(In thousands)	2009		2008

Loan origination commitments	$	187,981	$	108,948
Unadvanced portion of construction loans		78,103		82,525
Standby letters of credit		7,380		7,908
Unadvanced portion of lines of credit		613,155		608,043

Total commitments	$	886,619	$	807,424

		Other Commitments
		As of June 30, 2009 and December 31, 2008, the Company was contractually committed under limited partnership agreements to make additional partnership investments of approximately $1.7 million for each period which constitutes the Company’s maximum potential obligation to these partnerships. The Company is obligated to make additional investments in response to formal written requests, rather than a funding schedule. Funding requests are submitted when the partnerships plan to make additional investments.

		Legal Proceedings
		We are not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. We believe that those routine proceedings involve, in the aggregate, amounts which are immaterial to the financial condition and results of operations of NewAlliance Bancshares, Inc.

15.		Stockholders’ Equity

		At June 30, 2009 and December 31, 2008, stockholders’ equity amounted to $1.41 billion and $1.38 billion, respectively, representing 16.4% and 16.6% of total assets, respectively. The Company paid cash dividends totaling $0.14 per share on common stock during the six months ended June 30, 2009.

		Dividends
		The Company and the Bank are subject to dividend restrictions imposed by various regulators. Connecticut banking laws limit the amount of annual dividends that the Bank may pay to the Company to an amount that approximates the Bank’s net income retained for the current year plus net income retained for the two previous years. In addition, the Bank may not declare or pay dividends on, and the Company may not repurchase any of its shares of its common stock if the effect thereof would cause stockholders’ equity to be reduced below applicable regulatory capital maintenance requirements or if such declaration, payment or repurchase would otherwise violate regulatory requirements.

		Treasury Shares
		Share Repurchase Plan
		On January 31, 2006, the Company’s Board of Directors authorized a repurchase plan of up to an additional 10.0 million shares or approximately 10% of the then outstanding Company common stock. Under this plan the Company has repurchased 7.0 million shares of common stock at a weighted average price of $13.16 per share as of June 30, 2009. During the second quarter of 2009, no shares were repurchased. There is no set expiration date for this repurchase plan.

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements


		Other
		Upon vesting of shares under the Company’s benefit plans, plan participants may choose to have the Company withhold a number of shares necessary to satisfy tax withholding requirements. The withheld shares are classified as treasury shares by the Company. For the six months ended June 30, 2009, approximately 106,500 shares were returned to the Company for this purpose.

		Regulatory Capital
		Capital guidelines of the Federal Reserve Board and the Federal Deposit Insurance Corporation (“FDIC”) require the Company and its banking subsidiary to maintain certain minimum ratios, as set forth below. At June 30, 2009, the Company and the Bank were deemed to be “well capitalized” under the regulations of the Federal Reserve Board and the FDIC, respectively, and in compliance with the applicable capital requirements.

The following table provides information on the capital ratios.
									To Be Well
					For Capital				Capitalized Under
					Adequacy				Prompt Corrective
	Actual				Purposes				Action Provisions

(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio

NewAlliance Bank
June 30, 2009
Tier 1 Capital (to Average Assets)	$	702,310	8.8	%	$	318,021	4.0	%	$	397,526	5.0	%
Tier 1 Capital (to Risk Weighted Assets)		702,310	15.8			178,023	4.0			267,035	6.0
Total Capital (to Risk Weighted Assets)		753,867	16.9			356,047	8.0			445,059	10.0

December 31, 2008
Tier 1 Capital (to Average Assets)	$	735,144	9.5	%	$	308,308	4.0	%	$	385,385	5.0	%
Tier 1 Capital (to Risk Weighted Assets)		735,144	16.2			181,978	4.0			272,967	6.0
Total Capital (to Risk Weighted Assets)		785,055	17.3			363,955	8.0			454,944	10.0

NewAlliance Bancshares, Inc.
June 30, 2009
Tier 1 Capital (to Average Assets)	$	866,801	10.9	%	$	318,581	4.0	%	$	398,226	5.0	%
Tier 1 Capital (to Risk Weighted Assets)		866,801	19.4			178,461	4.0			267,692	6.0
Total Capital (to Risk Weighted Assets)		918,358	20.6			356,922	8.0			446,153	10.0

December 31, 2008
Tier 1 Capital (to Average Assets)	$	853,628	11.1	%	$	308,873	4.0	%	$	386,091	5.0	%
Tier 1 Capital (to Risk Weighted Assets)		853,628	18.7			182,537	4.0			273,806	6.0
Total Capital (to Risk Weighted Assets)		903,539	19.8			365,075	8.0			456,343	10.0

16.		Other Comprehensive Income

		The following table presents the components of other comprehensive income and the related tax effects for the three and six months ended June 30, 2009 and 2008.

	Three Months Ended						Six Months Ended
	June 30,						June 30,

(In thousands)	2009			2008			2009			2008

Net income	$	10,108		$	11,782		$	21,698		$	24,716
Other comprehensive income, before tax
Unrealized gains on securities
Unrealized holding gains (losses), arising during the period		15,321			(11,779	)		31,446			(8,292	)
Reclassification adjustment for gains included in net income		(1,617	)		(87	)		(3,483	)		(1,225	)
Non-credit unrealized loss on other-than-temporarily impaired debt securities		(1,896	)		-			(1,896	)		-

Other comprehensive income (loss), before tax		11,808			(11,866	)		26,067			(9,517	)
Income tax (expense) benefit, net of valuation allowance		(3,922	)		3,905			(9,099	)		3,107

Other comprehensive income (loss), net of tax		7,886			(7,961	)		16,968			(6,410	)

Comprehensive income	$	17,994		$	3,821		$	38,666		$	18,306

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements


17.		Earnings Per Share

		The calculation of basic and diluted earnings per share for the three and six months ended June 30, 2009 and 2008 is presented below.

	Three Months Ended				Six Months Ended
	June 30,				June 30,

(In thousands, except per share data)	2009		2008		2009		2008

Net income	$	10,108	$	11,782	$	21,698	$	24,716
Average common shares outstanding for basic EPS		99,278		100,113		99,266		100,195
Effect of dilutive stock options and unvested stock awards		33		169		44		20

Average common and common-equivalent shares for dilutive EPS		99,311		100,282		99,310		100,215
Net income per common share:
Basic	$	0.10	$	0.12	$	0.22	$	0.25
Diluted		0.10		0.12		0.22		0.25

NewAlliance Bancshares (NAL)

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