Annual Reports

 
Quarterly Reports

  • 10-Q (Nov 9, 2010)
  • 10-Q (Sep 3, 2010)
  • 10-Q (Aug 6, 2010)
  • 10-Q (May 7, 2010)
  • 10-Q (Nov 9, 2009)
  • 10-Q (Aug 7, 2009)

 
8-K

 
Other

NewAlliance Bancshares 10-Q 2010

Documents found in this filing:

  1. 10-Q
  2. Ex-31
  3. Ex-31
  4. Ex-32
  5. Ex-32
  6. Ex-32

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, 2010.

OR

[    ]   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 required 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 “large accelerated filer”, “accelerated filer” and “smaller reporting company” 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)   105,079,540
 
 
  Class   Outstanding at August 4, 2010



TABLE OF CONTENTS


Part I – FINANCIAL INFORMATION
     

      Page No.
     
Item 1.   Financial Statements (Unaudited)    
         
    Consolidated Balance Sheets at June 30, 2010 and December 31, 2009   3
         
    Consolidated Statements of Income for the three and six months ended June 30, 2010 and 2009   4
         
    Consolidated Statement of Changes in Stockholders’ Equity for the six months ended June 30, 2010   5
         
    Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009   6
         
    Notes to Unaudited Consolidated Financial Statements   7
         
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   33
         
Item 3.   Quantitative and Qualitative Disclosures about Market Risk   56
         
Item 4.   Controls and Procedures   56
         
Item 4T.   Controls and Procedures   56
         
Part II – OTHER INFORMATION
         
Item 1.   Legal Proceedings   56
         
Item 1A.   Risk Factors   56
         
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   56
         
Item 3.   Defaults Upon Senior Securities   57
         
Item 4.   (Removed and Reserved)   57
         
Item 5.   Other Information   57
         
Item 6.   Exhibits   57
         
SIGNATURES

2



NewAlliance Bancshares, Inc.
Consolidated Balance Sheets

            December 31,  
(In thousands, except per share data) (Unaudited)   June 30, 2010     2009  

Assets                

Cash and due from banks

  $ 97,693     $ 96,927  

Short term investments

    20,000       50,000  

Cash and cash equivalents

    117,693       146,927  

Investment securities available for sale, at fair value (note 3)

    2,403,317       2,327,855  

Investment securities held to maturity (note 3)

    323,255       240,766  

Loans held for sale (includes $11,744 at June 30, 2010 and

               

$12,908 at December 31, 2009 measured at fair value)

    13,362       14,659  

Loans, net (note 4)

    4,873,426       4,709,582  

Federal Home Loan Bank of Boston stock

    120,821       120,821  

Premises and equipment, net

    58,651       57,083  

Cash surrender value of bank owned life insurance

    135,054       140,153  

Goodwill (note 5)

    527,167       527,167  

Identifiable intangible assets (note 5)

    31,454       35,359  

Other assets (note 6)

    107,897       113,941  

Total assets

  $ 8,712,097     $ 8,434,313  

                 
Liabilities                

Deposits (note 7)

               

Non-interest bearing

  $ 568,414     $ 534,180  

Savings, interest-bearing checking and money market

    3,120,460       3,008,416  

Time

    1,447,872       1,481,446  

Total deposits

    5,136,746       5,024,042  

Borrowings (note 8)

    2,023,732       1,889,928  

Other liabilities

    87,448       85,390  

Total liabilities

    7,247,926       6,999,360  
                 

Commitments and contingencies (note 12)

               
                 
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, 2010 and December 31, 2009

    1,215       1,215  

Additional paid-in capital

    1,245,532       1,245,489  

Unallocated common stock held by ESOP

    (86,892 )     (88,721 )

Unearned restricted stock compensation

    (9,210 )     (12,389 )

Treasury stock, at cost (16,406 shares at June 30, 2010 and

               

15,435 shares at December 31, 2009)

    (222,835 )     (211,582 )

Retained earnings

    505,694       486,974  

Accumulated other comprehensive income (note 16)

    30,667       13,967  

Total stockholders’ equity

    1,464,171       1,434,953  

Total liabilities and stockholders’ equity

  $ 8,712,097     $ 8,434,313  


See accompanying notes to consolidated financial statements.

3



NewAlliance Bancshares, Inc.
Consolidated Statements of Income

    Three Months Ended   Six Months Ended
    June 30,   June 30,
   
 
(In thousands, except per share data) (Unaudited)   2010     2009     2010     2009  

Interest and dividend income                                    

Residential real estate loans

  $ 29,589     $ 33,782     $   59,273     $   68,376  

Commercial real estate loans

    18,662       17,448         36,915         35,065  

Commercial business loans

    5,591       5,527         10,785         11,239  

Consumer loans

    7,946       8,596         16,083         17,304  

Investment securities

    25,239       28,613         51,338         56,575  

Federal funds sold and other short-term investments

    34       116         67         278  

Total interest and dividend income

    87,061       94,082         174,461         188,837  

                                     
Interest expense                                    

Deposits

    12,464       21,277         26,346         44,118  

Borrowings

    16,856       22,878         34,732         46,799  

Total interest expense

    29,320       44,155         61,078         90,917  

                                     

Net interest income before provision for loan losses

    57,741       49,927         113,383         97,920  
                                     
Provision for loan losses     5,500       5,000         10,300         9,100  

Net interest income after provision for loan losses

    52,241       44,927         103,083         88,820  

                                     
Non-interest income                                    

Depositor service charges

    7,457       6,953         14,165         12,906  

Loan and servicing income, net

    351       357         668         176  

Trust fees

    1,573       1,392         3,174         2,651  

Investment management, brokerage and insurance fees

    1,302       1,564         2,816         3,814  

Bank owned life insurance

    847       899         4,309         1,770  


Other-than-temporary impairment losses on securities

    (30 )     (2,522 )       (30 )       (2,522 )

Less: Portion of loss recognized in other comprehensive income (before taxes)

    (522 )     1,896         (522 )       1,896  

Net impairment losses on securities recognized in earnings

    (552 )     (626 )       (552 )       (626 )
 

Net gain on sale of securities

    750       2,243         750         4,109  

Net securities gain

    198       1,617         198         3,483  
                                     

Mortgage origination activity and loan sale income

    571       1,481         1,299         3,500  

Net gain (loss) on limited partnerships

    2,372       89         2,703         (659 )

Other

    1,215       939         1,953         1,913  

Total non-interest income

    15,886       15,291         31,285         29,554  

                                     
Non-interest expense                                    

Salaries and employee benefits (notes 9 & 10)

    23,982       21,607         46,203         42,838  

Occupancy

    4,094       4,644         8,715         9,399  

Furniture and fixtures

    1,426       1,453         2,771         2,929  

Outside services

    4,718       4,455         9,867         9,805  

Advertising, public relations, and sponsorships

    1,486       981         3,017         2,115  

Amortization of identifiable intangible assets

    1,953       2,129         3,905         4,257  

FDIC insurance premiums

    1,898       5,893         3,755         6,838  

Other

    4,071       3,243         7,595         6,605  

Total non-interest expense

    43,628       44,405         85,828         84,786  

                                     

Income before income taxes

    24,499       15,813         48,540         33,588  
 

Income tax provision (note 11)

    8,226       5,705         15,834         11,890  

Net income

  $ 16,273     $ 10,108     $   32,706     $   21,698  

                                     
                                     

Basic earnings per share (note 17)

  $ 0.16     $ 0.10     $   0.33     $   0.22  

Diluted earnings per share (note 17)

    0.16       0.10         0.33         0.22  

Weighted-average shares outstanding (note 17)

                                   

Basic

    98,781       99,278         98,900         99,266  

Diluted

    98,860       99,311         98,937         99,310  

Dividends per share

  $ 0.07     $ 0.07     $   0.14     $   0.14  

See accompanying notes to consolidated financial statements.

4



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, 2010   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       Equity  

Balance December 31, 2009   106,051     $ 1,215     $ 1,245,489     $ (88,721 )   $ (12,389 )   $ (211,582 )   $ 486,974     $ 13,967     $ 1,434,953  
                                                                       
Dividends declared ($0.14 per share)                                                   (13,986 )             (13,986 )
Allocation of ESOP shares, net of tax                   (205 )     1,829                                       1,624  
Treasury shares acquired (note 15)   (971 )                                     (11,253 )                     (11,253 )
Restricted stock expense                                   3,179                               3,179  
Stock option expense                   248                                               248  
                                                                       
Comprehensive income:                                                                      

Net income

                                                  32,706               32,706  

Other comprehensive income, net of tax (note 16)

                                                          16,700       16,700  

Total comprehensive income                                                                   49,406  

Balance June 30, 2010   105,080     $ 1,215     $ 1,245,532     $ (86,892 )   $ (9,210 )   $ (222,835 )   $ 505,694     $ 30,667     $ 1,464,171  

See accompanying notes to consolidated financial statements.

5



NewAlliance Bancshares, Inc.
Consolidated Statements of Cash Flows

                 
    Six Months Ended
    June 30,
   
(In thousands) (Unaudited)   2010     2009  

Cash flows from operating activities                
Net income   $ 32,706     $ 21,698  
Adjustments to reconcile net income to net cash provided by operating activities                

Provision for loan losses

    10,300       9,100  

Loss on OREO

    18       193  

Restricted stock compensation expense

    3,179       2,900  

Stock option compensation expense

    248       131  

ESOP expense

    1,624       1,613  

Amortization of identifiable intangible assets

    3,905       4,257  

Net amortization/accretion of fair market adjustments from net assets acquired

    (941 )     (1,673 )

Net amortization/accretion of investment securities

    4,929       1,892  

Deferred income taxes

    (504 )     240  

Depreciation and amortization of premises and equipment

    3,101       3,253  

Net gain on securities

    (198 )     (3,483 )

Mortgage origination activity and loan sale income

    (1,299 )     (3,500 )

Proceeds from sales of loans held for sale

    114,875       280,195  

Loans originated for sale

    (112,279 )     (325,813 )

(Gain) loss on sale of fixed assets

    (5 )     19  

Net (gain) loss on limited partnerships

    (2,703 )     659  

Increase in cash surrender value of bank owned life insurance

    (1,677 )     (1,770 )

Increase in other assets

    (1,757 )     (181 )

Increase in other liabilities

    2,058       5,101  

Net cash provided by (used in) operating activities

    55,580       (5,169 )

Cash flows from investing activities                

Purchase of securities available for sale

    (535,189 )     (747,883 )

Purchase of securities held to maturity

    (140,638 )     (21,451 )

Proceeds from maturity, sales, calls and principal reductions of

               

securities available for sale

    482,235       386,276  

Proceeds from maturity, calls and principal reductions of

               

securities held to maturity

    58,059       43,503  

Proceeds from sales of fixed assets

    6       32  

Net (increase) decrease in loans held for investment

    (176,031 )     102,268  

Proceeds from sales of other real estate owned

    2,616       2,310  

Proceeds from bank owned life insurance

    6,776       263  

Purchase of premises and equipment

    (4,629 )     (1,342 )

Net cash used in investing activities

    (306,795 )     (236,024 )

Cash flows from financing activities                

Net increase in customer deposit balances

    112,678       414,752  

Net increase (decrease) in short-term borrowings

    76,856       (52,018 )

Proceeds from long-term borrowings

    491,100       142,000  

Repayments of long-term borrowings

    (433,414 )     (252,324 )

Book under/(over) tax benefit of stock-based compensation

    -       (98 )

Acquisition of treasury shares

    (11,253 )     (3,105 )

Dividends paid

    (13,986 )     (14,075 )

Net cash provided by financing activities

    221,981       235,132  

Net decrease in cash and cash equivalents

    (29,234 )     (6,061 )

Cash and equivalents, beginning of period

    146,927       153,131  

Cash and equivalents, end of period

  $ 117,693     $ 147,070  

Supplemental information                

Cash paid for

               

Interest on deposits and borrowings

  $ 62,101     $ 92,142  

Income taxes paid, net

    15,945       11,447  

Noncash transactions

               

Loans transferred to other real estate owned

    2,075       1,560  

See accompanying notes to consolidated financial statements.

6



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, 2009.
     
   
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.
     
   
Management has determined that no subsequent events have occurred following the balance sheet date of June 30, 2010 which require recognition or disclosure in the financial statements.
     
    Cash and Cash Equivalents
   
For purposes of reporting cash flows, cash and cash equivalents include cash on hand and due from banks and short-term investments with original maturities of three months or less. At June 30, 2010, included in the balance of cash and due from banks were cash on hand of $97.7 million, which includes required reserves in the form of deposits with the Federal Reserve Bank (“FRB”) of approximately $33.6 million. Short-term investments included money market funds of $20.0 million at June 30, 2010.
     
    Investment Securities
   
Marketable equity and debt securities are classified as either trading, available for sale, or held to maturity (applies only to debt securities). Management determines the appropriate classifications of securities at the time of purchase. At June 30, 2010 and December 31, 2009, the Company had no debt or equity securities classified as trading. Held to maturity securities are debt securities for which the Company has the ability and intent to hold until maturity. All other securities not included in held to maturity are classified as available for sale. Held to maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Available for sale securities are recorded at fair value. Unrealized gains and losses, net of the related tax effect, on available for sale securities are excluded from earnings and are reported in accumulated other comprehensive income, a separate component of equity, until realized. Further information relating to the fair value of securities can be found within Note 13 of the Notes to Consolidated Financial Statements.
     
   
Premiums and discounts on debt securities are amortized or accreted into interest income over the term of the securities using the level yield method. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“FASB ASC”) 320 – Debt and Equity Securities, a decline in market value of a debt security below amortized cost that is deemed other than temporary is charged to earnings for the credit related other than temporary impairment (“OTTI”) resulting in the establishment of a new cost basis for the security, while the non-credit related OTTI is recognized in other comprehensive income (“OCI”) if there is no intent to sell or will not be required to sell the security. If an equity security is deemed other-than-temporarily impaired, the full impairment is recorded as a charge to earnings. Gains and losses on sales of securities are recognized at the time of sale on a specific identification basis.
     
    Federal Home Loan Bank of Boston stock
   
As a member of the Federal Home Loan Bank of Boston, (“FHLB Boston”), the Bank is required to hold a certain amount of FHLB Boston stock. This stock is considered to be a non-marketable equity security reported at cost. The level of stock purchases is determined by the Bank’s advances outstanding and the amount of residential mortgage assets on the Bank’s balance sheet. The shares can only be purchased and sold between the FHLB Boston and the Company at a par value of $100 per share.

7



NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements


    Loans Held for Sale
   
The Company currently sells the majority of originated fixed rate residential real estate loans with terms of 15 years and over. Mortgage loans held for sale are carried at fair value. Fair value is estimated using quoted loan market prices provided by government-sponsored entities of Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”). Further information regarding the fair value measurement of mortgage loans held for sale can be found in Note 13 of the Notes to Consolidated Financial Statements. Residential loans are sold by the Company without recourse. The Company currently sells these loans servicing released.
     
   
The Company is also involved in the Small Business Administration (“SBA”) loan secondary market. The Company currently sells the guaranteed portion of SBA loans that meet certain criteria and retains the unguaranteed portion and the right to service the sold portion of the loan in its portfolio. Such loans are included in loans held for sale on the balance sheet upon origination. SBA loans held for sale are valued at the lower of cost (less principal payments received and net of deferred fees and costs) or estimated fair value. Fair value is estimated using quoted market prices from a secondary market broker. All other loan originations are classified as loans held for investment.
     
    Loans Receivable
   
Loans are stated at their principal amounts outstanding, net of deferred loan fees and costs and fair value adjustments for loans acquired.
     
   
Interest on loans is credited to income as earned based on the rate applied to principal amounts outstanding. Loans are placed on nonaccrual status when timely collection of principal or interest in accordance with contractual terms is in question. The Company’s policy is to discontinue the accrual of interest when principal or interest payments become 90 days delinquent or sooner if management concludes that circumstances indicate borrowers may be unable to meet contractual principal or interest payments. If ultimately collected, such interest is credited to income when received. Loans are removed from nonaccrual status when they become current as to principal and interest and when, in the opinion of management concern no longer exists as to the collectability of principal and interest.
     
   
Certain direct loan origination fees and costs and fair value adjustments to acquired loans are recognized over the lives of the related loans as an adjustment of interest using the level yield method. When loans are prepaid, sold or participated out, the unamortized portion is recognized as income or expense at that time.
     
    Allowance for Loan Losses
   
The adequacy of the allowance for loan losses is regularly evaluated by management. Factors considered in evaluating the adequacy of the allowance include previous loss experience, current economic conditions and their effect on borrowers, the performance of individual loans in relation to contract terms, and other pertinent factors. The provision for loan losses charged to expense is based upon management’s judgment of the amount necessary to maintain the allowance at a level adequate to absorb probable losses inherent in the loan portfolio. Loan losses are charged against the allowance when management believes the collectability of the principal balance outstanding is unlikely.
     
   
In determining the adequacy of the allowance for loan losses, management reviews overall portfolio quality through an evaluation of individual performing and impaired loans, the risk characteristics of the loan portfolios, an analysis of current levels and trends in charge offs, delinquency and nonperforming loan data, and the credit risk profile of each component of the portfolio, among other factors. While management uses the best available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examinations.
     
   
The allowance for loan losses consists of a formula allowance following FASB ASC 450 – Contingencies and FASB ASC 310 - Receivables, based on a variety of factors including historical loss experience for various loan portfolio classifications, and a specific valuation allowance for loans identified as impaired. The allowance is an estimate, and ultimate losses may vary from management’s estimate. Changes in the estimate are recorded in the results of operations in the period in which they become known, along with provisions for estimated losses incurred during that period.
     
   
A loan is considered to be impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans, as defined, may be measured based on the present value of expected future cash flows discounted at the loan’s original effective interest rate, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. When the measurement of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance.

8



NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements


    Loan Servicing Rights
   
The Company capitalizes servicing rights for loans sold based on the relative fair value which is allocated between the servicing rights and the loans (without servicing rights).
     
   
The cost basis of loan servicing rights is amortized on a level yield basis over the period of estimated net servicing revenue and such amortization is included in the consolidated statement of income as a reduction of loan servicing fee income. Servicing rights are evaluated for impairment by comparing their aggregate carrying amount to their fair value. The fair value of loan 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 loan prepayments and discount rates. All assumptions are based on standards used by market participants. An independent appraisal of the fair value of the Company’s loan servicing rights is obtained as necessary, but at least annually and is used by management to evaluate the reasonableness of the fair value estimates. For interim quarters, management analyzes the current variables and assesses the need for an independent appraisal. Impairment is recognized as an adjustment to loan and servicing income.
     
    Premises and Equipment
   
Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are computed on the straight-line method using the estimated lives of the assets. Estimated lives are 5 to 40 years for building and improvements and 3 to 10 years for furniture, fixtures and equipment. Amortization of leasehold improvements is calculated on a straight-line basis over the terms of the related leases or the life of the asset, whichever is shorter. The cost of maintenance and repairs is charged to expense as incurred, whereas significant renovations are capitalized.
     
    Bank Owned Life Insurance
   
Bank owned life insurance (“BOLI”) represents life insurance on certain employees who have consented to allow the Bank to be the beneficiary of those policies. BOLI is recorded as an asset at cash surrender value. Increases in the cash value of the policies, as well as insurance proceeds received in excess of cash values, are recorded in other non-interest income and are not subject to income tax. Management reviews the financial strength of the insurance carriers on a quarterly basis and BOLI with any individual carrier is limited to 15% of capital plus reserves.
     
    Goodwill and Identifiable Intangible Assets
   
The assets (including identifiable intangible assets) and liabilities acquired in a business combination are recorded at fair value at the date of acquisition. Goodwill is recognized for the excess of the acquisition cost over the fair values of the net assets acquired and is not subsequently amortized. Identifiable intangible assets are subsequently amortized on a straight-line or accelerated basis, over their estimated lives. Management assesses the recoverability of goodwill at least on an annual basis and all intangible assets whenever events or changes in circumstances indicate that their carrying value may not be recoverable. If carrying amount exceeds fair value an impairment charge is recorded to income.
     
    Income Taxes
   
The Company files a consolidated federal tax return and various combined and separate Company state tax returns. The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are established for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities. Deferred tax assets are also recognized for available tax carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to be in effect when temporary differences and carryforwards are realized or settled.
     
   
The deferred tax asset is subject to reduction by a valuation allowance in certain circumstances. This valuation allowance is recognized if, based on an analysis of available evidence, management determines that it is more likely than not that some portion or all of the deferred tax asset will not be realized. The valuation allowance is subject to ongoing adjustment based on changes in circumstances that affect management’s judgment about the realization of the deferred tax asset. Adjustments to increase or decrease the valuation allowance are charged or credited, respectively, to income tax expense or in certain limited circumstances to equity.
     
   
Income tax expense includes the amount of taxes payable for the current year, and the deferred tax benefit or expense for the period. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date.
     
   
The Company is required to make a determination of an inventory of tax positions (federal and state) for which the sustainability of the position, based upon the technical merits, is uncertain. The Company regularly evaluates all tax positions taken and the likelihood of those positions being sustained. If management is highly confident that the position will be allowed and there is a

9



NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements


   
greater than 50% likelihood that the full amount of the tax position will be ultimately realized, the company recognizes the full benefit associated with the tax position. Additionally, interest and penalties related to uncertain tax positions are included as a component of income tax expense.
     
    Trust Assets
   
The Bank had approximately $1.01 billion and $1.03 billion of assets under management at June 30, 2010 and December 31, 2009, respectively, in a fiduciary or agency capacity for customers. These assets are not included in the accompanying consolidated financial statements since they are not owned by the Bank. Trust income primarily consists of management fees based on the assets under management.
     
    Pension and Other Postretirement Benefit Plans
   
The Company has a noncontributory pension plan covering substantially all employees who meet certain age and length of service requirements and who were employed by the Company prior to January 1, 2008. Pension costs related to this plan are based upon actuarial computations of current and future benefits for employees based on years of service and the employee’s highest career earnings over a five-year consecutive period. Costs are charged to non-interest expense and are funded in accordance with requirements of the Employee Retirement Income Security Act and the Pension Protection Act of 2006. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future.
     
   
In addition to the qualified plan, the Company has supplemental retirement plans for certain key officers. These plans, which are nonqualified, were designed to offset the impact of changes in the pension plan that limit benefits for highly compensated employees under qualified pension plans.
     
   
The Company also accrues costs related to postretirement healthcare and life insurance benefits, which recognizes costs over the employee’s period of active employment.
     
     
   
The discount rate is set for the retirement plans by reference to high quality long-term fixed income instrument yields. The discount rates were determined by applying the estimated cash flows of the Company’s retirement plans to the Citigroup Pension Liability Yield Curve. The Moody’s Aa long-term corporate bond index was also reviewed as a benchmark. The expected long-term rate of return on the assets held in our defined pension plan is based on market and economic conditions, the Plan’s asset allocation and other factors.
     
   
Based on our review of rates at December 31, 2009, separate discount rates were chosen for each type of benefit plan for the measurement of benefit obligations to better represent the actual plans. Discount rates as of December 31, 2009 were 5.85% for the defined benefit plan, 5.50% for the postretirement plan and 5.75% for the supplemental executive retirement benefit plan. The expected long-term rate of return on the pension plan assets was 7.75% for December 31, 2009.
     
    Stock-Based Compensation
   
The Company accounts for stock option and restricted stock awards in accordance with FASB ASC 718 – Compensation – Stock Compensation. Pursuant to this guidance, 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.
     
    Repurchase Agreements
   
Repurchase agreements are accounted for as secured borrowings since the Company maintains effective control over the transferred securities and the transfer meets the other criteria for such accounting. Securities are sold to a counterparty with an agreement to repurchase the same or substantially the same security at a specified price and date. The Company has repurchase agreements with commercial or municipal customers that are offered as a business banking service. Customer repurchase agreements are for a term of one day and are backed by the purchasers’ interest in certain U.S. Treasury Notes or other U.S. Government securities. The Company also has a single dealer repurchase agreement that was initiated as a means to manage the Company’s interest rate risk. The dealer repurchase agreement was issued for a term of five years and matures in 2012. The dealer repurchase agreement is collateralized by U.S. Government mortgage-backed securities. Obligations to repurchase securities sold are reflected as a liability in the Consolidated Balance Sheets. The Company does not record transactions of repurchase agreements as sales. The securities underlying the repurchase agreements remain in the available-for-sale investment securities portfolio.
     
    Merger Related Charges
   
The Company accounts for acquisitions in accordance with FASB ASC 805, Business Combinations. Costs that do not meet the conditions for inclusion in the allocation of acquisition cost, costs for contemplated acquisitions and recurring costs related to prior acquisitions are expensed as incurred and are reported in other non-interest expense. These charges consist primarily of

10



NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements


   
consulting, legal, system conversion, printing and advertising costs associated with acquired companies, acquisition targets and potential acquisition targets. For acquisitions completed after January 1, 2009, pursuant to new business combination accounting guidance, merger-related charges will also include acquisition related transaction and restructuring costs which were previously capitalized as part of the cost of the acquisition.
     
    Related Party Transactions
   
Directors and executive officers of the Company and its subsidiaries and their associates have been customers of and have had transactions with the Company, and management expects that such persons will continue to have such transactions in the future.
     
    Comprehensive Income
   
The purpose of reporting comprehensive income is to report a measure of all changes in an entity that result from recognized transactions and other economic events of the period other than transactions with owners in their capacity as owners. Comprehensive income includes net income and certain changes in capital that are not recognized in the statement of income (such as changes in net unrealized gains and losses on securities available for sale). The Company has reported comprehensive income for the three and six months ended June 30, 2010 and 2009 in the Consolidated Statement of Changes in Stockholders’ Equity. The components of comprehensive income are presented in Note 16 of the Notes to Consolidated Financial Statements.
     
    Segment Reporting
   
The Company’s only business segment is Community Banking. During the six months ended June 30, 2010 and the years ended 2009 and 2008, this segment represented all the revenues and income of the consolidated group and therefore, is the only reported segment as defined by FASB ASC 820, Segment Reporting.
     
    Earnings Per Share
   
Basic earnings per share (“EPS”) excludes dilution and is calculated by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted EPS is computed in a manner similar to that of basic EPS except that the weighted-average number of common shares outstanding is increased to include the number of incremental common shares (computed using the treasury stock method) that would have been outstanding if all potentially dilutive common shares (such as stock options and unvested restricted stock) were issued during the period. Unallocated common shares held by the Employee Stock Ownership Plan (“ESOP”) are not included in the weighted-average number of common shares outstanding for either basic or diluted earnings per share calculations.
     
   
Earnings per share for the three and six months ended June 30, 2010 and 2009 can be found in Note 17 of the Notes to Consolidated Financial Statements.
     
2.   Recent Accounting Pronouncements
     
    Receivables (Topic 310)
     
   
In July 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The statement is intended to improve the transparency of financial reporting by requiring enhanced disclosures about a bank’s allowance for loan losses and the credit quality of its financing receivables (generally defined as loans and leases). The primary goal of the disclosure requirements is to provide more information about the credit risk in a bank’s portfolio of loans and how that risk is analyzed and assessed in arriving at the allowance for loan loss. The guidance is effective for public entities for annual and interim reporting periods ending on or after December 15, 2010. The adoption of ASU No. 2010-06 on December 31, 2010 will not have a material impact on the financial statements as it impacts disclosures only.
     
    Fair Value Measurements and Disclosures (Topic 820)
     
   
In February 2010, the FASB issued ASU No. 2010-06, Improving Disclosures about Fair Value Measurements. The amendment to Topic 820, Fair Value Measurements and Disclosures, requires additional disclosures about fair value measurements including transfer in and out of Levels 1 and 2 and higher levels of disaggregation for the different types of financial instruments. For the reconciliation of Level 3 fair values measurements, information about purchases, sales, issuances and settlements should be presented separately. The guidance was effective for annual and interim reporting periods beginning after December 15, 2009, except for the disclosure of information about sales, issuances and settlements on a gross basis for assets and liabilities classified as level 3, which is effective for reporting periods beginning after December 15, 2010. The adoption of ASU No. 2010-06 on January 1, 2010 did not have a material impact on the financial statements as it impacts disclosures only.

11



NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements


    Investments – Debt and Equity Securities (Topic 320)
     
   
In April 2009, the FASB issued new guidance on the Recognition and Presentation of Other-Than-Temporary Impairments (FASB ASC 320-10), which amends FASB ASC 320, Investments – Debt and Equity Securities, to make the other-than-temporary impairment (“OTTI”) guidance more operational and to improve the presentation of other-than-temporary impairments in the financial statements. This guidance 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 guidance 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 amendment 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. This new guidance does not amend existing recognition and measurement guidance for other-than-temporary impairments of equity securities. This guidance 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 and the adoption 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 an other-than-temporary impairment was previously recognized. Refer to Note 3 of the Notes to Consolidated Financial Statements for further information on the Company’s adoption of this guidance.
     
    Transfers of Financial Assets (Topic 860)
     
   
In December 2009, the FASB issued ASU No. 2009-16 codifying the new guidance issued in June 2009 regarding the Transfer of Financial Assets. This guidance requires entities to provide more information about sales of securitized financial assets and similar transactions, particularly if the seller retains some risk in the assets. The guidance 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. This guidance was effective for the fiscal year beginning after November 15, 2009. The adoption of ASU No. 2009-16 on January 1, 2010 did not have a material impact on the financial statements.
     
    Consolidation (Topic 810)
     
   
In December 2009, the FASB issued ASU No. 2009-17 codifying the new guidance issued in June 2009 regarding Consolidations. The guidance requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity (which would result in the enterprise being deemed the primary beneficiary of that entity and, therefore, obligated to consolidate the variable interest entity in its financial statements); to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity; to revise guidance for determining whether an entity is a variable interest entity; and to require enhanced disclosures that will provide more transparent information about an enterprise’s involvement with a variable interest entity. The guidance was effective for interim periods as of the beginning of the first annual reporting period beginning after November 15, 2009. The adoption of ASU No. 2009-17 on January 1, 2010 did not have a material impact on the financial statements.
     
    Subsequent Events (Topic 855)
     
   
In February 2010, the FASB issued ASU 2010-09 for amendments to certain recognition and disclosure requirements. Among other things, this guidance retracts, for public entities, the requirement to disclose the date through which subsequent events have been evaluated and whether that date is the date the financial statements were issued or were available to be issued. The portion of the ASU that addresses the disclosure of the date through which subsequent events have been evaluated, and that impacts the Company, was effective upon issuance.

12



NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements


     
3.   Investment Securities
     
   
The following table presents the amortized cost, gross unrealized gains, gross unrealized losses and estimated fair values of investment securities for the periods presented:


                                                                     
        June 30, 2010   December 31, 2009
       
 
                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  
   

U.S. Government sponsored

                                                               
   

enterprise obligations

    399,327       5,874       (22 )     405,179       198,692       1,621       (583 )     199,730  
   

Corporate obligations

    8,118       612       -       8,730       8,139       378       -       8,517  
   

Other bonds and obligations

    13,496       184       (1,419 )     12,261       14,625       127       (1,518 )     13,234  
   

Auction rate certificates

    12,050       -       -       12,050       27,550       -       (2,755 )     24,795  
   

Marketable equity securities

    8,582       197       -       8,779       8,567       216       -       8,783  
   

Trust preferred equity securities

    48,223       3       (13,444 )     34,782       48,754       -       (15,458 )     33,296  
   

Private label residential mortgage-backed securities

    21,428       27       (1,229 )     20,226       23,871       -       (3,015 )     20,856  
   

Residential mortgage-backed securities

    1,820,482       80,828       -       1,901,310       1,951,297       68,393       (1,643 )     2,018,047  
   
   

Total available for sale

    2,331,706       87,725       (16,114 )     2,403,317       2,282,092       70,735       (24,972 )     2,327,855  
   
    Held to maturity                                                                
   

Residential mortgage-backed securities

    313,520       12,172       -       325,692       230,596       11,360       -       241,956  
   

Other bonds

    9,735       311       (2 )     10,044       10,170       243       (38 )     10,375  
   
   

Total held to maturity

    323,255       12,483       (2 )     335,736       240,766       11,603       (38 )     252,331  
   
   

Total securities

  $ 2,654,961     $ 100,208     $ (16,116 )   $ 2,739,053     $ 2,522,858     $ 82,338     $ (25,010 )   $ 2,580,186  
   

   
The securities portfolio is reviewed on a monthly basis for the presence of other-than-temporary impairment (“OTTI”). In accordance with OTTI guidance issued by the FASB in 2009, credit related OTTI for debt securities is recognized in earnings while non-credit related OTTI is recognized in other comprehensive income (“OCI”) if there is no intent to sell or will not be required to sell the security. 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. During the second quarter of 2010, the Company recorded an OTTI loss on a debt security in accordance with this FASB guidance, as described below.
     
   
During the three months ended June 30, 2010, a pooled trust preferred security, which had a previous credit related impairment charge during 2009, was deemed to have an additional credit related OTTI loss in the amount of $552,000 based on a further decline in expected cash flows. The credit related impairment, which was reclassified from other comprehensive income as it was previously recognized as non-credit related was due to a cash flow analysis that indicated further credit related impairment. The Company received nine cash flow scenarios from the underwriter which were utilized by management to analyze this security for potential OTTI. The nine scenarios covered various default rates, recovery rates and prepayment options over different time periods. Two of the nine cash flow analyses indicated impairment over the life of the security. The driver of the indicated impairment was the recovery rate, which was modeled at 0% in these two cash flow scenarios. As the severity of the estimated loss in these two cash flow scenarios increased by a factor of five since the prior OTTI analysis in the first quarter of 2010 and the past history of the security indicates that there have not been any recoveries to date from securities that have defaulted, the Company recorded a credit related impairment charge. The credit impairment represents the average loss of the two negative cash flow analyses. After the write-down, the pooled trust preferred security had an amortized cost and fair value of approximately $869,000 and $220,000, respectively. There is no intent to sell nor is it more likely than not that the Company will be required to sell this security.
     
   
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 unrealized loss position for more than one year as of June 30, 2010 and December 31, 2009. Of the securities summarized, one issue has an unrealized loss for less than twelve months and 33 have unrealized losses for twelve months or more at June 30, 2010. This compares to a total of 72 issues that had an unrealized loss at December 31, 2009.

13



NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements


        June 30, 2010
       
        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

  $ -     $ -     $ 3,536     $ 22     $ 3,536     $ 22  
   

Corporate obligations

    -       -       -       -       -       -  
   

Other bonds and obligations

    978       2       6,657       1,419       7,635       1,421  
   

Auction rate certificates

    -       -       -       -       -       -  
   

Marketable equity securities

    -       -       -       -       -       -  
   

Trust preferred equity securities

    -       -       33,779       13,444       33,779       13,444  
   

Private label residential mortgage-backed securities

    -       -       17,801       1,229       17,801       1,229  
   

Residential mortgage-backed securities

    -       -       -       -       -       -  
   
   

Total securities with unrealized losses

  $ 978     $ 2     $ 61,773     $ 16,114     $ 62,751     $ 16,116  
   
        December 31, 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   $ 83,108     $ 542     $ 3,774     $ 41     $ 86,882     $ 583  
    Corporate obligations     -       -       -       -       -       -  
    Other bonds and obligations     942       38       6,558       1,518       7,500       1,556  
    Auction rate certificates     -       -       24,795       2,755       24,795       2,755  
    Marketable equity securities     -       -       -       -       -       -  
    Trust preferred equity securities     -       -       33,296       15,458       33,296       15,458  
    Private label residential mortgage-backed securities     -       -       20,856       3,015       20,856       3,015  
    Residential mortgage-backed securities     246,600       1,643       -       -       246,600       1,643  
   
   

Total securities with unrealized losses

  $ 330,650     $ 2,223     $ 89,279     $ 22,787     $ 419,929     $ 25,010  
   


   
Management believes that no individual unrealized loss as of June 30, 2010 represents an 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, 2010.
     
   
The unrealized loss on private label residential mortgage-backed securities is primarily concentrated in one BBB rated private-label mortgage-backed security which is substantially paid down, well seasoned and of an earlier vintage that has not been significantly affected by high delinquency levels or vulnerable to lower collateral coverage as seen in later issued pools. Widening in non-agency mortgage spreads since the date purchased is the primary factor for the unrealized losses reported on private label residential mortgage-backed securities. None of the securities are backed by subprime mortgage loans and none have suffered losses. One of the private issue securities is rated BBB and the remaining securities are AA through AAA rated. Management reviewed the above factors and issuer specific data and concluded that these private-label mortgage-backed securities are not other-than-temporarily impaired.
     
   
The unrealized losses on other bonds and obligations primarily relates to 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. Although the fund has experienced declines in credit ratings during 2009, it was not due to customer redemptions or forced selling of the investments. During 2009, the Company recorded an OTTI loss of $816,000 on this adjustable rate mortgage mutual fund due to a decrease in the credit quality of the security coupled with a loss recognized by the fund. As of June 30, 2010, the investment carries a market value to book value ratio of 82.43%, 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 management has therefore concluded that the fund experienced no further OTTI in the six months ended June 30, 2010.
     
   
Trust preferred securities are comprised of two pooled trust preferreds with an amortized cost of $5.6 million, one of which is rated A and the other is rated CC at June 30, 2010, a downgrade from BB at December 31, 2009. During 2009, the Company recorded a credit related impairment of $581,000 on the CC rated pooled trust preferred security based on a cash flow analysis and a subsequent credit related impairment of $552,000 during the second quarter ending June 30, 2010 as discussed above. The remaining $42.6 million of trust preferred securities are comprised of twelve “individual names” issues with the following

14



NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements


   
ratings: $15.6 million rated A to A-, $14.6 million rated BBB- to BBB+ and $12.4 million rated BB. The unrealized losses reported for trust preferred securities relate to the financial and liquidity stresses in the fixed income markets and in the banking sector and are not reflective of individual stresses in the individual company names. The ratings on all of the issues with the exception of the CC rated pooled security have improved or remained the same since December 31, 2009. Additionally, there have not been any disruptions in the cash flows of these securities and all are currently paying the contractual principal and interest payments. A detailed review of the two pooled trust preferreds and the “individual names” trust preferred equity securities was completed by management. This review included an analysis of collateral reports, cash flows, stress default levels and financial ratios of the underlying issuers. Management reviewed the above factors and issuer specific data and concluded that after the OTTI loss recorded on the CC rated pooled trust preferred security, these securities are not other-than-temporarily impaired.
     
   
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 during the 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)   2010     2009     2010     2009  
   
    Balance, beginning of period   $ 1,397     $ -     $ 1,397     $ -  
    Additions:                                
   

Initital credit impairments which were not previously recognized

                               
   

as a component of earnings

    -       626       -       626  
   

Subsequent credit impairments

    552       -       552       -  
    Reductions:                                
   

Securities sold

    -       -       -       -  
   
    Balance, end of period   $ 1,949     $ 626     $ 1,949     $ 626  
   

   
As of June 30, 2010, 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, 2010                                
   

Due in one year or less

  $ 119,165     $ 118,380     $ 2,565     $ 2,606  
   

Due after one year through five years

    98,465       101,345       6,170       6,438  
   

Due after five years through ten years

    212,813       215,966       -       -  
   

Due after ten years

    50,771       37,311       1,000       1,000  
                                     
   

Residential mortgage-backed securities

    1,841,910       1,921,536       313,520       325,692  
   
   

Total debt securities

  $ 2,323,124     $ 2,394,538     $ 323,255     $ 335,736  
   

   
Securities with a fair value of $772.8 million and $673.8 million at June 30, 2010 and December 31, 2009, respectively, were pledged to secure public deposits, repurchase agreements and Federal Home Loan Bank of Boston (“FHLB”) borrowings.

15



NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements


 

The following table presents information related to realized gains and losses on sales of securities available for sale during the three and six months ended June 30, 2010 and 2009.


      Debt Securities   Equity Securities
     
 
                             
      Three Months Ended June 30,
     
  (In thousands)     2010     2009       2010     2009
 
  Realized gains   $ 750   $ 2,243     $ -   $ -
  Realized losses     -     -       -     -
 

      Debt Securities   Equity Securities
     
 
                             
      Six Months Ended June 30,
     
  (In thousands)     2010     2009       2010     2009
 
  Realized gains   $ 750   $ 4,142     $ -   $ -
  Realized losses     -     33       -     -
 

4. Loans                
                   
  The composition of the Company’s loan portfolio is as follows:                
                   
      June 30,     December 31,  
  (In thousands)   2010     2009  
 
  Residential real estate   $ 2,472,730     $ 2,382,514  
  Commercial real estate     1,192,934       1,100,880  
  Construction                
 

Residential

    18,431       13,789  
 

Commercial

    68,884       132,370  
  Commercial business     473,329       411,211  
  Consumer                
 

Home equity and equity lines of credit

    687,635       705,673  
 

Other

    14,428       15,608  
 
 

Total consumer

    702,063       721,281  
 
 

Total loans

    4,928,371       4,762,045  
 

Allowance for loan losses

    (54,945 )     (52,463 )
 
 

Total loans, net

  $ 4,873,426     $ 4,709,582  
 

 

As of June 30, 2010 and December 31, 2009, the Company’s residential real estate loan, residential construction loan, home equity loan and equity lines of credit portfolios are 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, plant and equipment, collateralize the majority of the commercial business loan portfolio. The Company does not originate or directly invest in subprime loans.

16



NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements


  Allowance for Loan Losses
   
 

The following table provides a summary of activity in the allowance for loan losses for the periods presented:


      At or For the Three Months   At or For the Six Months
      Ended June 30,   Ended June 30,
     
 
  (In thousands)     2010     2009       2010     2009
 
  Balance at beginning of period   $ 54,164   $ 50,635     $ 52,463   $ 49,911
  Provisions charged to operations     5,500     5,000       10,300     9,100
  Charge-offs                          
 

Residential real estate loans

    1,293     990       2,345     1,489
 

Commercial real estate loans

    1,244     1,493       1,994     1,996
 

Commercial construction loans

    832     264       953     2,046
 

Commercial business loans

    1,459     1,346       2,406     2,151
 

Consumer loans

    213     254       533     413
 
 

Total charge-offs

    5,041     4,347       8,231     8,095
 
  Recoveries                          
 

Residential real estate loans

    8     103       11     137
 

Commercial real estate loans

    -     -       -     -
 

Commercial construction loans

    -     -       -     -
 

Commercial business loans

    276     84       321     291
 

Consumer loans

    38     27       81     158
 
 

Total recoveries

    322     214       413     586
 
  Net charge-offs     4,719     4,133       7,818     7,509
 
  Balance at end of period   $ 54,945   $ 51,502     $ 54,945   $ 51,502
 

  Nonperforming Assets
   
 

Nonperforming assets include loans that are 90 days or more past due, restructured loans due to a weakening in the financial condition of the borrower, other loans which have been identified by the Company as presenting uncertainty with respect to the collectability of principal or interest and other real estate owned. All of the Company’s nonperforming assets do not accrue interest.

   
  The following table provides a summary of nonperforming assets for the periods presented:

      June 30,     December 31,
  (In thousands)   2010     2009
 
  Nonaccrual loans   $ 68,295     $ 50,507
  Other real estate owned     2,648       3,705
 
 

Total nonperforming assets

  $ 70,943     $ 54,212
 
  Troubled debt restructured loans included in nonaccrual loans above   $ 4,073     $ 3,294
 

17



NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements


5. Goodwill and Identifiable Intangible Assets
   
 

The changes in the carrying amount of goodwill and identifiable intangible assets are summarized as follows:


                      Total  
              Identifiable     Identifiable  
              Intangible     Intangible  
  (In thousands)   Goodwill     Assets     Assets  
 
  Balance, December 31, 2008   $ 527,167     $ 43,860     $ 43,860  
  Amortization expense     -       (8,501 )     (8,501 )
 
  Balance, December 31, 2009     527,167       35,359       35,359  
  Amortization expense     -       (3,905 )     (3,905 )
 
  Balance, June 30, 2010   $ 527,167     $ 31,454     $ 31,454  
 
  Estimated amortization expense for the year ending:                        
 

Remaining 2010

          $ 3,904     $ 3,904  
 

2011

            7,556       7,556  
 

2012

            7,556       7,556  
 

2013

            7,461       7,461  
 

2014

            3,617       3,617  
 

2015

            982       982  
 

Thereafter

            378       378  
 

 

The Company completed its annual test for goodwill impairment during the first quarter of 2010 and no impairment charge was deemed necessary. There have been no impairments recorded for goodwill and identifiable intangible assets since inception.

   
 

The components of identifiable intangible assets are core deposit and customer relationships and had the following balances at June 30, 2010:


      Original             Balance
      Recorded     Cumulative     June 30,
  (In thousands)   Amount     Amortization     2010
 
  Core deposit and customer relationships   $ 86,908     $ 55,454     $ 31,454
 

6. Other Assets
   
  Selected components of other assets are as follows:

      June 30,     December 31,
  (In thousands)   2010     2009
 
  Deferred tax asset, net   $ 5,433     $ 14,078
  Accrued interest receivable     32,106       33,078
  Investments in limited partnerships and other investments     9,858       8,003
  Receivables arising from securities transactions     13,227       14,165
  Prepaid FDIC assessments     22,584       26,001
  All other     24,689       18,616
 
 

Total other assets

  $ 107,897     $ 113,941
 

18



NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements


7. Deposits
   
  A summary of deposits by account type is as follows:

      June 30,     December 31,
  (In thousands)   2010     2009
 
  Savings   $ 1,798,881     $ 1,817,787
  Money market     915,510       790,453
  NOW     406,069       400,176
  Demand     568,414       534,180
  Time     1,447,872       1,481,446
 
 

Total deposits

  $ 5,136,746     $ 5,024,042
 

8. Borrowings
   
  The following is a summary of the Company’s borrowed funds:

              December 31,
  (In thousands)   June 30, 2010     2009
 
  FHLB advances (1)   $ 1,900,561     $ 1,755,533
  Repurchase agreements     100,951       112,095
  Mortgage loans payable     1,085       1,165
  Junior subordinated debentures issued to affiliated trusts (2)     21,135       21,135
 
 

Total borrowings

  $ 2,023,732     $ 1,889,928
 

  (1)

Includes fair value adjustments on acquired borrowings, in accordance with purchase accounting standards of $2.4 million and $3.1 million at June 30, 2010 and December 31, 2009, 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)

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. ("Westbank"). The affiliated trusts are wholly-owned subsidiaries of the Company and the payments of these securities are irrevocably and unconditionally guaranteed by the Company.


 

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 mortgage-backed securities. At June 30, 2010 and December 31, 2009, the Bank was in compliance with the FHLB collateral requirements. At June 30, 2010, the Company could immediately borrow an additional $315.5 million from the FHLB, inclusive of a line of credit of approximately $20.0 million. Additional borrowing capacity of approximately $1.53 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 $101.3 million as of June 30, 2010, all of which was available on that date. Repurchase agreements with commercial or municipal customers or dealer/brokers are secured by the Company’s investment in specific issues of agency mortgage-backed securities and agency obligations of $38.6 million and $92.6 million, respectively, as of June 30, 2010. Repurchase agreement lines of credit with four large broker-dealers totaled $200.0 million at June 30, 2010, with availability of $175.0 million. At June 30, 2010, all of the Company’s $1.90 billion outstanding FHLB advances were at fixed rates ranging from 0.22% to 8.17%. The weighted average rate for all FHLB advances at June 30, 2010 was 3.35%.

   
9. 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 $1.3 million for the supplemental executive retirement plans in the third quarter of 2010.

   
 

The following table presents the amount of net periodic pension cost for the three months ended June 30, 2010 and 2009.

19



NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements


                      Supplemental                
                      Executive   Other Postretirement
      Qualified Pension   Retirement Plans   Benefits
     
 
 
  (In thousands)   2010     2009     2010     2009     2010     2009  
 
  Service cost - benefits earned during the period   $ 853     $ 809     $ 139     $ 112     $ 62     $ 55  
  Interest cost on projected benefit obligation     1,471       1,430       173       194       80       89  
  Expected return on plan assets     (1,693 )     (1,741 )     -       -       -       -  
  Amortization:                                                
 

Transition

    -       -       -       -       13       13  
 

Prior service cost

    14       13       2       2       -       -  
 

Loss (gain)

    324       204       -       -       (40 )     (43 )
 
 

Net periodic benefit cost

  $ 969     $ 715     $ 314     $ 308     $ 115     $ 114  
 
                                                   
 

The following table presents the amount of net periodic pension cost for the six months ended June 30, 2010 and 2009.


                      Supplemental                
                      Executive   Other Postretirement
      Qualified Pension   Retirement Plans   Benefits
     
 
 
  (In thousands)   2010     2009     2010     2009     2010     2009  
 
  Service cost - benefits earned during the period   $ 1,706     $ 1,617     $ 278     $ 225     $ 123     $ 109  
  Interest cost on projected benefit obligation     2,943       2,861       346       389       160       179  
  Expected return on plan assets     (3,386 )     (3,482 )     -       -       -       -  
  Amortization:                                                
 

Transition

    -       -       -       -       26       26  
 

Prior service cost

    27       26       3       3       -       -  
 

Loss (gain)

    648       408       -       -       (80 )     (86 )
 
 

Net periodic benefit cost

  $ 1,938     $ 1,430     $ 627     $ 617     $ 229     $ 228  
 

 

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 discretionary contributions to the ESOP over a remaining period of 24 years. The unallocated ESOP shares are pledged as collateral on the loan.

   
 

At June 30, 2010, the loan had an outstanding balance of $96.3 million and an interest rate of 4.0%. The Company accounts for its ESOP in accordance with FASB ASC 718-40, Compensation – Stock Compensation. Under this guidance, 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, 2010 was approximately $759,000 and $1.5 million. The ESOP compensation expense for the three and six months ended June 30, 2009 was approximately $779,000 and $1.5 million. 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, 2010 were as follows:


 
  Shares released for allocation     1,536,437
  Unreleased shares     5,918,125
 
 

Total ESOP shares

    7,454,562
 
  Market value of unreleased shares at June 30, 2010 (in thousands)   $ 66,342

20



NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements


10. 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 FASB ASC 718, Compensation - Stock Compensation. Pursuant to this guidance, 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. As of June 30, 2010, 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 10.0 million shares. The majority 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 2.9% 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, 2010 was $133,000 and $249,000, respectively, or after tax expense of approximately $86,000 and $160,000, respectively. Compensation expense 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, 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 407,068 shares and 411,130 shares were granted to employees during the six months ended June 30, 2010 and June 30, 2009, respectively. Using the Black-Scholes option pricing model, the weighted-average grant date fair value was $2.10 and $2.37 per share for the options which were granted in 2010 and 2009, respectively. The weighted-average assumptions for the six months ended June 30, 2010 and 2009 are presented in the following table.


      2010     2009  
 
  Risk-free interest rate     2.60 %     2.63 %
  Expected dividend yield     2.37 %     2.15 %
  Expected volatility     19.82 %     19.31 %
  Expected life (years)     6.25       6.25  
 
                   
 

A summary of option activity as of June 30, 2010 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     7,884,801     $ 14.30            
  Granted     407,068       11.80            
  Exercised     -       -            
  Forfeited/cancelled     (22,985 )     12.94            
  Expired     (566,164 )     14.39            
 
  Options outstanding at June 30, 2010     7,702,720     $ 14.16     5.54   $ 16
 
  Options exercisable at June 30, 2010     6,829,861     $ 14.38     5.07   $ -
 

21



NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements


 

The following table summarizes the nonvested options during the six months ended June 30, 2010.

               
            Weighted-average
            Grant-Date
    Shares     Fair Value
 
  Nonvested at January 1, 2010   631,154     $ 2.38
  Granted   407,068       2.10
  Vested   (142,378 )     2.36
  Forfeited / Cancelled   (22,985 )     2.34
 
  Nonvested at June 30, 2010   872,859     $ 2.26
 

  Restricted Stock and Performance-Based Restricted Stock Awards
 

To date, approximately 4.0 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 six months ended June 30, 2010, the Company granted approximately 252,000 restricted stock awards.

   
 

Performance-based restricted stock shares were awarded to executive management and other key members of senior management during 2010. The vesting for these performance-based awards is conditional upon fulfillment of a market condition and on meeting a service period requirement. The actual number of performance shares to be earned will be based on performance criteria over a three-year performance period which began May 28, 2010 and ending May 31, 2013. 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, 2013. A simulation model was used to provide a grant date fair value for the performance-based shares. Expense for the performance-based awards is recognized based on the probability of attaining the performance targets and 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, 2010 and 2009 was approximately $1.7 million and $1.2 million or after tax expense of approximately $1.3 million and $946,000 million, respectively. For the six months ended June 30, 2010 and 2009, compensation expense was $3.2 million and $2.9 million or after tax expense of approximately $2.5 million and $2.2 million was recorded. The Company anticipates that it will record expense of approximately $7.0 million, $5.6 million and $1.5 million and $389,000 in calendar years 2010 through 2013, 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, 2010.


              Weighted-average
              Grant-Date
      Shares     Fair Value
 
  Nonvested at January 1, 2010     1,225,063     $ 14.37
  Granted     251,795       13.44
  Vested     (394,747 )     14.29
  Forfeited / Cancelled     (57,643 )     14.51
 
  Nonvested at June 30, 2010     1,024,468     $ 14.17
 

11. Income Taxes
   
 

The Company has 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 stock awards. Deferred taxes charged to goodwill were in connection with prior acquisitions. The Company had a net deferred tax asset of $5.4 million and $14.1 million at June 30, 2010 and December 31, 2009, respectively.

   
 

As of June 30, 2010 and December 31, 2009, the Company has a valuation allowance of $1.1 million and $1.5 million, respectively, for the tax effect of capital loss carryforwards associated with realized and unrealized capital losses on capital

22



NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements


 

assets, of which $434,000 and $462,000, respectively, was recorded as an adjustment to other comprehensive income and the remainder had an effect on continuing operations.

   
 

The components of income tax expense are summarized as follows:


      Three Months Ended     Six Months Ended
      June 30,     June 30,
     
   
  (In thousands)   2010     2009     2010     2009
 
  Current tax expense                              
 

Federal

  $ 10,453     $ 5,826     $ 15,916     $ 11,326
 

State

    275       136       422       324
 
 

Total current

    10,728       5,962       16,338       11,650
 
  Deferred tax expense, net of valuation reserve                              
 

Federal

    (2,447 )     (257 )     (493 )     240
 

State

    (55 )     -       (11 )     -
 
 

Total deferred

    (2,502 )     (257 )     (504 )     240
 
 

Total income tax expense

  $ 8,226     $ 5,705     $ 15,834     $ 11,890
 
                                 
 

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)   2010     2009     2010     2009
 
  Deferred tax asset allocated to:                              
 

Stockholders’ equity, tax effect of net unrealized gain on investment securities available for sale, net of valuation allowance

  $ 11,270     $ 3,344     $ 9,149     $ 8,521
 

Reclass as a result of adoption of new OTTI accounting pronouncement

            578               578
 

Income

    (2,502 )     (257 )     (504 )     240
 
 

Total change in deferred tax assets, net

  $ 8,768     $ 3,665     $ 8,645     $ 9,339
 
                                 
 

The Company accounts for uncertainty in income taxes in accordance with FASB ASC 740-10. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:


      June 30,
  (In thousands)   2010
 
  Balance, beginning of period   $ 400
 

Additions for tax positions of current year

    -
 

Additions for tax positions of prior year

    -
 

Reductions for tax positions of prior year

    -
 
  Balance, end of period   $ 400
 

 

Included in the balance at June 30, 2010 is $400,000 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 $140,000 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, 2010, the Company has accrued approximately $420,000 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 2006. In the third quarter of 2008, the IRS commenced an examination of the 2006 and 2007 tax years for Westbank. As of June 30, 2010, the IRS has completed their audit and they have communicated that there are no adjustments to Westbank’s tax returns for the audited tax years. 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, 2010, the IRS has not proposed any significant adjustments to the Company’s tax returns for these tax years.

   
12. 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

23



NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements


 

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)   2010     2009
 
  Loan origination commitments   $ 248,918     $ 146,369
  Unadvanced portion of construction loans     52,401       40,700
  Standby letters of credit     12,580       6,587
  Unadvanced portion of lines of credit     679,105       608,854
 
 

Total commitments

  $ 993,004     $ 802,510
 

  Other Commitments
 

As of June 30, 2010 and December 31, 2009, the Company was contractually committed under limited partnership agreements to make additional partnership investments of approximately $1.4 million 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.

   
13. 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 FASB ASC 820, 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 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.

   
 

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.

24



NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements


  Fair Value Option
 

FASB ASC 825-10 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. In the first quarter of 2009 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 increased significantly. Mortgage loan activity has slowed from 2009 levels, however, it is still strong thus far in 2010. The fair value option election relating to mortgage loans held for sale did 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.

   
 

At June 30, 2010, mortgage loans held for sale pursuant to forward loan sale commitments had a fair value of $11.7 million, which includes a positive fair value adjustment of $132,000. For the three and six months ended June 30, 2010, gains from fair value changes of $182,000 and $353,000, respectively, and for the three and six months ended June 30, 2009, losses from fair value changes of $712,000 and $581,000, respectively were recorded in non-interest income as mortgage origination activity and loan sale income.

   
  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, 2010 and December 31, 2009 and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value. There were no transfers in and out of Level 1 and Level 2 measurements during the quarter ended June 30, 2010.


      June 30, 2010
     
              Quoted Prices in                
              Active Markets     Significant     Significant
              for Identical     Observable     Unobservable
              Assets     Inputs     Inputs
  (In thousands)   Total     (Level 1)     (Level 2)     (Level 3)
 
  Securities Available for Sale                              
 

Marketable equity securities

  $ 8,779     $ 1,279     $ 7,500     $ -
 

Bonds and obligations

    426,170       401,172       24,998       -
 

Auction rate certificates

    12,050       -       -       12,050
 

Trust preferred equity securities

    34,782       -       28,240       6,542
 

Residential mortgage-backed securities

    1,921,536       -       1,921,536       -
 
  Total Securities Available for Sale   $ 2,403,317     $ 402,451     $ 1,982,274     $ 18,592
 
  Mortgage Loans Held for Sale     11,744       -       11,744       -
  Mortgage Loan Derivative Assets     601       -       601       -
  Mortgage Loan Derivative Liabilities     (504 )     -       (504 )     -
 

      December 31, 2009
     
              Quoted Prices in                
              Active Markets     Significant     Significant
              for Identical     Observable     Unobservable
              Assets     Inputs     Inputs
  (In thousands)   Total     (Level 1)     (Level 2)     (Level 3)
 
  Securities Available for Sale                              
 

Marketable equity securities

  $ 8,783     $ 1,283     $ 7,500     $ -
 

Bonds and obligations

    222,078       196,060       26,018       -
 

Auction rate certificates

    24,795       -       -       24,795
 

Trust preferred equity securities

    33,296       -       27,924       5,372
 

Residential mortgage-backed securities

    2,038,903       -       2,038,903       -
 
  Total Securities Available for Sale   $ 2,327,855     $ 197,343     $ 2,100,345     $ 30,167
 
  Mortgage Loans Held for Sale     12,908       -       12,908       -
  Mortgage Loan Derivative Assets     495       -       495       -
  Mortgage Loan Derivative Liabilities     (75 )     -       (75 )     -
 

25



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.


      Securities Available for Sale
     
 
      For the three months ended   For the six months ended
      June 30,   June 30,
     
 
  (In thousands)   2010     2009     2010     2009  
 
  Balance at beginning of period   $ 25,056     $ 28,543     $ 30,167     $ 26,626  
 

Transfer into Level 3

    -       -       -       -  
 

Total gains (losses) - (realized/unrealized):

                               
 

Included in earnings

    -       -       -       -  
 

Included in other comprehensive income

    3,703       (772 )     3,960       1,159  
 

Settlements

    (10,150 )     -       (15,500 )     -  
 

Discount accretion

    4       4       8       7  
 

Principal payments

    (21 )     (74 )     (43 )     (91 )
 
  Balance at end of period   $ 18,592     $ 27,701     $ 18,592     $ 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 99.2% of this 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, but these prices are not binding quotes. The fair value prices on all investment securities are reviewed for reasonableness by management through an extensive process. This review process was implemented to determine any unusual market price fluctuations and the analysis includes 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. The review resulted in no adjustments to the IDC pricing as of June 30, 2010. Also, management assessed the valuation techniques used by IDC based on a review of their pricing methodology to ensure proper hierarchy classifications. The Company’s Level 3 available for sale debt securities include auction rate certificates, a pooled trust preferred security and an individual named trust preferred security which were valued through means other than quoted market prices due to the fact that these securities were not priced by the pricing service. The fair value for these securities are based on Level 3 inputs in accordance with FASB ASC 820.

   
 

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 at par and are classified as Level 2 of the valuation hierarchy.

       
   

Bonds and obligations: Included within this category are highly liquid government obligations and government agency 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 municipal obligations, corporate obligations and a mortgage mutual fund 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 had been obtaining a price from the market maker that factored in credit risk and liquidity premiums to determine a current fair value market price. At June 30, 2010, these securities were priced at par as the Company tendered its three remaining positions to the underwriter at par as part of their 2008 settlement agreement. 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.

26



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 of $2.8 million and an individual name trust preferred security of $3.7 million are not priced by IDC, both of which are classified within Level 3 of the valuation hierarchy. The remaining securities are at Level 2 and are priced by IDC based upon matrix pricing factoring in observable benchmark yields and issuer spreads. The Company calculates the fair value of the Level 3 pooled trust preferred security based on a cash flow methodology that uses the Bloomberg A rated bank yield curve to discount the current expected cash flows. In order to derive the fair value of the individual name security, the Company uses the Bloomberg A rated insurance yield curve to discount the current expected cash flows. Additionally, the low level of the three month LIBOR rate, the general widening of credit spreads compared to when these securities were purchased and the reduced level of liquidity in the fixed income markets, were all factors in the determination of the current fair value market price.

       
   

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 in 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 derivatives pursuant to the requirements of FASB ASC 815-10, however, the Company has not designated them as hedging instruments. Accordingly, they are marked to fair value through earnings.

At June 30, 2010, 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, 2010
     
      Notional or          
      Principal     Fair Value  
  (In thousands)   Amount     Adjustment  
 
  Rate Lock Commitments   $ 36,212     $ 601  
  Forward Sales Commitments     45,214       (504 )
  Mortgage Loans Held for Sale     11,612       132  
 

 

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 13% 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.

   
 

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, 2010 and December 31, 2009 and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:

27



NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements


      June 30, 2010
     
              Quoted Prices in                  
              Active Markets     Significant     Significant  
              for Identical     Observable     Unobservable  
              Assets     Inputs     Inputs  
  (In thousands)   Total     (Level 1)     (Level 2)     (Level 3)  
 
  Loan Servicing Rights   $ 1,825     $ -     $ -     $ 1,825  
  Other Real Estate Owned     2,648       -       -       2,648  
  Impaired Loans     19,502       -       -       19,502  
 

      December 31, 2009
     
              Quoted Prices in                  
              Active Markets     Significant     Significant  
              for Identical     Observable     Unobservable  
              Assets     Inputs     Inputs  
  (In thousands)   Total     (Level 1)     (Level 2)     (Level 3)  
 
  Loan Servicing Rights   $ 2,063     $ -     $ -     $ 2,063  
  Other Real Estate Owned     3,705       -       -       3,705  
  Impaired Loans     16,733       -       -       16,733  
 

 

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.

   
 

Other Real Estate Owned: The Company classifies property acquired through foreclosure or acceptance of deed-in-lieu of foreclosure as other real estate owned in its financial statements. Upon foreclosure, the property securing the loan is written down to fair value. The writedown is based upon differences between the appraised value and the book value. Appraisals are based upon observable market data such as comparable sale within the real estate market, however assumptions made in determining comparability are unobservable and therefore these assets are classified as Level 3 within the valuation hierarchy.

   
 

Impaired Loans: Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s original effective interest rate, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. Consequently, measurement at fair value is on a nonrecurring basis. These loans are written down through a valuation allowance 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.

   
 

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 due to the fact that it can only be redeemed back to the FHLB Boston at par value.

   
 

Loans held for sale: The fair value of 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.

28



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 credit and prepayment 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.

   
 

Derivative Liabilities: Refer to the above discussion on derivatives.

   
 

The following are the carrying amounts and estimated fair values of the Company’s financial assets and liabilities as of June 30, 2010 and December 31, 2009:


      June 30, 2010   December 31, 2009
     
      Carrying     Estimated     Carrying     Estimated  
  (In thousands)   Amounts     Fair Value     Amounts     Fair Value  
 
  Financial Assets                                
 

Cash and due from banks

  $ 97,693     $ 97,693     $ 96,927     $ 96,927  
 

Short-term investments

    20,000       20,000       50,000       50,000  
 

Investment securities

    2,726,572       2,739,053       2,568,621       2,580,186  
 

Loans held for sale

    13,362       13,362       14,659       14,659  
 

Loans, net

    4,873,426       4,923,384       4,709,582       4,779,888  
 

Federal Home Loan Bank of Boston stock

    120,821       120,821       120,821       120,821  
 

Accrued income receivable

    32,106       32,106       33,078       33,078  
 

Derivative assets

    601       601       495       495  
  Financial Liabilities                                
 

Interest and non-interest bearing checking, savings and money market accounts

  $ 3,688,874     $ 3,688,874     $ 3,542,774     $ 3,542,774  
 

Time deposits

    1,447,872       1,472,018       1,481,446       1,498,126  
 

Borrowed funds

    2,023,732       2,059,039       1,889,928       1,919,918  
 

Derivative liabilities

    504       504       75       75  
 

14. Derivative Financial Instruments
   
 

The Company accounts for derivatives in accordance with FASB ASC 815, Derivatives and Hedging, which requires that all derivative instruments be recorded on the consolidated balance sheets 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, 2010.

   
 

Loan Commitments and Forward Loan Sale Commitments: The Company enters into 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, 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 of cost or fair value in accordance with accounting guidance for certain mortgage banking activities. Fluctuations in the fair value of loan commitments, loans held for 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.

29



NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements


  The following table summarizes the Company’s derivative positions at June 30.

      2010   2009
     
 
      Notional or             Notional or          
      Principal     Fair Value     Principal     Fair Value  
  (In thousands)   Amount     Adjustment (1)     Amount     Adjustment (1)  
 
  Interest Rate Lock Commitments   $ 36,212     $ 601     $ 41,112     $ 65  
  Forward Sales Commitments     45,214       (504 )     91,827       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,       December 31,               June 30,       December 31,  
              2010       2009               2010       2009  
      Balance Sheet      
     
      Balance Sheet      
     
 
  (In thousands)   Location       Fair Value       Fair Value       Location       Fair Value       Fair Value  
 
  Derivatives not designated as hedging instruments                                              
 

Interest rate contracts

  Other Assets     $ 601     $ 495       Other Liabilities     $ 504     $ 75  
 
  Total derivatives not designated as hedging instruments         $ 601     $ 495             $ 504     $ 75  
 

  Effect of Derivative Instruments on the Statement of Income                                    
            For the Three   For the Six
            Months Ended   Months Ended
            June 30,   June 30,
           
 
            2010     2009     2010     2009
           
   
   
   
            Amount of Gain or (Loss)   Amount of Gain or (Loss)
      Location of Gain or (Loss) Recognized     Recognized in Income on   Recognized in Income on
  (In thousands)   in Income on Derivatives     Derivatives   Derivatives
 
  Derivatives not designated as hedging instruments                                    
 

Interest rate contracts

  Non-interest income     $ (130 )   $ 807     $ (323 )   $ 1,107
 
  Total derivatives not designated as hedging instruments         $ (130 )   $ 807     $ (323 )   $ 1,107
 

15. Stockholders’ Equity
   
 

At June 30, 2010 and December 31, 2009, stockholders’ equity amounted to $1.46 billion and $1.43 billion, respectively, representing 16.8% and 17.0% of total assets, respectively. The Company paid cash dividends totaling $0.14 per share on common stock during the six months ended June 30, 2010.

   
  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 8,578,062 million shares of common stock at a weighted average price of $12.80 per share as of June 30, 2010. During 2010, there were approximately 882,000 shares repurchased. There is no set expiration date for this repurchase plan.

30



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, 2010, approximately 89,000 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, 2010, 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, 2010

                                               
 

Tier 1 Capital (to Average Assets)

  $ 775,050       9.7 %   $ 320,203       4.0 %   $ 400,253       5.0 %
 

Tier 1 Capital (to Risk Weighted Assets)

    775,050       17.3       179,064       4.0       268,596       6.0  
 

Total Capital (to Risk Weighted Assets)

    830,084       18.5       358,128       8.0       447,660       10.0  
                                                   
 

December 31, 2009

                                               
 

Tier 1 Capital (to Average Assets)

  $ 734,951       9.3 %   $ 317,623       4.0 %   $ 397,029       5.0 %
 

Tier 1 Capital (to Risk Weighted Assets)

    734,951       16.7       176,043       4.0       264,064       6.0  
 

Total Capital (to Risk Weighted Assets)

    787,510       17.9       352,085       8.0       440,107       10.0  
                                                   
  NewAlliance Bancshares, Inc.                                                
 

June 30, 2010

                                               
 

Tier 1 Capital (to Average Assets)

  $ 895,079       11.2 %   $ 320,554       4.0 %   $ 400,693       5.0 %
 

Tier 1 Capital (to Risk Weighted Assets)

    895,079       20.0       179,375       4.0       269,063       6.0  
 

Total Capital (to Risk Weighted Assets)

    950,113       21.2       358,750       8.0       448,438       10.0  
                                                   
 

December 31, 2009

                                               
 

Tier 1 Capital (to Average Assets)

  $ 878,553       11.1 %   $ 318,072       4.0 %   $ 397,590       5.0 %
 

Tier 1 Capital (to Risk Weighted Assets)

    878,553       19.9       176,422       4.0       264,633       6.0  
 

Total Capital (to Risk Weighted Assets)

    931,113       21.1       352,844       8.0       441,055       10.0  
 

16. Other Comprehensive Income
   
 

The following table presents the components of other comprehensive income and the related tax effects for the periods presented:


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