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, 2006. | ||
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 | ||
(Registrants 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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. | |||||
Large accelerated filer X | Accelerated filer _____ | Non-accelerated filer _____ | |||
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 issuers classes of common stock, as of the latest practicable date. | |||||
Common Stock (par value $.01) | 109,718,926 | ||||
Class | Outstanding at August 3, 2006 |
2
NewAlliance Bancshares,
Inc.
Consolidated Balance Sheets
June 30, | December 31, | |||||||
(In thousands, except per share data) (Unaudited) | 2006 | 2005 | ||||||
Assets | ||||||||
Cash and due from banks, noninterest bearing |
$ | 126,925 | $ | 127,290 | ||||
Short-term investments |
64,059 | 46,497 | ||||||
Cash and cash equivalents |
190,984 | 173,787 | ||||||
Investment securities available for sale (note 4) |
2,188,527 | 2,363,471 | ||||||
Investment securities held to maturity (note 4) |
333,078 | 91,734 | ||||||
Loans held for sale |
3,705 | 1,222 | ||||||
Loans, net (note 5) |
3,670,157 | 3,241,154 | ||||||
Premises and equipment, net |
51,861 | 50,399 | ||||||
Cash surrender value of bank owned life insurance |
63,118 | 57,325 | ||||||
Goodwill (note 6) |
454,231 | 425,001 | ||||||
Identifiable intangible assets (note 6) |
53,936 | 52,016 | ||||||
Other assets (note 7) |
102,618 | 105,293 | ||||||
Total assets |
$ | 7,112,215 | $ | 6,561,402 | ||||
Liabilities | ||||||||
Deposits (note 8) |
||||||||
Non-interest bearing |
$ | 485,519 | $ | 486,528 | ||||
Savings, interest-bearing checking and money market |
1,778,257 | 1,677,693 | ||||||
Time |
1,690,398 | 1,633,891 | ||||||
Total deposits |
3,954,174 | 3,798,112 | ||||||
Borrowings (note 9) |
1,750,550 | 1,380,775 | ||||||
Other liabilities |
78,597 | 71,647 | ||||||
Total liabilities |
5,783,321 | 5,250,534 | ||||||
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 117,474 shares at June 30, 2006 and 114,897 shares |
||||||||
at December 31, 2005 |
1,175 | 1,149 | ||||||
Additional paid-in capital |
1,175,884 | 1,137,806 | ||||||
Unallocated common stock held by ESOP |
(101,527 | ) | (103,356 | ) | ||||
Unearned restricted stock compensation |
(37,253 | ) | (41,302 | ) | ||||
Treasury stock, at cost (7,696 shares at June 30, 2006 and 6,073 shares at December 31, 2005) |
(111,485 | ) | (87,998 | ) | ||||
Retained earnings |
441,990 | 430,971 | ||||||
Accumulated other comprehensive loss (note 14) |
(39,890 | ) | (26,402 | ) | ||||
Total stockholders equity |
1,328,894 | 1,310,868 | ||||||
Total liabilities and stockholders equity |
$ | 7,112,215 | $ | 6,561,402 | ||||
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 share data) (Unaudited) | 2006 | 2005 | 2006 | 2005 | ||||||||
Interest and dividend income | ||||||||||||
Residential real estate loans |
$ | 24,188 | $ | 20,344 | $ | 46,573 | $ | 40,710 | ||||
Commercial real estate loans |
14,356 | 11,058 | 28,414 | 21,721 | ||||||||
Commercial business loans |
6,190 | 5,006 | 12,231 | 9,524 | ||||||||
Consumer loans |
9,002 | 7,012 | 17,491 | 13,543 | ||||||||
Investment securities |
25,167 | 24,848 | 51,353 | 47,001 | ||||||||
Short-term investments |
941 | 315 | 1,560 | 738 | ||||||||
Total interest and dividend income |
79,844 | 68,583 | 157,622 | 133,237 | ||||||||
Interest expense | ||||||||||||
Deposits |
21,651 | 13,147 | 40,657 | 23,939 | ||||||||
Borrowings |
15,589 | 10,938 | 29,741 | 20,597 | ||||||||
Total interest expense |
37,240 | 24,085 | 70,398 | 44,536 | ||||||||
Net interest income before provision for loan losses |
42,604 | 44,498 | 87,224 | 88,701 | ||||||||
Provision for loan losses | - | - | - | - | ||||||||
Net interest income after provision for loan losses |
42,604 | 44,498 | 87,224 | 88,701 | ||||||||
Non-interest income | ||||||||||||
Depositor service charges |
6,584 | 5,790 | 12,543 | 10,775 | ||||||||
Loan and servicing income |
481 | 1,089 | 1,237 | 1,908 | ||||||||
Trust fees |
1,647 | 710 | 3,312 | 1,275 | ||||||||
Investment and insurance fees |
1,350 | 1,574 | 2,960 | 3,374 | ||||||||
Bank owned life insurance |
653 | 606 | 1,288 | 1,197 | ||||||||
Rent |
832 | 821 | 1,640 | 1,586 | ||||||||
Net securities gains |
4 | 4 | 4 | 12 | ||||||||
Net gain on sale of loans |
164 | 76 | 538 | 120 | ||||||||
Other |
318 | 507 | 743 | 817 | ||||||||
Total non-interest income |
12,033 | 11,177 | 24,265 | 21,064 | ||||||||
Non-interest expense | ||||||||||||
Salaries and employee benefits (notes 1 & 10) |
20,099 | 17,160 | 40,640 | 32,580 | ||||||||
Occupancy |
3,456 | 2,749 | 6,978 | 6,133 | ||||||||
Furniture and fixtures |
1,483 | 1,697 | 3,269 | 3,257 | ||||||||
Outside services |
4,453 | 4,614 | 9,476 | 9,288 | ||||||||
Advertising, public relations, and sponsorships |
1,572 | 1,473 | 3,133 | 2,534 | ||||||||
Amortization of identifiable intangible assets |
2,389 | 2,664 | 4,858 | 5,971 | ||||||||
Conversion and merger related charges |
326 | 410 | 2,481 | 890 | ||||||||
Other |
3,200 | 3,290 | 6,552 | 6,915 | ||||||||
Total non-interest expense |
36,978 | 34,057 | 77,387 | 67,568 | ||||||||
Income before income taxes |
17,659 | 21,618 | 34,102 | 42,197 | ||||||||
Income tax provision | 5,850 | 7,108 | 11,273 | 13,992 | ||||||||
Net income |
$ | 11,809 | $ | 14,510 | $ | 22,829 | $ | 28,205 | ||||
Basic and diluted earnings per share (note 15) | $ | 0.12 | $ | 0.14 | $ | 0.23 | $ | 0.26 | ||||
Weighted-average shares outstanding (note 15) | ||||||||||||
Basic |
100,102,013 | 106,933,079 | 100,161,660 | 106,902,106 | ||||||||
Diluted |
100,524,577 | 106,933,079 | 100,608,205 | 106,902,106 | ||||||||
Dividends per share | $ | 0.06 | $ | 0.05 | $ | 0.115 | $ | 0.10 |
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, 2006 | 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 | Loss | Equity | |||||||||||||||||||||||||
Balance December 31, 2005 | 108,824 | $ | 1,149 |
$ | 1,137,806 | $ | (103,356 | ) | $ | (41,302 | ) | $ | (87,998 | ) | $ | 430,971 | $ | (26,402 | ) | $ | 1,310,868 | |||||||||||||
Common stock issued for acquisition | 2,577 | 26 |
35,826 | 35,852 | ||||||||||||||||||||||||||||||
Dividends declared ($0.115 per share) | (11,810 | ) | (11,810 | ) | ||||||||||||||||||||||||||||||
Allocation of ESOP shares, net of tax | (33 | ) | 1,829 | 1,796 | ||||||||||||||||||||||||||||||
Treasury shares acquired (note 13) | (1,623 | ) | (23,487 | ) | (23,487 | ) | ||||||||||||||||||||||||||||
Restricted stock expense | 4,049 | 4,049 | ||||||||||||||||||||||||||||||||
Stock option expense | 2,285 | 2,285 | ||||||||||||||||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||||
Net income |
22,829 | 22,829 | ||||||||||||||||||||||||||||||||
Other comprehensive loss, net of tax (note 14) |
(13,488 | ) | (13,488 | ) | ||||||||||||||||||||||||||||||
Total comprehensive income |
9,341 | |||||||||||||||||||||||||||||||||
Balance June 30, 2006 | 109,778 | $ | 1,175 |
$ | 1,175,884 | $ | (101,527 | ) | $ | (37,253 | ) | $ | (111,485 | ) | $ | 441,990 | $ | (39,890 | ) | $ | 1,328,894 | |||||||||||||
See accompanying notes to consolidated financial statements.
5
NewAlliance Bancshares,
Inc.
Consolidated Statements of Cash Flows
Six Months Ended | ||||||||
June 30, | ||||||||
(In thousands) (Unaudited) | 2006 | 2005 | ||||||
Cash flows from operating activities | ||||||||
Net income | $ | 22,829 | $ | 28,205 | ||||
Adjustments to reconcile net income to net cash provided by operating activities | ||||||||
Loss on sale of OREO |
21 | - | ||||||
Restricted stock compensation expense |
4,049 | - | ||||||
Stock option compensation expense |
2,285 | - | ||||||
ESOP expense |
1,796 | 1,759 | ||||||
Amortization of identifiable intangible assets |
4,857 | 5,971 | ||||||
Net amortization/accretion of fair market adjustments from net assets acquired |
(3,933 | ) | (4,606 | ) | ||||
Net amortization/accretion of investment securities |
1,267 | 3,844 | ||||||
Change in deferred income taxes |
1,452 | 911 | ||||||
Depreciation and amortization |
3,146 | 2,936 | ||||||
Net securities gains |
(4 | ) | (12 | ) | ||||
Net gain on sales of performing loans |
(538 | ) | (120 | ) | ||||
Proceeds from sales of loans held for sale |
16,032 | 23,024 | ||||||
Loans originated for sale |
(18,476 | ) | (25,179 | ) | ||||
Loss (gain) on sale of fixed assets |
44 | (3 | ) | |||||
(Gain) provision for loss on limited partnerships |
(50 | ) | 43 | |||||
Increase in cash surrender value of bank owned life insurance |
(1,288 | ) | (1,197 | ) | ||||
Decrease in other assets |
16,818 | 11,160 | ||||||
(Decrease) increase in other liabilities |
(7,969 | ) | 7,864 | |||||
Net cash provided by operating activities |
42,338 | 54,600 | ||||||
Cash flows from investing activities | ||||||||
Purchase of securities available for sale |
(57,971 | ) | (623,807 | ) | ||||
Purchase of securities held to maturity |
(248,410 | ) | (57,773 | ) | ||||
Proceeds from maturity, sales, calls and principal reductions of securities available for sale |
261,956 | 352,761 | ||||||
Proceeds from maturity, calls and principal reductions of securities held to maturity |
7,256 | 416 | ||||||
Proceeds from sales of fixed assets |
348 | 238 | ||||||
Net increase in loans held for investment |
(290,738 | ) | (58,076 | ) | ||||
Net cash paid for acquisitions |
(5,581 | ) | - | |||||
Proceeds from sales of other real estate owned |
132 | - | ||||||
Proceeds from bank owned life insurance |
13 | 12 | ||||||
Purchase of premises and equipment |
(2,244 | ) | (2,951 | ) | ||||
Net cash used in investing activities |
(335,239 | ) | (389,180 | ) | ||||
Cash flows from financing activities | ||||||||
Net (decrease) increase in customer deposit balances |
(20,183 | ) | 71,556 | |||||
Net increase (decrease) in short-term borrowings |
13,304 | (56,725 | ) | |||||
Proceeds from long-term borrowings |
613,082 | 397,198 | ||||||
Repayments of long-term borrowings |
(260,808 | ) | (99,370 | ) | ||||
Acquisition of treasury shares |
(23,487 | ) | - | |||||
Dividends paid |
(11,810 | ) | (10,687 | ) | ||||
Net cash provided by financing activities |
310,098 | 301,972 | ||||||
Net increase (decrease) in cash and cash equivalents |
17,197 | (32,608 | ) | |||||
Cash and equivalents, beginning of period |
173,787 | 201,099 | ||||||
Cash and equivalents, end of period |
$ | 190,984 | $ | 168,491 | ||||
Supplemental information | ||||||||
Cash paid for |
||||||||
Interest on deposits and borrowings |
$ | 67,855 | $ | 43,276 | ||||
Income taxes paid, net |
6,956 | 7,260 |
In 2006, the fair values on noncash assets acquired and liabilities assumed in the acquisition of Cornerstone were $212.3 million and $199.8 million.
In 2006, approximately 2.6 million shares of common stock, valued at approximately $35.9 million were issued in connection with the acquistion of Cornerstone and the contingent payment due to former shareholders of Trust Company.
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. All significant intercompany transactions and balances have been eliminated
in consolidation. Certain reclassifications have been made to prior year amounts
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 Companys Annual Report on Form 10K as of and
for the year ended December 31, 2005. |
|
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, the valuation of mortgage servicing rights and
estimates used to evaluate asset impairment including other-than-temporary declines
in the value of securities, income tax accruals and the recoverability of goodwill
and other intangible assets. |
|
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, 2006, included in the balance of cash and due from banks were
cash on hand of $20.4 million and required reserves in the form of deposits with
the Federal Reserve Bank of $25.5 million. Short-term investments included money
market funds and commercial paper of $64.1 million and $46.5 million at June 30, 2006
and December 31, 2005, respectively. |
|
Investment Securities | |
Marketable
equity and debt securities (other than those reported as short-term investments)
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. Trading securities are bought and held principally
for the purpose of selling them in the near term. 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 trading or held to maturity are classified
as available for sale. Federal Home Loan Bank (FHLB) stock is a non-marketable
security reported at cost. At June 30, 2006 and December 31, 2005, the Company had
no debt or equity securities classified as trading. |
|
Held to maturity
securities are recorded at amortized cost, adjusted for the amortization or accretion
of premiums or discounts. Trading and available for sale securities are recorded
at fair value. Unrealized gains and losses on trading securities are included in
earnings. 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. |
|
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 FASB
Staff Position No. 115-1, a decline in market value of a security below amortized
cost that is deemed other than temporary is charged to earnings, resulting in the
establishment of a new cost basis for the security. Gains and losses on sales of
securities are recognized at the time of sale on a specific identification basis. |
|
Investments in Limited Partnerships | |
The Company
invests in limited partnerships. As of June 30, 2006 and December 31, 2005, the
carrying value of the Companys investment in twelve limited partnerships was approximately $4.6
million and $4.0 million, respectively, and are included in other assets. The Companys
interest in these limited partnerships is not considered significant and since
the Company has no ability to influence operating and financial policies, the partnerships
are accounted for at the lower of cost or net realizable value. If the Companys
ownership percentage were higher or if the Company had the ability to influence
operating and financial policies, these partnerships would be accounted for under
the equity method or consolidated. Income, generally in the form of distributions
from the partnerships, is recognized on an accrual basis and included in non-interest
income. Six of the twelve limited partnerships are real estate related. |
|
Loans Held for Sale | |
The Company
currently sells all originated fixed rate residential real estate loans with terms
of over 15 years. 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 provided by government-sponsored entities.
Residential loans are sold by the Company without recourse. |
7
NewAlliance Bancshares, Inc.
Notes
to Unaudited Consolidated Financial Statements
The Company
has historically originated Small Business Association (SBA) loans which have
been held in its portfolio. However, with the acquisition of Cornerstone Bancorp,
the Company became involved in the 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. All other loan originations
are classified as loans not held for resale. |
|
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 Companys 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 managements 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 nonaccruing 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 Banks 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, 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 managements 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 loans original effective interest rate, at
the loans 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. |
|
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 |
8
NewAlliance Bancshares, Inc.
Notes
to Unaudited Consolidated Financial Statements
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 Companys loan servicing rights is obtained on
a quarterly basis and is used by management to evaluate the reasonableness of the
fair value estimates. Impairment is recognized through a valuation reserve and is
recorded 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 surrender value of the
policies, as well as insurance proceeds received, are recorded in other non-interest
income and are not subject to income tax. Management reviews the financial strength
of the insurance carriers on an annual 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 a combined state tax return. In accordance
with Statement of Financial Accounting Standards (SFAS) No. 109, Accounting
for Income Taxes, 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 Companys 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 managements
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. |
|
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. |
|
Trust Assets | |
The Bank had
approximately $1.02 billion and $1.15 billion of assets under management at June 30,
2006 and December 31, 2005, 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. |
|
Pension and Other Postretirement Benefit Plans | |
The Company
has a noncontributory pension plan covering substantially all employees. 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 employees 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. |
|
In addition
to the qualified plan, the Company has adopted 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. |
9
NewAlliance Bancshares, Inc.
Notes
to Unaudited Consolidated Financial Statements
The Company
also accrues costs related to postretirement healthcare and life insurance benefits,
which recognizes costs over the employees period of active employment. |
|
The Company
uses a September 30 measurement date. In accordance with SFAS No. 87, Employers
Accounting for Pensions, the discount rate is set for the retirement plans by
reference to investment grade bond and yields. The expected long-term rate of return
on the assets held in our defined pension plan is based on market and economic conditions,
the Plans asset allocation and other factors. |
|
Stock-Based Compensation | |
On January
1, 2006, the Company began accounting for stock option and restricted stock awards
in accordance with revised SFAS No.123 (SFAS No. 123R), Share Based Payment,
and chose the modified prospective application transition method provided for
under this statement. Under SFAS No. 123R, the fair value of stock option and restricted
stock awards, measured at grant date, is amortized to compensation expense on a
straight-line basis over the vesting period. The financial impact of the implementation
of SFAS No. 123R is discussed in Note 10 of the Notes to Unaudited Consolidated
Financial Statements. Prior to the adoption of SFAS No. 123R, the Company accounted
for stock options and restricted stock in accordance with Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations. Accordingly, compensation expense was not recognized
for fixed stock options as the exercise price of the option was equal to the fair
value of the underlying stock at the grant date. The fair value of restricted stock
awards, measured at grant date, was amortized to compensation expense on a straight-line
basis over the vesting period. SFAS No. 123, Accounting for Stock-Based Compensation,
encouraged recognition of the fair value of all stock-based awards on the date
of grant as expense over the vesting period. However, as permitted by SFAS No. 123,
the Company continued to apply the intrinsic value-based method of accounting prescribed
by APB Opinion No. 25 through December 31, 2005 and disclosed certain proforma amounts
as if the fair value approach of SFAS No. 123 had been applied. |
|
Conversion and Merger Related Charges | |
The Company
records costs incurred due to a plan to either exit an activity or involuntarily
terminate employees of an acquired company as recognized liabilities assumed in
a purchase business combination and included in the allocation of the acquisition
cost when: (a) the plan to exit an activity begins by the acquisition date; (b)
commitment to the plan occurs within one year of the acquisition; (c) the plan is
sufficiently detailed to ensure its completion; and (d) plan activities begin shortly
after the plan is finalized. Costs that do not meet the conditions for inclusion
in the allocation of acquisition cost are expensed as incurred and are reported
as Conversion and Merger Related Charges. These merger charges consist primarily
of consulting, legal, system conversion, printing and advertising costs associated
with acquired companies, acquisition targets and potential acquisition targets.
Certain merger related charges continue to be incurred after the closing of these
acquisitions primarily due to the timing of banking system conversion activities,
which often occur several months after the closing of an acquisition. The Company
expects to incur similar charges in the future. |
|
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.
All deposit accounts, loans, services and commitments comprising such transactions
were made in the ordinary course of business, on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable transactions
with other customers who are not related parties and, in the opinion of management,
the transactions did not involve more than normal risks of collectability, favored
treatment or terms, or present other unfavorable features. |
|
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 six months
ended June 30, 2006 in the consolidated statement of changes in stockholders equity.
The components of comprehensive income are presented in Note 14 of the Notes to
Unaudited Consolidated Financial Statements. |
10
NewAlliance Bancshares, Inc.
Notes
to Unaudited Consolidated Financial Statements
Segment Reporting | |
The Companys
only business segment is Community Banking. During the periods presented this
segment represented all the revenues and income of the consolidated group and therefore,
is the only reported segment as defined by SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. |
|
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. |
|
2. | Recent Accounting Pronouncements |
On July 27,
2006, the Financial Accounting Standards Board (FASB) affirmed Statement of Financial
Accounting Standards (FAS), Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans an amendment of FAS Nos. 87, 88, 106, and 132(R), that
requires employers to recognize the overfunded or underfunded positions of defined
benefit postretirement plans, including pension plans, in their balance sheets for fiscal years ending after December 15, 2006.
The Standard also requires that employers measure plan assets and obligations as of the date of their financial statements.
This Statement requires a public entity that currently measures plan assets and benefit obligations as of a date other than the
date of its statement of financial position to implement the change in measurement date for fiscal years ending after
December 15, 2008. The FASB is expected to issue its final standard on or before September 29, 2006. Management
is currently evaluating the impact this Proposed Standard will have on the Companys
consolidated financial statements. |
|
On July, 13,
2006, the FASB issued Interpretation No. 48 (FIN 48), Accounting for Uncertainty
in Income Taxes. FIN 48 applies to all tax positions related to income taxes
subject to SFAS No. 109, Accounting for Income Taxes. This includes tax positions
considered to be routine as well as those with a high degree of uncertainty. FIN
48 utilizes a two-step approach for evaluating tax positions. Recognition (step
one) occurs when an enterprise concludes that a tax position, based solely on its
technical merits, is more-likely-than-not to be sustained upon examination. Measurement
(step two) is only addressed if step one has been satisfied (i.e., the position
is more-likely-than-not to be sustained). FIN 48 clarifies the accounting for income
taxes by prescribing the minimum recognition threshold a tax position must meet
before being recognized in the financial statements. FIN 48 also provides guidance
on derecognition, measurement, classification, interest and penalties, accounting
in interim periods, disclosure, and transition. |
|
FIN 48 is
effective for fiscal years beginning after December 15, 2006. Earlier adoption is
permitted as of the beginning of an enterprises fiscal year, provided the enterprise
has not yet issued financial statements, including financial statements for any
interim period, for that fiscal year. Management elected not to early adopt FIN
48 and does not believe that the adoption of FIN 48 will have a material impact
on the Companys consolidated financial statements. |
|
In March of
2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets.
The statement is an amendment to SFAS No. 140 and was issued with the intention
of simplifying the accounting for servicing assets and liabilities by permitting
an entity with a separately recognized servicing asset or servicing liability to
choose either the amortization or fair value method for the subsequent measurement.
The statement also permits a servicer that uses derivative financial instruments
to offset risks on servicing to report both the derivative financial instrument
and related servicing asset or liability by using a consistent fair value measurement
attribute. |
|
SFAS No. 156
is effective for all separately recognized servicing assets and liabilities acquired
or issued after the beginning of an entitys fiscal year that begins after September
15, 2006, but early adoption is permitted. Management has elected not to early adopt
SFAS No. 156 and is currently analyzing the method that will be implemented upon
adoption. Regardless of the form of adoption, the Company does not believe that
it will have a material impact on the Companys consolidated financial statements. |
|
In February
of 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Instruments,
which amends SFAS Nos. 133 and 140. SFAS No. 155 allows financial instruments
that have embedded derivatives to be accounted for as a whole (eliminating the need
to bifurcate the derivative from its host) if the holder elects to account for the
whole instrument on a fair value basis. The standard also: |
|
Clarifies which
interest-only strips and principal-only strips are not subject to the requirements of Statement 133. |
||
|
Establishes a requirement to evaluate interests
in securitized financial assets to identify interests that are freestanding derivatives
or that are hybrid financial instruments that contain an embedded derivative requiring
bifurcation. |
11
NewAlliance Bancshares, Inc.
Notes
to Unaudited Consolidated Financial Statements
|
Clarifies
that concentrations of credit risk in the form of subordination are not embedded
derivatives. |
||
|
Amends Statement
140 to eliminate the prohibition on a qualifying special-purpose entity from holding
a derivative financial instrument that pertains to a beneficial interest other than
another derivative financial instrument. |
||
SFAS No. 155
is effective for all financial instruments acquired or issued after the beginning
of an entitys first fiscal year that begins after September 15, 2006, but
early adoption is permitted. Management has elected not to early adopt SFAS No.
155 and does not believe that the adoption of SFAS No. 155 will have a material
impact on the Companys consolidated financial statements. |
|
3. | Business Combinations |
The following table summarizes acquisitions completed between April 1, 2004 and June 30, 2006. |
Balance at | |||||||||||||||||||||||||||||||||
Acquisition Date | Transaction Related Items | ||||||||||||||||||||||||||||||||
Total | |||||||||||||||||||||||||||||||||
Acquisition | Identifiable | Cash | Shares | Purchase | |||||||||||||||||||||||||||||
(In thousands) |
Date | Assets | Equity | Goodwill | Intangibles | Paid | Issued | Price | |||||||||||||||||||||||||
Cornerstone Bancorp, Inc. |
1/2/2006 | $ | 211,358 | $ | 18,290 | $ | 24,929 | $ | 6,777 | $ | 14,261 | 2,393 | $ | 47,519 | |||||||||||||||||||
Trust Company of Connecticut |
7/1/2005 | 5,611 | 4,937 | 10,498 | 7,277 | 6,528 | 922 | 19,499 | |||||||||||||||||||||||||
Connecticut Bancshares, Inc. |
4/1/2004 | 2,541,575 | 239,139 | 368,775 | 56,609 | 610,600 | | 610,600 | |||||||||||||||||||||||||
Alliance Bancorp of New England, Inc. |
4/1/2004 | 427,631 | 26,664 | 49,464 | 10,010 | 191 | 7,665 | 76,841 | |||||||||||||||||||||||||
The transactions
were accounted for using the purchase method of accounting in accordance with SFAS
No. 141, Business Combinations. Accordingly, the purchase price was
allocated based on the estimated fair market values of the assets and liabilities
acquired. |
||
Cornerstone Bancorp, Inc. Acquisition | ||
On January
2, 2006 the Company completed the acquisition of Cornerstone Bancorp, Inc. (Cornerstone), the parent company of Cornerstone Bank. Under the terms of the purchase
agreement, the Company paid approximately $14.3 million in cash and issued 2,392,648
shares of stock for an aggregated merger consideration of approximately $47.5 million.
Cornerstone had assets of approximately $211.4 million and stockholders equity
of approximately $18.3 million on January 2, 2006. |
||
Transactions Pending Consummation | ||
On July 18,
2006, the Company announced that it had signed a definitive agreement to acquire
Westbank Corporation (Westbank), the parent company of Westbank, a commercial
bank and trust company. At March 31, 2006, Westbank had assets of $821.8 million
and a branch network of 17 banking offices in Massachusetts and Connecticut. Under
the terms of the agreement, each outstanding share of Westbank common stock will
be converted into the right to receive $23.00 in cash or stock subject to a collar
on the stock consideration. The exchange ratio for the stock consideration will
be determined by dividing $23.00 by a 20-day average daily closing price of NewAlliance
common stock, provided that should the average NewAlliance price be below $13.30,
the exchange ratio will be fixed at 1.7293, or should the average NewAlliance price
be above $14.70, the exchange ratio will be fixed at 1.5646. As a result of the elective
option, the merger consideration each Westbank shareholder elects to receive may
be adjusted if necessary, so that 50% of the total merger consideration will be
paid in Company stock. The aggregate merger consideration is valued at approximately $116.0
million. The transaction is subject to all required regulatory approvals and the
shareholders of Westbank and other customary conditions. The definitive agreement
has been approved by the directors of both the Company and Westbank. The transaction
is expected to close in the first quarter of 2007. |
||
4. | Investment Securities | |
The following
table presents the amortized cost, gross unrealized gains, gross unrealized losses
and estimated fair values of investment securities at June 30, 2006 and December
31, 2005. |
12
NewAlliance Bancshares, Inc.
Notes
to Unaudited Consolidated Financial Statements
June 30, 2006 | December 31, 2005 | ||||||||||||||||||||||||||||||||
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 |
$ | 8,838 | $ | - | $ | (229 | ) | $ | 8,609 | $ | 8,877 | $ | 1 | $ | (133 | ) | $ | 8,745 | |||||||||||||||
U.S. Government sponsored enterprise obligations |
172,178 | 78 | (1,660 | ) | 170,596 | 159,008 | 19 | (1,641 | ) | 157,386 | |||||||||||||||||||||||
Corporate obligations |
49,627 | 38 | (1,221 | ) | 48,444 | 54,831 | 48 | (1,262 | ) | 53,617 | |||||||||||||||||||||||
Other bonds and obligations |
104,343 | 84 | (1,225 | ) | 103,202 | 120,663 | 191 | (1,006 | ) | 119,848 | |||||||||||||||||||||||
Marketable and trust preferred equity securities |
179,375 | 903 | (1,244 | ) | 179,034 | 161,122 | 783 | (1,099 | ) | 160,806 | |||||||||||||||||||||||
Mortgage-backed securities |
1,735,133 | 272 | (56,763 | ) | 1,678,642 | 1,899,374 | 537 | (36,842 | ) | 1,863,069 | |||||||||||||||||||||||
Total available for sale |
2,249,494 | 1,375 | (62,342 | ) | 2,188,527 | 2,403,875 | 1,579 | (41,983 | ) | 2,363,471 | |||||||||||||||||||||||
Held to maturity |
|||||||||||||||||||||||||||||||||
Mortgage-backed securities |
328,373 | 57 | (3,173 | ) | 325,257 | 87,104 | 81 | (1,034 | ) | 86,151 | |||||||||||||||||||||||
Other bonds |
4,705 | - | (160 | ) | 4,545 | 4,630 | - | (74 | ) | 4,556 | |||||||||||||||||||||||
Total held to maturity |
333,078 | 57 | (3,333 | ) | 329,802 | 91,734 | 81 | (1,108 | ) | 90,707 | |||||||||||||||||||||||
Total securities |
$ | 2,582,572 | $ | 1,432 | $ | (65,675 | ) | $ | 2,518,329 | $ | 2,495,609 | $ | 1,660 | $ | (43,091 | ) | $ | 2,454,178 | |||||||||||||||
The following table presents the fair value of investments with continuous unrealized losses for less than one year and those that have been in a continuous loss position for more than one year as of June 30, 2006. |
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. Treasury obligations |
$ | 3,940 | $ | 42 | $ | 3,587 | $ | 187 | $ | 7,527 | $ | 229 | |||||||||||||
U. S. Government sponsored enterprise obligations |
95,525 | 409 | 64,009 | 1,251 | 159,534 | 1,660 | |||||||||||||||||||
Corporate obligations |
- | - | 43,406 | 1,221 | 43,406 | 1,221 | |||||||||||||||||||
Other bonds and obligations |
16,027 | 209 | 43,041 | 1,176 | 59,068 | 1,385 | |||||||||||||||||||
Marketable and trust preferred equity obligations |
18 | - | 25,733 | 1,244 | 25,751 | 1,244 | |||||||||||||||||||
Mortgage-backed securities |
757,103 | 13,269 | 1,177,286 | 46,667 | 1,934,389 | 59,936 | |||||||||||||||||||
Total securities with unrealized losses |
$ | 872,613 | $ | 13,929 | $ | 1,357,062 | $ | 51,746 | $ | 2,229,675 | $ | 65,675 | |||||||||||||
Of the issues
summarized above, 168 issues have unrealized losses for less than twelve months
and 341 have unrealized losses for twelve months or more. Management believes that
no individual unrealized loss as of June 30, 2006 represents an other-than-temporary
impairment. The unrealized losses reported for mortgage-backed securities relate
to securities issued by FNMA, FHLMC and AAA rated securities issued by private institutions
and the unrealized losses on these securities are attributable to changes in market
interest rates. The unrealized losses reported for trust-preferred securities, corporate
obligations and other bonds and obligations relate to securities that are investment
grade with the exception of one bond that will mature within one year, and the unrealized
losses on these securities are attributable to changes in market interest rates
rather than credit quality of the issuer. The Company has the ability and intent
to hold the securities contained in the table for a period of time necessary to
recover the unrealized losses. |
|
5. | Loans |
The composition of the Companys loan portfolio is as follows: |
June 30, | December 31, | ||||||||
(In thousands) |
2006 | 2005 | |||||||
Residential real estate |
$ | 1,874,160 | $ | 1,650,527 | |||||
Commercial real estate |
903,192 | 768,582 | |||||||
Commercial business |
350,403 | 314,562 | |||||||
Consumer |
|||||||||
Home equity and equity lines of credit |
559,078 | 520,290 | |||||||
Other |
21,282 | 22,745 | |||||||
Total consumer |
580,360 | 543,035 | |||||||
Total loans |
3,708,115 | 3,276,706 | |||||||
Allowance for loan losses |
(37,958 | ) | (35,552 | ) | |||||
Total loans, net |
$ | 3,670,157 | $ | 3,241,154 | |||||
13
NewAlliance Bancshares, Inc.
Notes
to Unaudited Consolidated Financial Statements
At June 30,
2006 and December 31, 2005, the Companys residential real estate loan, home
equity and equity lines of credit portfolios are entirely collateralized by one
to four family homes and condominiums, the majority of which are located in Connecticut.
The commercial real estate loan portfolio is collateralized primarily by multi-family,
commercial and industrial properties located predominately in Connecticut. A variety
of different assets, including accounts receivable, inventory and property, and
plant and equipment, collateralize the majority of commercial business loans. |
|
The following table provides a summary of activity in the allowance for loan losses. |
At or For the Three Months | At or For the Six Months | ||||||||||||||||
Ended June 30, | Ended June 30, | ||||||||||||||||
(In thousands) |
2006 | 2005 | 2006 | 2005 | |||||||||||||
Balance at beginning of period |
$ | 38,153 | $ | 36,679 | $ | 35,552 | $ | 36,163 | |||||||||
Net allowances gained through acquisition |
- | - | 2,224 | - | |||||||||||||
Provision for loan losses |
- | - | - | - | |||||||||||||
Charge-offs |
|||||||||||||||||
Residential and commercial real estate loans |
116 | 2 | 116 | 21 | |||||||||||||
Commercial business loans |
350 | 836 | 669 | 1,310 | |||||||||||||
Consumer loans |
100 | 75 | 189 | 156 | |||||||||||||
Total charge-offs |
566 | 913 | 974 | 1,487 | |||||||||||||
Recoveries |
|||||||||||||||||
Residential and commercial real estate loans |
16 | 177 | 172 | 191 | |||||||||||||
Commercial business loans |
317 | 190 | 902 | 1,231 | |||||||||||||
Consumer loans |
38 | 48 | 82 | 83 | |||||||||||||
Total recoveries |
371 | 415 | 1,156 | 1,505 | |||||||||||||
Net charge-offs (recoveries) |
195 | 498 | (182 | ) | (18 | ) | |||||||||||
Balance at end of period |
$ | 37,958 | $ | 36,181 | $ | 37,958 | $ | 36,181 | |||||||||
6. | Goodwill and Identifiable Intangible Assets |
The changes in the carrying amount of goodwill and identifiable intangible assets for the six months ended June 30, 2006 are summarized as follows: |
Total | |||||||||||||||||
Core Deposit | Identifiable | ||||||||||||||||
and Customer | Non-Compete | Intangible | |||||||||||||||
(In thousands) |
Goodwill | Relationships | Agreements | Assets | |||||||||||||
Balance, December 31, 2005 |
$ | 425,001 | $ | 49,149 | $ | 2,867 | $ | 52,016 | |||||||||
Cornerstone acquisition |
24,929 | 6,777 | - | 6,777 | |||||||||||||
Additional Trust Company of Connecticut merger consideration |
4,301 | - | - | - | |||||||||||||
Amortization expense |
- | (3,780 | ) | (1,077 | ) | (4,857 | ) | ||||||||||
Balance, June 30, 2006 |
$ | 454,231 | $ | 52,146 | $ | 1,790 | $ | 53,936 | |||||||||
Estimated amortization expense for the year ending: |
|||||||||||||||||
Remaining 2006 |
$ | 3,700 | $ | 833 | $ | 4,533 | |||||||||||
2007 |
6,955 | 957 | 7,912 | ||||||||||||||
2008 |
6,628 | - | 6,628 | ||||||||||||||
2009 |
6,370 | - | 6,370 | ||||||||||||||
2010 |
6,185 | - | 6,185 | ||||||||||||||
Thereafter |
22,308 | - | 22,308 | ||||||||||||||
The components of identifiable intangible assets are as follows: |
Original | Balance | ||||||||||||
Recorded | Cumulative | June 30, | |||||||||||
(In thousands) |
Amount | Amortization | 2006 | ||||||||||
Identifiable intangible assets |
|||||||||||||
Core deposit and customer relationships |
$ | 71,313 | $ | 19,167 | $ | 52,146 | |||||||
Non-compete agreements |
9,758 | 7,968 | 1,790 | ||||||||||
Total |
$ | 81,071 | $ | 27,135 | $ | 53,936 | |||||||
14
NewAlliance Bancshares, Inc.
Notes
to Unaudited Consolidated Financial Statements
7. | Other Assets |
Selected components of other assets are as follows: |
June 30, | December 31, | ||||||||
(In thousands) |
2006 | 2005 | |||||||
Deferred tax asset |
$ | 34,430 | $ | 27,971 | |||||
Current Federal income tax receivable |
4,498 | 2,579 | |||||||
Accrued interest receivable |
27,329 | 25,684 | |||||||
Prepaid pension |
11,616 | 11,921 | |||||||
Wire transfer for January 2, 2006 Cornerstone acquisition |
- | 14,254 | |||||||
Receivable arising from securities transactions |
4,173 | 3,262 | |||||||
Investments in limited partnerships and other investments |
6,331 | 8,044 | |||||||
Mortgage servicing rights |
2,966 | 2,702 | |||||||
8. | Deposits |
A summary of deposits by account type is as follows: |
June 30, | December 31, | ||||||||
(In thousands) |
2006 | 2005 | |||||||
Savings |
$ | 809,884 | $ | 781,346 | |||||
Money market |
581,736 | 554,079 | |||||||
NOW |
386,637 | 342,268 | |||||||
Demand |
485,519 | 486,528 | |||||||
Time |
1,690,398 | 1,633,891 | |||||||
Total deposits |
$ | 3,954,174 | $ | 3,798,112 | |||||
9. | Borrowings |
The following is a summary of the Companys borrowed funds: |
June 30, | December 31, | ||||||||
(In thousands) |
2006 | 2005 | |||||||
FHLB advances (1) |
$ | 1,581,132 | $ | 1,191,280 | |||||
Repurchase agreements |
160,054 | 179,970 | |||||||
Mortgage loans payable |
1,655 | 1,716 | |||||||
Junior subordinated debentures issued to affiliated trusts (2) |
7,709 | 7,809 | |||||||
Total borrowings |
$ | 1,750,550 | $ | 1,380,775 | |||||
The acquisition
fair value adjustments (premiums) are being amortized as an adjustment to interest
expense on borrowings over their remaining term using the level yield method. |
|
FHLB advances
are secured by the Companys investment in FHLB stock, a blanket security agreement
and other eligible securities. This agreement requires the Bank to maintain as collateral
certain qualifying assets, principally mortgage loans. At June 30, 2006 and December
31, 2005, the Bank was in compliance with the FHLB collateral requirements. At June
30, 2006, the Company could borrow an additional $204.2 million from the FHLB, inclusive
of a line of credit of approximately $20.0 million. Additional borrowing capacity
would be available by pledging additional eligible securities as collateral. The
Company also has borrowing capacity at the Federal Reserve Bank of Bostons
discount window, which was approximately $179.6 million as of June 30, 2006, all
of which was available on that date. At June 30, 2006, the majority of the Companys $1.58 billion outstanding FHLB advances were at fixed rates, while only $25.0
million had floating rates. |
15
NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
10. | Employee Benefits | |
Postretirement Benefits |
The Company provides various defined benefit and other postretirement benefit plans (postretirement
health and life insurance benefits) to substantially all employees. 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. |
||
The following table presents the amount
of net periodic benefit cost for the three months ended June 30, 2006 and 2005: |
Other | |||||||||||||||||||||||||
Qualified | Supplemental | Postretirement | |||||||||||||||||||||||
Pension | Retirement Plans | Benefits | |||||||||||||||||||||||
(In thousands) | 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | |||||||||||||||||||
Service cost - benefits earned during the period | $ | 719 | $ | 711 | $ | 139 | $ | 103 | $ | 40 | $ | 43 | |||||||||||||
Interest cost on projected benefit obligation | 1,137 | 1,173 | 150 | 142 | 83 | 94 | |||||||||||||||||||
Expected return on plan assets | (1,736 | ) | (1,259 | ) | - | - | - | - | |||||||||||||||||
Amortization and deferral | - | - | - | - | 13 | 13 | |||||||||||||||||||
Prior service cost recognized | 13 | 13 | 3 | 7 | - | - | |||||||||||||||||||
Recognized net loss (gain) | 19 | 26 | - | - | (4 | ) | (1 | ) | |||||||||||||||||
Net periodic benefit cost |
$ | 152 | $ | 664 | $ | 292 | $ | 252 | $ | 132 | $ | 149 | |||||||||||||
The following table presents the amount
of net periodic pension cost for the six months ended June 30, 2006 and 2005: |
Other | |||||||||||||||||||||||||
Qualified | Supplemental | Postretirement | |||||||||||||||||||||||
Pension | Retirement Plans | Benefits | |||||||||||||||||||||||
(In thousands) | 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | |||||||||||||||||||
Service cost - benefits earned during the period | $ | 1,439 | $ | 1,421 | $ | 278 | $ | 206 | $ | 80 | $ | 86 | |||||||||||||
Interest cost on projected benefit obligation | 2,275 | 2,346 | 300 | 284 | 166 | 188 | |||||||||||||||||||
Expected return on plan assets | (3,472 | ) | (2,518 | ) | - | - | - | - | |||||||||||||||||
Amortization and deferral | - | - | - | - | 26 | 26 | |||||||||||||||||||
Prior service cost recognized | 25 | 26 | 6 | 14 | 1 | - | |||||||||||||||||||
Recognized net loss (gain) | 38 | 52 | - | - | (8 | ) | (1 | ) | |||||||||||||||||
Net periodic benefit cost |
$ | 305 | $ | 1,327 | $ | 584 | $ | 504 | $ | 265 | $ | 299 | |||||||||||||
In connection with its conversion to a state-charted
stock bank the Company established an ESOP to provide substantially all employees
of the Company the opportunity to also become shareholders. 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 Banks discretionary contributions
to the ESOP over a remaining period of 28 years. The unallocated ESOP shares are
pledged as collateral on the loan. At June 30, 2006, the loan had an outstanding
balance of $105.3 million and an interest rate of 4.0%. The Company accounts for
its ESOP in accordance with Statement of Position (SOP) 93-6, Employers Accounting
for Employee Stock Ownership Plans. Under SOP 93-6, unearned ESOP shares are
not considered outstanding and are shown as a reduction of shareholders 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 Companys ESOP shares differs
from the cost of such shares, this differential will be credited to equity. The
Company will receive a tax deduction equal to the cost of the shares released. 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 Companys 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, 2006 was approximately $880,000 and $1.8 million, respectively. The amount
of loan repayments made by the ESOP is used to reduce the unallocated common stock
held by the ESOP. |
16
NewAlliance Bancshares, Inc.
Notes
to Unaudited Consolidated Financial Statements
The ESOP shares as of June 30, 2006 were as follows:
Shares released for allocation | 539,700 | ||
Unreleased shares | 6,914,862 | ||
Total ESOP shares |
7,454,562 | ||
Market value of unreleased shares at June 30, 2006 (in thousands) | $ | 98,952 |
Weighted-average fair value | $ | 2.61 | ||
Risk-free interest rate | 3.89 | % | ||
Expected dividend yield | 1.53 | % | ||
Expected volatility | 19.84 | % | ||
Expected life | 3.84 years | |||
Since the Company had no share-based compensation history, it used peer group historical data of recently converted thrifts for volatility and life estimates. The risk-free rate is based on the U.S Treasury yield curve in effect at the time of the grant.
Fifteen percent, or 513,675 shares of
restricted stock awarded on June 15, 2005 with a total fair value of approximately
$7.5 million, vested on January 1, 2006. Fifteen percent of the restricted stock
awarded in 2005 will vest in January 1st on each of the years 2007 through
2011 and 10% on January 1, 2012, while the associated expense on the awarded stock
will be recorded from the award date through 2011. The 2006 awards vest over three
years. For the three and six month periods ended June 30, 2006, the Company recorded
expense of approximately $2.0 million and $4.0 million, or after tax expense of
approximately $1.4 million and $2.7 million, respectively. The Company anticipates
that it will record expense of approximately $8.1 million, $7.7 million, $6.8 million,
$6.3 million, $6.2 million and $4.1 million in calendar years 2006 through 2011,
respectively in connection with the restricted stock awards. For the three and six
months ended June 30, 2005, the Company recorded expense of approximately $612,000,
or after tax expense of $398,000.
17
NewAlliance Bancshares, Inc.
Notes
to Unaudited Consolidated Financial Statements
A summary of option activity under the plan as of June 30, 2006 and changes during the period ended is presented below.
Weighted- | ||||||||||||
Weighted- | Average | Aggregate | ||||||||||
Average | Remaining | Intrinsic | ||||||||||
Exercise | Contractual | Value | ||||||||||
Shares | Price | Term | ($000) | |||||||||
Options outstanding at beginning of year | 8,757,100 | $14.40 | ||||||||||
Granted | 23,750 | 14.05 | ||||||||||
Exercised | - | - | ||||||||||
Forfeited/cancelled | (366,400 | ) | 14.39 | |||||||||
Options outstanding at June 30, 2006 | 8,414,450 | $14.40 | 8.96 | $6 | ||||||||
Options exercisable at June 30, 2006 | 3,359,940 | $14.40 | 8.96 | $- | ||||||||
Restricted Stock | Options | ||||||||||||||||
Weighted-average | Weighted-average | ||||||||||||||||
Grant-Date | Grant-Date | ||||||||||||||||
Shares | Fair Value | Shares | Fair Value | ||||||||||||||
Nonvested at January 1, 2006 | 3,424,500 | $ | 14.39 | 5,260,260 | $ | 2.61 | |||||||||||
Granted | 3,060 | 13.89 | 23,750 | 2.41 | |||||||||||||
Vested | (513,675 | ) | 14.39 | - | - | ||||||||||||
Forfeited/Cancelled | (146,200 | ) | 14.39 | (229,500 | ) | 2.61 | |||||||||||
Expired | - | - | - | - | |||||||||||||
Nonvested at June 30, 2006 | 2,767,685 | $ | 14.39 | 5,054,510 | $ | 2.61 | |||||||||||
The following table provides proforma net income and earnings per share for the three and six months ended June 30, 2005, during which time the fair value-based method was not used to account for stock-based compensation.
Three Months | Six Months | |||||||
Ended June 30, | Ended June 30, | |||||||
(In thousands, except per share data) | 2005 | 2005 | ||||||
Net income, as reported | $ | 14,510 | $ | 28,205 | ||||
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects | 398 | 398 | ||||||
Deduct: Total
stock-based employee compensation expense determined under the fair value based
method for all awards, |
844 | 844 | ||||||
Proforma net income | $ | 14,064 | $ | 27,759 | ||||
Basic and diluted earnings per share | ||||||||
As reported |
$ | 0.14 | $ | 0.26 | ||||
Proforma |
0.13 | 0.26 | ||||||
18
NewAlliance Bancshares, Inc.
Notes
to Unaudited Consolidated Financial Statements
11. | Deferred Taxes | |
The Company
had transactions in which the related tax effect was recorded directly to stockholders
equity or goodwill instead of operations. Transactions in which the tax effect was
recorded directly to stockholders equity included the tax effects of unrealized
gains and losses on available for sale securities. Deferred taxes charged to goodwill
were in connection with the acquisitions of Connecticut Bancshares, Inc. (Connecticut
Bancshares), Alliance Bancorp of New England, Inc. (Alliance), Trust Company of
Connecticut (Trust Company) and Cornerstone. The Company had a net deferred tax
asset of $34.4 million and $28.0 million at June 30, 2006 and December 31, 2005,
respectively. |
||
The allocation
of deferred tax expense (benefit) involving items charged to income, items charged
directly to shareholders equity and items charged to goodwill is as follows: |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||
(In thousands) | 2006 | 2005 | 2006 | 2005 | ||||||||||||||
Deferred tax benefit allocated to: | ||||||||||||||||||
Stockholders equity, tax effect of unrealized losses on marketable equity securities (net of valuation allowance) |
$ | (2,792 | ) | $ | 5,421 | $ | (7,074 | ) | $ | (2,088 | ) | |||||||
Goodwill |
- | - | (837 | ) | 1,213 | |||||||||||||
Income |
(539 | ) | 384 | 1,452 | 911 | |||||||||||||
Total deferred tax benefit |
$ | (3,331 | ) | $ | 5,805 | $ | (6,459 | ) | $ | 36 | ||||||||
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, generally having
fixed expiration dates or other termination clauses that may require payment of
a fee. 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 managements assessment of the customers creditworthiness. |
The table below summarizes the Companys
commitments and contingencies discussed above. |
June 30, | December 31, | ||||||
(In thousands) | 2006 | 2005 | |||||
Loan commitments | $ | 34,741 | $ | 68,160 | |||
Unadvanced portion of construction loans | 161,656 | 98,360 | |||||
Standby letters of credit | 17,851 | 11,701 | |||||
Unadvanced portion of lines of credit | 530,463 | 491,977 | |||||
Total commitments |
$ | 744,711 | $ | 670,198 | |||
Investment Commitments | |
As of June
30, 2006 and December 31, 2005, the Company was contractually committed under five
limited partnership agreements to make additional partnership investments of approximately
$3.1 million and $3.7 million, respectively, which constitutes our 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. |
|
For a discussion of legal proceedings and other material litigation, see Part II, Item I, Legal Proceedings, of this Form 10-Q. |
19
NewAlliance Bancshares, Inc.
Notes
to Unaudited Consolidated Financial Statements
13. | Stockholders Equity | |
At June 30,
2006, stockholders equity amounted to $1.33 billion, or 18.7% of total assets, compared
to $1.31 billion, or 20.0% at December 31, 2005. The Company paid cash dividends
totaling $0.115 per share on common stock during the first six months of 2006. |
||
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 Banks 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. |
||
Share Repurchase Plan | ||
On January,
31, 2006, the Companys Board of Directors authorized the repurchase of up to an
additional 10.0 million shares or approximately 10% of the then outstanding Company
common stock. The Company repurchased 312,900 shares of common stock at a weighted
average price of $13.97 per share as of June 30, 2006. There is no set expiration
date for this repurchase plan. |
||
During the
quarter ended March 31, 2006, the Company completed its repurchase of approximately
10.7 million shares of common stock at a weighted average price of $14.55 per share
under its first repurchase plan authorized by the Companys Board of Directors on
May 9, 2005. |
||
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, 2006, 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, 2006 |
|||||||||||||||||||
Tier 1 Capital (to Average Assets) |
$ | 645,770 | 10.2 | % | $ | 253,888 | 4.0 | % | $ | 317,360 | 5.0 | % | |||||||
Tier 1 Capital (to Risk Weighted Assets) |
645,770 | 17.2 | 150,483 | 4.0 | 225,724 | 6.0 | |||||||||||||
Total Capital (to Risk Weighted Assets) |
683,728 | 18.2 | 300,966 | 8.0 | 376,207 | 10.0 | |||||||||||||
December 31, 2005 |
|||||||||||||||||||
Tier 1 Capital (to Average Assets) |
$ | 601,971 | 10.0 | % | $ | 241,043 | 4.0 | % | $ | 301,303 | 5.0 | % | |||||||
Tier 1 Capital (to Risk Weighted Assets) |
601,971 | 17.6 | 136,899 | 4.0 | 205,349 | 6.0 | |||||||||||||
Total Capital (to Risk Weighted Assets) |
637,523 | 18.6 | 273,798 | 8.0 | 342,248 | 10.0 | |||||||||||||
NewAlliance Bancshares, Inc. |
|||||||||||||||||||
June 30, 2006 |
|||||||||||||||||||
Tier 1 Capital (to Average Assets) |
$ | 866,720 | 13.6 | % | $ | 254,679 | 4.0 | % | $ | 318,348 | 5.0 | % | |||||||
Tier 1 Capital (to Risk Weighted Assets) |
866,720 | 22.9 | 151,318 | 4.0 | 226,977 | 6.0 | |||||||||||||
Total Capital (to Risk Weighted Assets) |
904,678 | 23.9 | 302,636 | 8.0 | 378,295 | 10.0 | |||||||||||||
December 31, 2005 |
|||||||||||||||||||
Tier 1 Capital (to Average Assets) |
$ | 866,567 | 14.3 | % | $ | 242,239 | 4.0 | % | $ | 302,799 | 5.0 | % | |||||||
Tier 1 Capital (to Risk Weighted Assets) |
866,567 | 25.0 | 138,686 | 4.0 | 208,029 | 6.0 | |||||||||||||
Total Capital (to Risk Weighted Assets) |
902,119 | 26.0 | 277,372 | 8.0 | 346,715 | 10.0 | |||||||||||||
20
NewAlliance Bancshares, Inc.
Notes
to Unaudited Consolidated Financial Statements
14. | Other Comprehensive Income (Loss) | |
The following table presents the components of other comprehensive income (loss) and the related tax effects for the three and six months ended June 30, 2006 and 2005. |
Three Months Ended | Six Months Ended | |||||||||||||||||
June 30, | June 30, | |||||||||||||||||
(In thousands) | 2006 | 2005 | 2006 | 2005 | ||||||||||||||
Net income | $ | 11,809 | $ | 14,510 | $ | 22,829 | $ | 28,205 | ||||||||||
Other comprehensive (loss) gain, before tax | ||||||||||||||||||
Unrealized losses on securities |
||||||||||||||||||
Unrealized holding (losses) gains, arising during the period |
(8,243 | ) | 15,738 | (20,559 | ) | (5,803 | ) | |||||||||||
Reclassification adjustment for gains included in net income |
(4 | ) | (4 | ) | (4 | ) | (12 | ) | ||||||||||
Other comprehensive (loss) gain, before tax | (8,247 | ) | 15,734 | (20,563 | ) | (5,815 | ) | |||||||||||
Income tax benefit (expense) net of valuation allowance | 2,792 | (5,421 | ) | 7,075 | 2,088 | |||||||||||||
Other comprehensive (loss) income, net of tax | (5,455 | ) | 10,313 | (13,488 | ) | (3,727 | ) | |||||||||||
Comprehensive income | $ | 6,354 | $ | 24,823 | $ | 9,341 | $ | 24,478 | ||||||||||
15. | Earnings Per Share | |
The calculation of basic and diluted earnings per share for the three and six months ended June 30, 2006 and 2005 is presented below. |
Three Months Ended | Six Months Ended | |||||||||||||
June 30, | June 30, | |||||||||||||
(In thousands, except per share data) | 2006 | 2005 | 2006 | 2005 | ||||||||||
Net income | $ | 11,809 | $ | 14,510 | $ | 22,829 | $ | 28,205 | ||||||
Average common shares outstanding for basic EPS | 100,102 | 106,933 | 100,162 | 106,902 | ||||||||||
Effect of dilutive stock options and unvested stock awards | 423 | - | 446 | - | ||||||||||
Average common and common-equivalent shares for dilutive EPS | 100,525 | 106,933 | 100,608 | 106,902 | ||||||||||
Net income per common share: | ||||||||||||||
Basic |
$ | 0.12 | $ | 0.14 | $ | 0.23 | $ | 0.26 | ||||||
Diluted |
0.12 | 0.14 | 0.23 | 0.26 | ||||||||||
21
22
ratio, asset
quality, loan and deposit growth, liquidity and interest rate sensitivity levels,
customer service standards, market share and peer comparisons. |
|
The Company
entered into a definitive agreement to acquire Westbank Corporation (Westbank).
This agreement became effective July 18, 2006 and the transaction is expected to
close in the first quarter of 2007. Westbank had approximately $821.8 million of
assets and approximately $46.6 million of stockholders equity at March 31, 2006.
Further information regarding these acquisitions can be found in Note 3, Business Combinations, in the Notes to the Unaudited Consolidated Financial Statements. On
January 2, 2006, the Company completed its acquisition of Cornerstone Bancorp, Inc.
(Cornerstone), the holding company for Cornerstone Bank. Cornerstone had assets
and stockholders equity of approximately $211.4 and $18.3 million, respectively at
December 31, 2005, with six full service offices serving the attractive Fairfield
County market in Southern Connecticut. Cornerstone is the fourth acquisition completed
by the Company since April 1, 2004. |
|
Earnings for
the three months ended June 30, 2006 were $0.12 per share compared to $0.14 per share
for the three months ended June 30, 2005, a decrease of $0.02, or 14.3%. For the
six months ended June 30, 2006 and 2005, earnings per share were $0.23 and $0.26,
respectively. The decrease in EPS for both periods was primarily a result of higher
operating expenses and conversion and merger related charges, partially offset by
an increase in non-interest income. The acquisitions of Trust Company of Connecticut
(Trust Company) and Cornerstone, new accounting rules for stock-based compensation
and executive severance were the main reasons for the increases in non-interest
expense during the quarter and six month periods ended June 30, 2006 compared to
the same periods in 2005. |
|
Annualized
return on average equity (ROE) and annualized return on average assets (ROA)
were 3.56% and 0.69%, respectively for the quarter ended June 30, 2006 compared
to 4.10% and 0.89%, respectively for the quarter ended June 30, 2005. The Companys net interest margin was 2.77%, down 30 basis points for the quarter ended June
30, 2006 from the quarter ended June 30, 2005. For the six months ended June 30,
2006, ROE and ROA were 3.43% and 0.67%, respectively, compared to ROE of 3.98% and
ROA of 0.88% for the six month ended June 30, 2005. |
|
Asset quality
remained strong even though nonperforming loans increased $2.3 million primarily as a result of the Cornerstone
acquisition. Nonperforming loans totaled $9.7 million at June 30, 2006 compared to $7.4 million at December 31, 2005. Nonperforming loans to
total loans were 0.26% at June 30, 2006, up from 0.23% at December 31, 2005 and
nonperforming assets to total assets also increased to 0.14% at June 30, 2006 from
0.11% at December 31, 2005. Although there were net charge-offs of $195,000 recorded
for the three months ended June 30, 2006, no provision for loan losses has been
recorded for either the three or six months ended June 30, 2006 primarily due to
year-to-date net recoveries of $182,000. |
|
Selected financial data, ratios and per share data are provided in Table 1. |
23
Table 1: Selected Data | ||||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||||
June 30, | June 30, | |||||||||||||||||
(Dollars in thousands, except share data) | 2006 | 2005 | 2006 | 2005 | ||||||||||||||
Condensed Income Statement | ||||||||||||||||||
Interest and dividend income | $ | 79,844 | $ | 68,583 | $ | 157,622 | $ | 133,237 | ||||||||||
Interest expense | 37,240 | 24,085 | 70,398 | 44,536 | ||||||||||||||
Net interest income before provision for loan losses | 42,604 | 44,498 | 87,224 | 88,701 | ||||||||||||||
Provision for loan losses | - | - | - | - | ||||||||||||||
Net interest income after provision for loan losses | 42,604 | 44,498 | 87,224 | 88,701 | ||||||||||||||
Non-interest income | 12,033 | 11,177 | 24,265 | 21,064 | ||||||||||||||
Operating expenses | 36,652 | 33,647 | 74,906 | 66,678 | ||||||||||||||
Conversion and merger related charges | 326 | 410 | 2,481 | 890 | ||||||||||||||
Income before income taxes | 17,659 | 21,618 | 34,102 | 42,197 | ||||||||||||||
Income tax provision | 5,850 | 7,108 | 11,273 | 13,992 | ||||||||||||||
Net income | $ | 11,809 | $ | 14,510 | $ | 22,829 | $ | 28,205 | ||||||||||
Weighted average shares outstanding | ||||||||||||||||||
Basic |
100,102,013 | 106,933,079 | 100,161,660 | 106,902,106 | ||||||||||||||
Diluted |
100,524,577 | 106,933,079 | 100,608,205 | 106,902,106 | ||||||||||||||
Earnings per share | ||||||||||||||||||
Basic |
$ | 0.12 | $ | 0.14 | $ | 0.23 | $ | 0.26 | ||||||||||
Diluted |
0.12 | 0.14 | 0.23 | 0.26 | ||||||||||||||
Financial Ratios | ||||||||||||||||||
Return on average assets (1) | 0.69 | % | 0.89 | % | 0.67 | % | 0.88 | % | ||||||||||
Return on average equity (1) | 3.56 | 4.10 | 3.43 | 3.98 | ||||||||||||||
Net interest margin (1) | 2.77 | 3.07 | 2.86 | 3.11 | ||||||||||||||
Efficiency ratio (2) | 67.65 | 61.11 | 69.27 | 61.41 | ||||||||||||||
Per share data |
||||||||||||||||||
Book value per share | $ | 12.11 | $ | 12.54 | $ | 12.11 | $ | 12.54 | ||||||||||
Tangible book value per share | 7.48 | 8.44 | 7.48 | 8.44 | ||||||||||||||
Comparison of Operating Results for the Three and Six Months Ended June 30, 2006 and 2005 |
Table 2: Summary Income Statements | |||||||||||||||||||||||||||||
Three Months Ended June 30, |
Change 2006/2005 |
Six Months Ended June 30, |
Change 2006/2005 | ||||||||||||||||||||||||||
(Dollars in thousands, except per share data) | 2006 | 2005 | Amount | Percent | 2006 | 2005 | Amount | Percent | |||||||||||||||||||||
Net interest income | $ | 42,604 | $ | 44,498 | $ | (1,894 | ) | (4 | )% | $ | 87,224 | $ | 88,701 | $ | (1,477 | ) | (2 | )% | |||||||||||
Provision for loan losses | - | - | - | - | - | - | - | - | |||||||||||||||||||||
Non-interest income | 12,033 | 11,177 | 856 | 8 | 24,265 | 21,064 | 3,201 | 15 | |||||||||||||||||||||
Operating expenses | 36,652 | 33,647 | 3,005 | 9 | 74,906 | 66,678 | 8,228 | 12 | |||||||||||||||||||||
Conversion and merger related charges | 326 | 410 | (84 | ) | (20 | ) | 2,481 | 890 | 1,591 | 179 | |||||||||||||||||||
Income before income taxes | 17,659 | 21,618 | (3,959 | ) | (18 | ) | 34,102 | 42,197 | (8,095 | ) | (19 | ) | |||||||||||||||||
Income tax provision | 5,850 | 7,108 | (1,258 | ) | (18 | ) | 11,273 | 13,992 | (2,719 | ) | (19 | ) | |||||||||||||||||
Net income |
$ | 11,809 | $ | 14,510 | $ | (2,701 | ) | (19 | )% | $ | 22,829 | $ | 28,205 | $ | (5,376 | ) | (19 | )% | |||||||||||
Basic and diluted earnings per share | $ | 0.12 | $ | 0.14 | $ | (0.02 | ) | (14 | )% | $ | 0.23 | $ | 0.26 | $ | (0.03 | ) | (12 | )% | |||||||||||
Earnings Summary | |
As shown in
Table 2, net income decreased by $2.7 million, to $11.8 million for the three months
ended June 30, 2006 from $14.5 million for the three months ended June 30, 2005.
Basic and diluted earnings per share for the three months ended June 30, 2006 and
2005 were $0.12 and $.0.14, respectively. The decrease in earnings was primarily the
result of higher operating expenses and a decrease in net interest income, partially
offset by higher non-interest income. Salaries and employee benefits expense was
the predominant reason for the increase in operating expenses and was due mainly
to charges associated with the 2005 Long-Term Compensation Plan (LTCP) implemented
in June 2005, executive severance and the acquisitions of Trust Company and Cornerstone
on July 1, 2005 and January 2, 2006, respectively. Net interest income decreased
in part due to the absence of approximately $1.0 million of dividend income on Federal Home Loan Bank (FHLB) stock due to changes by the FHLB in the timing of declaring
their quarterly dividend. |
24
For the six
months ended June 30, 2006, net income was $22.8 million, a decrease of $5.4 million
from the comparative period in 2005. In addition to the reasons outlined in the
quarterly discussion for higher operating expenses and lower net interest income,
the decline for the six months ended was also due to higher conversion and merger
related charges, partially offset by higher non-interest income. Conversion and
merger related charges increased mostly due to consulting and data processing expenses
related to Cornerstone for systems conversion as well as legal and consulting expenses
related to a potential merger that was abandoned during the due-diligence phase.
Non-interest income increased primarily due to an increase in trust fees as a result
of the Trust Company acquisition; an increase in depositor service charges primarily
due to an increase in overdraft fees; and gains recorded on the sale of Small Business
Administration (SBA) loans. |
|
Market interest
rates have continued to increase and is the principal reason for increases in the
average yield earned on interest-earning assets and the average rate paid on interest-bearing
liabilities. The interest rate spread for both the three and six month periods ended
June 30, 2006 as compared to 2005 has decreased largely due to growth in interest-bearing
liabilities outpacing growth in earning assets principally because of stock buy-backs
coupled with offering promotional rates on higher cost time deposits. This is also
causing pressure on the net interest margin which was 2.77% and 2.86% for the three
and six months ended June 30, 2006 compared to 3.07% and 3.11% for the three and
six months ended June 30, 2005. |
|
Average Balances, Interest, Average Yields/Cost and Rate/Volume Analysis | |
Tables 3 and
4 below set forth certain information concerning average interest-earning assets
and interest-bearing liabilities and their associated yields or rates for the periods
indicated. The average yields and costs are derived by dividing income or expenses
by the average balances of interest-earning assets or interest-bearing liabilities,
respectively, for the periods shown and reflect annualized yields and costs. Average
balances are computed using daily balances. Yields and amounts earned include loan
fees and fair value adjustments related to acquired loans, deposits and borrowings.
Loans held for sale and nonaccrual loans have been included in interest-earning
assets for purposes of these computations. |
|
Table 5 below
presents the extent to which changes in interest rates and changes in volume of
interest-earning assets and interest-bearing liabilities have affected the Companys interest income and interest expense during the periods indicated. Information
is provided in each category with respect to: (i) change attributable to change
in volume (change in volume multiplied by prior rate), (ii) change attributable
to change in rate (change in rate multiplied by prior volume); and (iii) the net
change (change in rate multiplied by change in volume). The net change is allocated
based on the percentage of the change attributable to rate and volume. |
25
Table 3: Average Balance Sheets for the Three Months Ended June 30, 2006 and 2005
Three Months Ended | |||||||||||||||||||||||
June 30, 2006 | June 30, 2005 | ||||||||||||||||||||||
Average | Average | ||||||||||||||||||||||
Average | Yield/ | Average | Yield/ | ||||||||||||||||||||
(Dollars in thousands) | Balance | Interest | Rate | Balance | Interest | Rate | |||||||||||||||||
Interest-earning assets | |||||||||||||||||||||||
Loans |
|||||||||||||||||||||||
Residential real estate |
$ | 1,822,346 | $ | 24,188 | 5.31 | % | $ | 1,577,179 | $ | 20,344 | 5.16 | % | |||||||||||
Commercial real estate |
882,643 | 14,356 | 6.51 | 733,870 | 11,058 | 6.03 | |||||||||||||||||
Commercial business |
348,246 | 6,190 | 7.11 | 318,653 | 5,006 | 6.28 | |||||||||||||||||
Consumer |
567,070 | 9,002 | 6.35 | 523,279 | 7,012 | 5.36 | |||||||||||||||||
Total Loans |
3,620,305 | 53,736 | 5.94 | 3,152,981 | 43,420 | 5.51 | |||||||||||||||||
Short-term investments |
76,811 | 941 | 4.90 | 40,537 | 315 | 3.11 | |||||||||||||||||
Investment securities |
2,451,351 | 25,167 | 4.11 | 2,608,068 | 24,848 | 3.81 | |||||||||||||||||
Total interest-earning assets |
6,148,467 | $ | 79,844 | 5.19 | % | 5,801,586 | $ | 68,583 | 4.73 | % | |||||||||||||
Non-interest-earning assets |
726,965 | 699,594 | |||||||||||||||||||||
Total assets |
$ | 6,875,432 | $ | 6,501,180 | |||||||||||||||||||
Interest-bearing liabilities | |||||||||||||||||||||||
Deposits |
|||||||||||||||||||||||
Money market |
$ | 570,112 | $ | 3,772 | 2.65 | % | $ | 768,396 | $ | 3,599 | 1.87 | % | |||||||||||
NOW |
361,283 | 439 | 0.49 | 335,598 | 148 | 0.18 | |||||||||||||||||
Savings |
799,766 | 1,864 | 0.93 | 895,778 | 1,066 | 0.48 | |||||||||||||||||
Time |
1,701,553 | 15,576 | 3.66 | 1,292,440 | 8,334 | 2.58 | |||||||||||||||||
Total interest-bearing deposits |
3,432,714 | 21,651 | 2.52 | 3,292,212 | 13,147 | 1.60 | |||||||||||||||||
Repurchase agreements | 165,419 | 1,288 | 3.11 | 189,607 | 1,008 | 2.13 | |||||||||||||||||
FHLB advances and other borrowings | 1,408,924 | 14,301 | 4.06 | 1,078,127 | 9,930 | 3.68 | |||||||||||||||||
Total interest-bearing-liabilities |
5,007,057 | 37,240 | 2.98 | % | 4,559,946 | 24,085 | 2.11 | % | |||||||||||||||
Non-interest-bearing demand deposits | 471,047 | 448,120 | |||||||||||||||||||||
Other non-interest-bearing liabilities | 70,200 | 75,781 | |||||||||||||||||||||
Total liabilities |
5,548,304 | 5,083,847 | |||||||||||||||||||||
Equity | 1,327,128 | 1,417,333 | |||||||||||||||||||||
Total liabilities and equity |
$ | 6,875,432 | $ | 6,501,180 | |||||||||||||||||||
Net interest-earning assets | $ | 1,141,410 | $ | 1,241,640 | |||||||||||||||||||
Net interest income | $ | 42,604 | $ | 44,498 | |||||||||||||||||||
Interest rate spread | 2.21 | % | 2.62 | % | |||||||||||||||||||
Net interest margin (net interest income as a percentage of total interest-earning assets) |
2.77 | % | 3.07 | % | |||||||||||||||||||
Ratio of total interest-earning assets to total interest-bearing liabilities |
122.80 | % | 127.23 | % | |||||||||||||||||||
26
Table 4: Average Balance Sheets for the Six Months Ended June 30, 2006 and 2005
Six Months Ended | |||||||||||||||||||||||
June 30, 2006 | June 30, 2005 | ||||||||||||||||||||||
Average | Average | ||||||||||||||||||||||
Average | Yield/ | Average | Yield/ | ||||||||||||||||||||
(Dollars in thousands) | Balance | Interest | Rate | Balance | Interest | Rate | |||||||||||||||||
Interest-earning assets | |||||||||||||||||||||||
Loans |
|||||||||||||||||||||||
Residential real estate |
$ | 1,762,800 | $ | 46,573 | 5.28 | % | $ | 1,571,001 | $ | 40,710 | 5.18 | % | |||||||||||
Commercial real estate |
877,738 | 28,414 | 6.47 | 731,310 | 21,721 | 5.94 | |||||||||||||||||
Commercial business |
346,249 | 12,231 | 7.06 | 318,710 | 9,524 | 5.98 | |||||||||||||||||
Consumer |
558,399 | 17,491 | 6.26 | 518,637 | 13,543 | 5.22 | |||||||||||||||||
Total Loans |
3,545,186 | 104,709 | 5.91 | 3,139,658 | 85,498 | 5.45 | |||||||||||||||||
Short-term investments |
66,644 | 1,560 | 4.68 | 58,213 | 738 | 2.54 | |||||||||||||||||
Investment securities |
2,478,746 | 51,353 | 4.14 | 2,511,459 | 47,001 | 3.74 | |||||||||||||||||
Total interest-earning assets |
6,090,576 | $ | 157,622 | 5.18 | % | 5,709,330 | $ | 133,237 | 4.67 | % | |||||||||||||
Non-interest-earning assets |
730,171 | 708,086 | |||||||||||||||||||||
Total assets |
$ | 6,820,747 | $ | 6,417,416 | |||||||||||||||||||
Interest-bearing liabilities | |||||||||||||||||||||||
Deposits |
|||||||||||||||||||||||
Money market |
$ | 572,063 | $ | 6,799 | 2.38 | % | $ | 765,550 | $ | 6,483 | 1.69 | % | |||||||||||
NOW |
351,908 | 668 | 0.38 | 334,609 | 303 | 0.18 | |||||||||||||||||
Savings |
793,052 | 3,185 | 0.80 | 905,935 | 2,154 | 0.48 | |||||||||||||||||
Time |
1,700,985 | 30,005 | 3.53 | 1,248,985 | 14,999 | 2.40 | |||||||||||||||||
Total interest-bearing deposits |
3,418,008 | 40,657 | 2.38 | 3,255,079 | 23,939 | 1.47 | |||||||||||||||||
Repurchase agreements | 171,752 | 2,549 | 2.97 | 192,058 | 1,759 | 1.83 | |||||||||||||||||
FHLB advances and other borrowings | 1,357,736 | 27,192 | 4.01 | 1,036,677 | 18,838 | 3.63 | |||||||||||||||||
Total interest-bearing-liabilities |
4,947,496 | 70,398 | 2.85 | % | 4,483,814 | 44,536 | 1.99 | % | |||||||||||||||
Non-interest-bearing demand deposits | 475,477 | 440,337 | |||||||||||||||||||||
Other non-interest-bearing liabilities | 68,527 | 75,741 | |||||||||||||||||||||
Total liabilities |
5,491,500 | 4,999,892 | |||||||||||||||||||||
Equity | 1,329,247 | 1,417,524 | |||||||||||||||||||||
Total liabilities and equity |
$ | 6,820,747 | $ | 6,417,416 | |||||||||||||||||||
Net interest-earning assets | $ | 1,143,080 | $ | 1,225,516 | |||||||||||||||||||
Net interest income | $ | 87,224 | $ | 88,701 | |||||||||||||||||||
Interest rate spread | 2.33 | % | 2.68 | % | |||||||||||||||||||
Net interest margin (net interest income as a percentage of total interest-earning assets) |
2.86 | % | 3.11 | % | |||||||||||||||||||
Ratio of total interest-earning assets to total interest-bearing liabilities |
123.10 | % | 127.33 | % | |||||||||||||||||||
27
Table 5: Rate/Volume Analysis
Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005 |
Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005 |
|||||||||||||||||||||||
Increase (Decrease) | Increase (Decrease) | |||||||||||||||||||||||
Due to | Due to | |||||||||||||||||||||||
(In thousands) | Rate | Volume | Net | Rate | Volume | Net | ||||||||||||||||||
Interest-earning assets | ||||||||||||||||||||||||
Loans |
||||||||||||||||||||||||
Residential real estate |
$ | 603 | $ | 3,241 | $ | 3,844 | $ | 322 | $ | 5,541 | $ | 5,863 | ||||||||||||
Commercial real estate |
928 | 2,370 | 3,298 | 1,492 | 5,201 | 6,693 | ||||||||||||||||||
Commercial business |
694 | 490 | 1,184 | 1,813 | 894 | 2,707 | ||||||||||||||||||
Consumer |
1,369 | 621 | 1,990 | 2,831 | 1,117 | 3,948 | ||||||||||||||||||
Total loans |
3,594 | 6,722 | 10,316 | 6,458 | 12,753 | 19,211 | ||||||||||||||||||
Short-term investments |
245 | 381 | 626 | 700 | 122 | 822 | ||||||||||||||||||
Investment securities |
1,863 | (1,544 | ) | 319 | 4,972 | (620 | ) | 4,352 | ||||||||||||||||
Total interest-earning assets |
$ | 5,702 | $ | 5,559 | $ | 11,261 | $ | 12,130 | $ | 12,255 | $ | 24,385 | ||||||||||||
Interest-bearing liabilities | ||||||||||||||||||||||||
Deposits |
||||||||||||||||||||||||
Money market |
$ | 1,249 | $ | (1,076 | ) | $ | 173 | $ | 2,367 | $ | (2,051 | ) | $ | 316 | ||||||||||
NOW |
279 | 12 | 291 | 348 | 17 | 365 | ||||||||||||||||||
Savings |
923 | (125 | ) | 798 | 1,333 | (302 | ) | 1,031 | ||||||||||||||||
Time |
4,128 | 3,114 | 7,242 | 7,627 | 7,379 | 15,006 | ||||||||||||||||||
Total interest bearing deposits |
6,579 | 1,925 | 8,504 | 11,675 | 5,043 | 16,718 | ||||||||||||||||||
Repurchase agreements |
422 | (142 | ) | 280 | 996 | (206 | ) | 790 | ||||||||||||||||
FHLB advances and other borrowings |
1,091 | 3,280 | 4,371 | 766 | 7,588 | 8,354 | ||||||||||||||||||
Total interest-bearing liabilities |
8,092 | 5,063 | 13,155 | 13,437 | 12,425 | 25,862 | ||||||||||||||||||
(Decrease) increase in net interest income | $ | (2,390 | ) | $ | 496 | $ | (1,894 | ) | $ | (1,307 | ) | $ | (170 | ) | $ | (1,477 | ) | |||||||
Net Interest Income Analysis
Net interest income is the amount that interest
and fees on earning assets (loans and investments) exceeds the cost of funds, primarily
interest paid to the Companys depositors and interest on external borrowings. Net
interest margin is the difference between the income on earning assets and the cost
of interest-bearing funds as a percentage of average earning assets.
As shown in Table 3, net interest income for the quarter ended June 30, 2006 was $42.6 million, compared to $44.5 million for the same period last year. This decrease of $1.9 million, or 4.3%, is primarily due to the absence of approximately $1.0 million of dividend income on FHLB stock due to changes by the FHLB in declaring their quarterly dividend. It is expected the FHLB will declare and pay the dividend in the third quarter. It is anticipated that the third quarter dividend will be for 183 days instead of 91 days which will cause an anomaly in the third quarter. Additionally, the decrease in net interest-earning assets of $100.2 million, principally due to stock buy-backs and the interest rate spread decline of 41 basis points contributed to the decline in net interest income.
Interest income for the three months ended June 30, 2006 was $79.8 million, compared to $68.6 million for the quarter ended June 30, 2005, an increase of $11.2 million, or 16.4%. The increase in interest income was driven primarily by loans due to both an increase in the average balances of $467.3 million and a 43 basis point increase in the average yield earned. While all loan categories experienced increases in average balances and average yields, the commercial and residential real estate loan portfolios continued to be the drivers of growth. The increases in average balances are due to the acquisition of Cornerstone; the Companys continued strategy of purchasing residential mortgages in the secondary market and increased organic loan originations. This volume increase accounted for approximately $5.6 million of the increase in interest income. The average yield earned on total loans increased 43 basis points due to increases in market interest rates and contributed approximately $3.6 million of the increase in interest income. The increase in interest income on investment securities was due to an increase in the average rate earned on investment securities of 30 basis points, which was also the result of an increase in market interest rates. As previously mentioned, interest income on investment securities would have been $1.0 million higher if not for the delayed dividend declaration by the FHLB for the second quarter. The dividend is expected to be paid in the third quarter.
The cost of funds for the quarter ended June 30, 2006 increased $13.2 million, or 54.6% to $37.2 million compared to the prior year period. The average rate on interest-bearing liabilities increased 87 basis points to 2.98% from 2.11%. The increase in interest expense was primarily due to increases in time deposits and FHLB advances, of $7.2 million and $4.4 million, respectively, from the quarter ended June 30, 2005. The increase in time deposits interest expense is due to a 108 basis point increase in the average rate on these deposits coupled with an average balance increase of $409.1 million. The 108 basis point increase in the average rate was due to market interest rate increases and offering promotional rates to customers who either had or established a checking relationship with the Bank. Although there has been a decline in the average balances of money market and savings deposits as monies shifted to higher paying time deposits or were lost to competitors, interest expense has
28
increased due to market interest rates. The increase in interest expense on FHLB advances was predominantly due to an increase in the average balance of $330.8 million which funded the purchase of residential mortgages and to a lesser extent helped fund the Companys stock buy-back program, as well as a 38 basis point increase in the average rate paid on these borrowings due to increases in market interest rates.
As shown in Table 4, net interest income for the six months ended June 30, 2006 was $87.2 million, compared to $88.7 million for the same period last year. A decrease of 35 basis points in the interest rate spread coupled with the average balance decrease in net interest-earning assets of $82.4 million and the FHLB dividend issue previously discussed were the primary factors for the $1.5 million decrease in net interest income.
For the six months ended June 30, 2006, interest income was $157.6 million, an increase of $24.4 million, or 18.3%, from $133.3 million for the six months ended June 30, 2005. The increase in interest income attributable to the loan portfolio is $19.2 million due to the same reasons as the quarterly discussion. Additionally, higher market interest rates caused a 40 basis point increase in the average yield of the investment securities portfolio which contributed $5.0 million of the increase in interest income.
For the six months ended June 30, 2006, the cost of funds was $70.4 million compared to $44.5 million for the six months ended June 30, 2005. This dynamics affecting this increase of $25.9 million, or 58.1%, was consistent with the quarterly change in the cost of funds outlined above.
Provision for Loan Losses
The provision for loan losses (provision) is based on managements periodic assessment of the adequacy of the loan loss
allowance which, in turn, is based on such interrelated factors as the composition
of the loan portfolio and its inherent risk characteristics, the level of nonperforming
loans and charge-offs, both current and historic, local economic conditions, the
direction of real estate values, and regulatory guidelines.
Management performs a monthly review of the loan portfolio, and based on this review determines the level of the provision necessary to maintain an adequate allowance for loan losses (allowance). Management did not record a provision for loan losses for either the three or six months ended June 30, 2006 or 2005. The primary factor that influenced managements decision not to record a provision was that net recoveries of $182,000 and $18,000 were recorded for the six months ended June 30, 2006 and 2005, respectively. The allowance was deemed adequate based on the acceptable level of delinquencies, nonperforming loans and criticized assets, and considering the growth in the portfolio, including the Cornerstone acquisition.
At June 30, 2006, the allowance for loan losses was $38.0 million, which represented 392.82% of nonperforming loans and 1.02% of total loans. This compared to the allowance for loan losses of $35.6 million at December 31, 2005 representing 481.02% of nonperforming loans and 1.08% of total loans at that date. The allowance acquired as a result of the Cornerstone acquisition was $2.2 million.
Table 6: Non-Interest Income
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
June 30, | Change | June 30, | Change | |||||||||||||||||||||||||||||
(Dollars in thousands) | 2006 | 2005 | Amount | Percent | 2006 | 2005 | Amount | Percent | ||||||||||||||||||||||||
Depositor service charges | $ | 6,584 | $ | 5,790 | $ | 794 | 13.71 | % | $ | 12,543 | $ | 10,775 | $ | 1,768 | 16.41 | % | ||||||||||||||||
Loan and servicing income | 481 | 1,089 | (608 | ) | (55.83 | ) | 1,237 | 1,908 | (671 | ) | (35.17 | ) | ||||||||||||||||||||
Trust fees | 1,647 | 710 | 937 | 131.97 | 3,312 | 1,275 | 2,037 | 159.76 | ||||||||||||||||||||||||
Investment and insurance fees | 1,350 | 1,574 | (224 | ) | (14.23 | ) | 2,960 | 3,374 | (414 | ) | (12.27 | ) | ||||||||||||||||||||
Bank owned life insurance | 653 | 606 | 47 | 7.76 | 1,288 | 1,197 | 91 | 7.60 | ||||||||||||||||||||||||
Rent | 832 | 821 | 11 | 1.34 | 1,640 | 1,586 | 54 | 3.40 | ||||||||||||||||||||||||
Net securities gains | 4 | 4 | - | - | 4 | 12 | (8 | ) | (66.67 | ) | ||||||||||||||||||||||
Net gain on sale of loans | 164 | 76 | 88 | 115.79 | 538 | 120 | 418 | 348.33 | ||||||||||||||||||||||||
Other | 318 | 507 | (189 | ) | (37.28 | ) | 743 | 817 | (74 | ) | (9.06 | ) | ||||||||||||||||||||
Total non-interest income |
$ | 12,033 | $ | 11,177 | $ | 856 | 7.66 | % | $ | 24,265 | $ | 21,064 | $ | 3,201 | 15.20 | % | ||||||||||||||||
Non-Interest Income
As
displayed in Table 6, non-interest income increased $856,000 to $12.0 million for
the three months ended June 30, 2006 from $11.2 million for the three months ended
June 30, 2005. This increase is primarily due to increases in trust fees and depositor
service charges and was mostly offset by decreases in loan and servicing income,
investment and insurance fees and other income. Trust fees increased due to the
acquisition of Trust Company, which occurred on July 1, 2005 and the increase in
depositor service charges is mainly due to increases in overdraft fees on demand
deposit accounts as a result of a check card overdraft program implemented during
the second quarter of 2005. Loan and servicing income has decreased due largely
to a decrease in loan fees, principally commercial real estate prepayment fees and
a decrease in loan servicing fees. Loan servicing
29
fees decreased due to a write-up of previously recorded impairment in the valuation of the mortgage servicing asset for the quarter ended June 30, 2005, compared to no change in the valuation for the current quarter. Investment and insurance fees decreased mainly due to an unfavorable market for fixed annuity insurance products and the decrease in other income is primarily due to income received in the prior year quarter that were nonrecurring in nature, including a lease termination gain relating to a closed branch and interest on a tax refund.
For the six months ended June 30, 2006, non-interest income increased $3.2 million to $24.3 million from $21.1 million for the six months ended June 30, 2005. The rationale for the year to date increases in trust fees and depositor service charges and the year to date decreases in investment and insurance fees and loan and servicing income are the same as the quarterly discussion. Net gain on sale of loans increased primarily due to the Companys new strategy of selling SBA loans, a result of the acquisition of Cornerstone which was already an active participant in the secondary SBA market.
Table 7: Non-Interest Expense
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
June 30, | Change | June 30, | Change | |||||||||||||||||||||||||||||
(Dollars in thousands) | 2006 | 2005 | Amount | Percent | 2006 | 2005 | Amount | Percent | ||||||||||||||||||||||||
Salaries and employee benefits | $ | 20,099 | $ | 17,160 | $ | 2,939 | 17.13 | % | $ | 40,640 | $ | 32,580 | $ | 8,060 | 24.74 | % | ||||||||||||||||
Occupancy | 3,456 | 2,749 | 707 | 25.72 | 6,978 | 6,133 | 845 | 13.78 | ||||||||||||||||||||||||
Furniture and fixtures | 1,483 | 1,697 | (214 | ) | (12.61 | ) | 3,269 | 3,257 | 12 | 0.37 | ||||||||||||||||||||||
Outside services | 4,453 | 4,614 | (161 | ) | (3.49 | ) | 9,476 | 9,288 | 188 | 2.02 | ||||||||||||||||||||||
Advertising, public relations, and sponsorships | 1,572 | 1,473 | 99 | 6.72 | 3,133 | 2,534 | 599 | 23.64 | ||||||||||||||||||||||||
Amortization of identifiable intangible assets | 2,389 | 2,664 | (275 | ) | (10.32 | ) | 4,858 | 5,971 | (1,113 | ) | (18.64 | ) | ||||||||||||||||||||
Conversion and merger related charges | 326 | 410 | (84 | ) | (20.49 | ) | 2,481 | 890 | 1,591 | 178.76 | ||||||||||||||||||||||
Other | 3,200 | 3,290 | (90 | ) | (2.74 | ) | 6,552 | 6,915 | (363 | ) | (5.25 | ) | ||||||||||||||||||||
Total non-interest expense |
$ | 36,978 | $ | 34,057 | $ | 2,921 | 8.58 | % | $ | 77,387 | $ | 67,568 | $ | 9,819 | 14.53 | % | ||||||||||||||||
Non-Interest Expense
As displayed in Table 7, non-interest expense
increased $2.9 million to $37.0 million for the three months ended June 30, 2006
from $34.1 million for the comparable prior-year period. The increase was primarily
due to increases in salaries and employee benefits and occupancy expense. The main
drivers for the increase in salaries and employee benefits expense were the 2005
LTCP, severance recorded for an executive who left the Company and the acquisitions
of Trust Company and Cornerstone on July 1, 2005 and January 2, 2006, respectively.
The LTCP was implemented in June of 2005. The grant date fair value of restricted
stock awards granted under that plan is being recorded as compensation expense over
the vesting period of the award. The Company has been recording compensation expense
related to the restricted stock award grant under the LTCP since June of 2005. In
addition, the Company adopted the provisions of SFAS No. 123R as of January 1, 2006
and upon adoption, the Company began expensing stock options that were awarded under
the LTCP. These increases were partially offset by a decrease in pension expense
primarily due to the Companys 2005 contribution to the qualified pension plan in
the amount of $24.5 million. Further information regarding the LTCP can be found
in Note 10 of the Notes to Unaudited Consolidated Financial Statements. The increase
in occupancy expense was mostly attributable to the acquisitions of Trust Company
on July 1, 2005 and as we added six branches to our branch network with the Cornerstone
acquisition on January 2, 2006.
These increases for the quarter ended June 30, 2006 were partially offset by decreases in amortization of identifiable intangible assets, outside services and furniture and fixtures expense. The decrease in the amortization of identifiable intangible assets was due to fewer non-compete agreements remaining in 2006 as they began to expire in 2005. The non-compete agreements are being amortized on a straight-line basis over the terms of each agreement. Additionally, the Company experienced a reduction of amortization on the core deposit intangibles, due to the Company utilizing an accelerated method which calls for a higher level of expense in earlier periods, both relating to the Connecticut Bancshares and Alliance acquisitions, partially offset by new amortization of a customer relationship intangible and core deposit intangible recorded in conjunction with the Trust Company and Cornerstone acquisitions. The net decrease in outside services was comprised of various components including reductions in: i) consulting relating to Sarbanes Oxley (SOX), the 2005 LTCP and systems projects; ii) a reduction in data processing fees due to a new contract extension, partially offset by increases due to additional transactional volume related to the acquisitions and iii) outsourced internal audit services for SOX implementation. The decrease in furniture and fixtures expense is comprised of several items but is mainly attributable to a decline in equipment maintenance charges.
On a year-to-date basis, non-interest expense increased $9.8 million to $77.4 million for the six months ended June 30, 2006 from $67.6 million for the six months ended June 30, 2005. The main drivers of this increase are salaries and employee benefits which has the same explanation as outlined in the quarterly discussion above, and conversion and merger related charges. Conversion and merger related charges increased mostly due to consulting and data processing expenses related to Cornerstone for systems conversion charges as well as legal and consulting expenses related to a potential plan of merger that was abandoned during the due-diligence phase in the first quarter of 2006. Other changes include increases in occupancy expenses due to the increased branch network from the acquisitions of Cornerstone and Trust Company and advertising expenses largely due to
30
newspaper, radio and direct mail campaigns for home equity and checking products. These increases were offset by decreases in amortization of identifiable intangible assets and other expenses. The decrease in the amortization of identifiable intangible assets is consistent with the quarterly explanation and the decrease in other expense is largely due to a reduction in the Companys operating insurance premiums.
Income Tax Provision
The income tax expense of $5.9 million for
the three months ended June 30, 2006 resulted in an effective tax rate of 33.1%,
compared to $7.1 million for the three months ended June 30, 2005, which resulted
in an effective tax rate of 32.9%. The increase in the effective tax rate for the
three months ended June 30, 2006 is primarily due to the disallowance of excess
compensation pursuant to Section 162(m) of the Internal Revenue Code.
For the six months ended June 30, 2006, income tax expense was $11.3 million compared to $14.0 million for the six months ended June 30, 2005. The resulting effective tax rates were 33.1% and 33.2%, respectively. The effective tax rate as of June 30, 2006 is representative of the Companys projected effective tax rate for the year.
Financial Condition
Financial Condition Summary
From December 31, 2005 to June 30, 2006,
total assets and liabilities increased approximately $550.8 million and $532.8 million,
respectively, due mainly to increases in loans, investments, deposits and borrowings.
Of the total increases, approximately $211.4 million of assets and approximately
$194.5 million of liabilities are attributable to the Cornerstone acquisition. Stockholders
equity increased $18.0 million to $1.33 billion due primarily to stock issued to
acquire Cornerstone and year-to-date net income, partially offset by treasury shares
acquired, dividends and a decrease in the after tax fair value of investment securities.
Short-Term Investments
At June 30, 2006, short-term investments
were $64.1 million, an increase of $17.6 million, or 37.8% from $46.5 million at
December 31, 2005. This increase was the result of normal daily fluctuations including
changes in deposits and escrow payments.
Investment Securities
The following table presents the amortized
cost and estimated fair values of investment securities at June 30, 2006 and December
31, 2005.
Table 8: Investment Securities
June 30, 2006 | December 31, 2005 | |||||||||||||||
Amortized | Fair | Amortized | Fair | |||||||||||||
(In thousands) | cost | value | cost | value | ||||||||||||
Available for sale | ||||||||||||||||
U.S. Treasury obligations |
$ | 8,838 | $ | 8,609 | $ | 8,877 | $ | 8,745 | ||||||||
U.S. Government sponsored enterprise obligations |
172,178 | 170,596 | 159,008 | 157,386 | ||||||||||||
Corporate obligations |
49,627 | 48,444 | 54,831 | 53,617 | ||||||||||||
Other bonds and obligations |
104,343 | 103,201 | 120,663 | 119,848 | ||||||||||||
Marketable and trust preferred equity securities |
179,375 | 179,034 | 161,122 | 160,806 | ||||||||||||
Mortgage-backed securities |
1,735,133 | 1,678,642 | 1,899,374 | 1,863,069 | ||||||||||||
Total available for sale |
2,249,494 | 2,188,526 | 2,403,875 | 2,363,471 | ||||||||||||
Held to maturity | ||||||||||||||||
Mortgage-backed securities |
328,373 | 325,257 | 87,104 | 86,151 | ||||||||||||
Other bonds |
4,705 | 4,545 | 4,630 | 4,556 | ||||||||||||
Total held to maturity |
333,078 | 329,802 | 91,734 | 90,707 | ||||||||||||
Total securities |
$ | 2,582,572 | $ | 2,518,328 | $ | 2,495,609 | $ | 2,454,178 | ||||||||
At June 30, 2006 the Company had total investments of $2.52 billion, or 35.5%, of total assets. This is an increase of $66.4 million, or 2.7%, from $2.46 billion at December 31, 2005. The increase was primarily the result of purchasing held to maturity mortgage backed securities that were duration match funded against FHLB borrowings.
31
The Companys underlying investment strategy is to purchase hybrid adjustable rate mortgage-backed securities, five and seven year balloon mortgage-backed securities, ten-year pass through mortgage-backed securities and collateralized mortgage obligations based off fifteen-year mortgage collateral. These securities have been emphasized due to their limited extension risk in a rising rate environment and for their monthly cash flows that provide the Company with liquidity. This strategy is also supplemented with select purchases of bullet and callable agency and asset-backed securities. For mortgage-backed securities, the average life when purchased would range between 1.5 and 3.5 years and the maturity dates for Agency obligations would range between one and five years.
SFAS No. 115 requires the Company to designate its securities as held to maturity, available for sale or trading depending on the Companys intent regarding its investments at the time of purchase. The Company does not currently maintain a portfolio of trading securities. As of June 30, 2006, $2.19 billion, or 86.8%, of the portfolio, was classified as available for sale and $333.1 million of the portfolio was classified as held to maturity. The net unrealized loss on securities classified as available for sale as of June 30, 2006 was $61.0 million compared to an unrealized loss of $40.4 million as of December 31, 2005. The depreciation in the market value of securities available for sale was primarily due to fluctuations in market interest rates during the period. Management has performed a review of all investments with unrealized losses and determined that none of these investments had other-than-temporary impairment.
Lending Activities
The Company makes residential real estate
loans secured by one-to-four family residences, commercial real estate loans, residential
and commercial construction loans, commercial business loans, multi-family loans,
home equity loans and lines of credit and other consumer loans. Table 9 displays
the balances of the Companys loan portfolio as of June 30, 2006 and December 31,
2005.
Table 9: Loan Portfolio
June 30, 2006 | December 31, 2005 | ||||||||||||||
Percent | Percent | ||||||||||||||
(Dollars in thousands) | Amount | of Total | Amount | of Total | |||||||||||
Residential real estate | $ | 1,874,160 | 50.5 | % | $ | 1,650,527 | 50.4 | % | |||||||
Commercial real estate | 903,192 | 24.4 | 768,582 | 23.4 | |||||||||||
Commercial business | 350,403 | 9.4 | 314,562 | 9.6 | |||||||||||
Home equity and equity lines of credit | 559,078 | 15.1 | 520,290 | 15.9 | |||||||||||
Other consumer | 21,282 | 0.6 | 22,745 | 0.7 | |||||||||||
Total loans | $ | 3,708,115 | 100.0 | % | $ | 3,276,706 | 100.0 | % | |||||||
As shown in Table 9, gross loans were $3.71 billion, up $431.4 million, or 13.2%, at June 30, 2006 from year-end 2005. The Company experienced an increase in all but one loan category and was primarily attributable to the acquisition of Cornerstone, loan purchases and an increase in loan originations.
Residential real estate loans continue to represent the largest segment of the Companys loan portfolio as of June 30, 2006, comprising 50.5% of gross loans. The increase of $223.6 million is due to loan portfolio purchases, originations and balances acquired from Cornerstone, partially offset by a decrease in organic loan balances. The purchased portfolio includes adjustable rate and 10 and 15 year fixed rate residential real estate loans with property locations throughout the United States, with the majority in the Northeast. For 2006, loan purchases accounted for $260.0 million of new residential real estate loans and were primarily purchased with cash flows from the investment portfolio and funds borrowed from the FHLB. The acquisition of Cornerstone added approximately $12.1 million in residential loans.
Commercial business loans increased $35.8 million to $350.4 million at June 30, 2006, primarily due to $76.0 million in originations and $35.5 million acquired through the Cornerstone acquisition, partially offset by payoffs and loan maturities. Commercial real estate loans increased $134.6 million from December 31, 2005 to June 30, 2006. The increase was attributable to the acquisition of Cornerstone which added approximately $86.7 million to the portfolio as well as increases in both the number and average balance of organic loan originations partially as a result of the Companys competitive position in the Connecticut commercial real estate lending market subsequent to the acquisitions of Cornerstone, Connecticut Bancshares and Alliance. The Companys continued strategy is to build a larger percentage of the Companys assets in commercial loans including real estate, construction and other commercial loans. To accomplish this goal, the Company is expanding penetration of its geographical target area as well as promoting stronger business development efforts to obtain new business banking relationships, while maintaining strong credit quality.
32
Home equity loans and lines of credit increased
$38.8 million from December 31, 2005 to June 30, 2006, with Cornerstone contributing
approximately $2.6 million of the increase. These products were promoted by the
Company through attractive pricing and marketing campaigns as the Company is committed
to growing this loan segment while maintaining credit quality as a higher yielding
alternative to investments.
Asset Quality
As displayed in Table 10, nonperforming
assets at June 30, 2006 increased to $9.7 million compared to $7.4 million at December
31, 2005. The increase is primarily due to an increase in the commercial real estate
portfolio, which includes commercial construction loans, as a result of the Cornerstone
acquisition offset by a decrease in residential real estate due to loans that were
either brought to a current status and reinstated, or that paid off during the six
months ended June 30, 2006. Nonperforming loans as a percent of total loans outstanding
at June 30, 2006 was 0.26 %, up from 0.23% at December 31, 2005. The allowance for
loan losses to nonperforming loans ratio, a general measure of coverage adequacy,
was 392.82% at June 30, 2006, down from the ratio of 481.02% at year-end 2005. The
allowance for loan losses to total loans was 1.02% at the end of the June 30, 2006,
compared to 1.08% at December 31, 2005.
Table 10: Nonperforming Assets
June 30, | December 31, | ||||||||
(Dollars in thousands) | 2006 | 2005 | |||||||
Nonaccruing loans (1) | |||||||||
Real estate loans |
|||||||||
Residential (one- to four- family) |
$ | 709 | $ | 1,808 | |||||
Commercial |
5,908 | 2,889 | |||||||
Total real estate loans |
6,617 | 4,697 | |||||||
Commercial business |
2,951 | 2,446 | |||||||
Consumer loans |
|||||||||
Home equity and equity lines of credit |
78 | 29 | |||||||
Other consumer |
17 | 219 | |||||||
Total consumer loans |
95 | 248 | |||||||
Total Nonaccruing loans |
9,663 | 7,391 | |||||||
Real Estate Owned | - | - | |||||||
Total nonperforming assets |
$ | 9,663 | $ | 7,391 | |||||
Allowance for loan losses as a percent of total loans (2) |
1.02 | % | 1.08 | % | |||||
Allowance for loan losses as a percent of total nonperforming loans |
392.82 | % | 481.02 | % | |||||
Total nonperforming loans as a percentage of total loans (2) |
0.26 | % | 0.23 | % | |||||
Total nonperforming assets as a percentage of total assets |
0.14 | % | 0.11 | % |
Allowance For Loan Losses
As displayed in Table 11 below, during the
three months ended June 30, 2006, the Company recorded net charge-offs of $195,000,
compared to net charge-offs of $498,000 for the three months ended June 30, 2005.
For the six months ended June 30, 2006, the Company recorded net recoveries of $182,000
primarily due to the receipt of significant cash recoveries, including $433,000
received from one commercial relationship in the first quarter. Management believes
that the allowance for loan losses is adequate and consistent with positive asset
quality and delinquency indicators. The Company had a loan loss allowance of $38.0
million and $35.6 million at June 30, 2006 and December 31, 2005, respectively.
The June 30, 2006 allowance includes $2.2 million which was acquired as a result
of the Cornerstone acquisition in January 2006.
33
Table 11: Schedule of Allowance for Loan Losses
At or For the Three Months | At or For the Six Months | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
(Dollars in thousands) | 2006 | 2005 | 2006 | 2005 | ||||||||||||
Balance at beginning of period | $ | 38,153 | $ | 36,679 | $ | 35,552 | $ | 36,163 | ||||||||
Net allowances gained through acquisition | - | - | 2,224 | - | ||||||||||||
Provision for loan losses | - | - | - | - | ||||||||||||
Charge-offs | ||||||||||||||||
Residential and commercial real estate loans |
116 | 2 | 116 | 21 | ||||||||||||
Commercial business loans |
350 | 836 | 669 | 1,310 | ||||||||||||
Consumer loans |
100 | 75 | 189 | 156 | ||||||||||||
Total charge-offs |
566 | 913 | 974 | 1,487 | ||||||||||||
Recoveries | ||||||||||||||||
Residential and commercial real estate loans |
16 | 177 | 172 | 191 | ||||||||||||
Commercial business loans |
317 | 190 | 902 | 1,231 | ||||||||||||
Consumer loans |
38 | 48 | 82 | 83 | ||||||||||||
Total recoveries |
371 | 415 | 1,156 | 1,505 | ||||||||||||
Net charge-offs (recoveries) | 195 | 498 | (182 | ) | (18 | ) | ||||||||||
Balance at end of period | $ | 37,958 | $ | 36,181 | $ | 37,958 | $ | 36,181 | ||||||||
Net charge-offs (recoveries) to average loans | 0.02 | % | 0.06 | % | (0.01 | )% | - | % | ||||||||
Allowance for loan losses to total loans | 1.02 | 1.13 | 1.02 | 1.13 | ||||||||||||
Allowance for loan losses to nonperforming loans | 392.82 | 385.23 | 392.82 | 385.23 | ||||||||||||
Net charge-offs (recoveries) to allowance for loan losses | 0.51 | 1.38 | (0.48 | ) | (0.05 | ) | ||||||||||
Total recoveries to total charge-offs | 65.49 | 45.45 | 118.69 | 101.21 |
Intangible Assets
At June 30, 2006, the Company had intangible
assets of $508.2 million, an increase of $31.2 million, or 6.5%, from $477.0 million
at December 31, 2005. The increase was predominately due to the acquisition of Cornerstone
on January 2, 2006 which resulted in the Company recording additional goodwill of
$24.9 million and a core deposit intangible of $6.8 million, partially offset by
year-to-date amortization expense of $4.9 million. Also, in accordance with the
definitive agreement the Company previously entered into with Trust Company, additional
merger consideration in the form of Company stock and cash was remitted to Trust
Company shareholders, which resulted in the Company recording an additional $4.3
million of goodwill. In accordance with SFAS No. 141, the assets acquired and liabilities
assumed are recorded based on their fair values on the acquisition date.
Identifiable intangible assets are amortized on a straight-line or accelerated basis, over their estimated lives. Management assesses the recoverability of intangible assets subject to amortization 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. Goodwill is not amortized, but instead is reviewed for impairment on an annual basis. For 2006, the goodwill evaluation occurred during the first quarter and no impairment was recorded. Also, no events or circumstances subsequent to that evaluation indicate that the carrying value of the Companys goodwill may not be recoverable.
Deposits and Borrowings
The Companys traditional sources of funds are the deposits it gathers, borrowings
from the FHLB and customer repurchase agreements. The Companys FHLB borrowings
are collateralized by stock in the FHLB, certain mortgage loans and other investments.
Repayment and prepayment of loans and securities, proceeds from sales of loans and
securities and proceeds from maturing securities are also sources of funds for the
Company.
Table 12: Deposits |
June 30, | December 31, | |||||||
(In thousands) | 2006 | 2005 | ||||||
Savings | $ | 809,884 | $ | 781,346 | ||||
Money market | 581,736 | 554,079 | ||||||
NOW | 386,637 | 342,268 | ||||||
Demand | 485,519 | 486,528 | ||||||
Time | 1,690,398 | 1,633,891 | ||||||
Total deposits |
$ | 3,954,174 | $ | 3,798,112 | ||||
34
As displayed in Table 12, deposits increased $156.1 million, or 4.1%, as compared to December 31, 2005, primarily attributable to the acquisition of Cornerstone which added approximately $178.3 million in deposits. This increase was partially offset by a decrease in organic deposit balances, primarily demand deposits. The Company focused on continuing its strategy of offering premium time deposit rates to customers who either have or establish a checking relationship with the Company coupled with the offering of free checking and savings products to both retail and commercial customers while minimizing any negative effect on its net interest margin.
Table 13: Borrowings
June 30, | December 31, | |||||||
(In thousands) | 2006 | 2005 | ||||||
FHLB advances (1) | $ | 1,581,132 | $ | 1,191,280 | ||||
Repurchase agreements | 160,054 | 179,970 | ||||||
Mortgage loans payable | 1,655 | 1,716 | ||||||
Junior subordinated debentures issued to affiliated trusts (2) | 7,709 | 7,809 | ||||||
Total borrowings |
$ | 1,750,550 | $ | 1,380,775 | ||||
The acquisition fair value adjustments (premiums) are being amortized as an adjustment to interest expense on borrowings over their remaining term using the level yield method.
Table 13 above summarizes the Companys recorded borrowings of $1.75 billion at June 30, 2006. Borrowings increased $369.8 million, or 26.8%, from the balance recorded at December 31, 2005, mainly in FHLB advances. This increase in FHLB advances was due to funding loan growth and investment purchases, while managing interest rate risk and liquidity. At June 30, 2006, the majority of the Companys outstanding FHLB advances were at fixed rates, while only $25.0 million had floating rates.
Stockholders Equity
Total stockholders
equity equaled $1.33 billion at June 30, 2006; $18.0 million higher than the balance
at December 31, 2005. The increase consisted primarily of common stock issued for
the Cornerstone acquisition and contingent shares issued for Trust Company of $35.8
million, net income of $22.8 million, stock option and restricted stock expense
of $6.3 million and $1.8 million of released ESOP shares. These increases were partially
offset by decreases due to shares repurchased of $23.4 million, dividends of $11.8
million and a decrease of $13.5 million in other comprehensive income resulting
from an after tax depreciation in the fair market value of investments available
for sale. For information regarding our compliance with applicable capital requirements,
see Liquidity and Capital Position below. Book value per share amounted to $12.11
and $12.05 at June 30, 2006 and December 31, 2005, respectively.
Asset and Liability Management and Management of Market and Interest Rate Risk
General
Market risk is the exposure to losses resulting
from changes in interest rates, foreign currency exchange rates, commodity prices
and equity prices. The Company has no foreign currency or commodity price risk.
Credit risk related to investment securities is low as substantially all are investment
grade or have government guarantees. The chief market risk factor affecting financial
condition and operating results is interest rate risk. Interest rate risk is the
exposure of current and future earnings and capital arising from adverse movements
in interest rates. This risk is managed by periodic evaluation of the interest rate
risk inherent in certain balance sheet accounts, determination of the level of risk
considered appropriate given the Companys capital and liquidity requirements, business
strategy, performance objectives and operating environment and maintenance of such
risks within guidelines approved by the Board of Directors. Through such management,
the Company seeks to reduce the vulnerability of its net earnings to changes in
interest rates. The Asset/Liability Committee, comprised of several senior executives,
is responsible for managing interest rate risk. On a quarterly basis, the Board
of Directors reviews the Companys gap position and interest rate sensitivity exposure
described below and Asset/Liability Committee minutes detailing the Companys activities
and strategies, the effect of those strategies on the Companys operating results,
interest rate risk position and the effect changes in
35
interest rates
would have on the Companys net interest income. The extent of movement of interest
rates is an uncertainty that could have a negative impact on earnings.
The principal
strategies used to manage interest rate risk include (i) emphasizing the origination,
purchase and retention of adjustable rate loans, and the origination and purchase
of loans with maturities matched with those of the deposits and borrowings funding
the loans, (ii) investing in debt securities with relatively short maturities and/or
average lives and (iii) classifying a significant portion of its investment portfolio
as available for sale so as to provide sufficient flexibility in liquidity management.
The Company employs two approaches to interest rate risk measurement; gap analysis and income simulation analysis.
Gap Analysis
The matching
of assets and liabilities may be analyzed by examining the extent to which such
assets and liabilities are interest rate sensitive and by monitoring a banks interest
rate sensitivity gap. An asset or liability is deemed to be interest rate sensitive
within a specific time period if it will mature or reprice within that time period.
The interest rate sensitivity gap is defined as the difference between the amount
of interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within that same
time period. At June 30, 2006, the Companys cumulative one-year interest rate gap
(which is the difference between the amount of interest-earning assets maturing
or repricing within one year and interest-bearing liabilities maturing or repricing
within one year), was negative $429.9 million, or negative 6.04% of total assets.
The Banks approved policy limit is plus or minus 20%. A gap is considered positive
when the amount of interest rate sensitive assets exceeds the amount of interest
rate sensitive liabilities. A gap is considered negative when the amount of interest
rate sensitive liabilities exceeds the amount of interest rate sensitive assets.
During a period of rising interest rates, a negative gap would tend to adversely
affect net interest income while a positive gap would tend to result in an increase
in net interest income. Conversely, during a period of falling interest rates, a
negative gap would tend to result in an increase in net interest income while a
positive gap would tend to adversely affect net interest income.
Income Simulation Analysis
Income simulation analysis considers the maturity and repricing characteristics
of assets and liabilities, as well as the relative sensitivities of these balance
sheet components over a range of interest rate scenarios. Tested scenarios include
instantaneous rate shocks, rate ramps over a six-month or one-year period, static
rates, non-parallel shifts in the yield curve and a forward rate scenario. The simulation
analysis is used to measure the exposure of net interest income to changes in interest
rates over a specified time horizon, usually a three-year period. Simulation analysis
involves projecting future balance sheet structure and interest income and expense
under the various rate scenarios. The Companys internal guidelines on interest
rate risk specify that for all interest rate scenarios, the estimated net interest
margin over the next 12 months should decline by less than 12% as compared to the
forecasted net interest margin in the base case scenario. However, in practice,
interest rate risk is managed well within these 12% guidelines.
For the base case rate scenario the forward yield curve as of June 30, 2006 was utilized. This resulted in a yield curve that increased approximately 30 basis points at the front end of the yield curve and increased approximately 5 basis points at the long end of the yield curve. The overnight rate was modeled to remain flat to the June 30, 2006 level. This interest rate scenario most closely approximates managements expectations for interest rate movements over the next twelve months.
As of June 30, 2006, the Companys estimated exposure as a percentage of estimated net interest margin for the next twelve-month period as compared to the forecasted net interest margin in the base case scenario are as follows:
Percentage change in | ||||
estimated net interest margin | ||||
over twelve months | ||||
100 basis point instantaneous and sustained increase in rates | 0.13 | % | ||
100 basis point instantaneous and sustained decrease in rates | -1.62 | % | ||
In the current rate environment, an instantaneous and sustained downward rate shock of 100 basis points is a realistic representation of the potential risk facing the Company due to declining rates. For an increase in rates, a 100 basis points instantaneous and sustained rate shock is also a relevant representation of potential risk given the current rate structure and the current state of the economy.
Based on the scenarios above, net interest income would decrease slightly in the 12-month period after an immediate decrease in rates, and would increase slightly after an immediate increase in rates. Computation of prospective effects of hypothetical interest rate changes are based on a number of assumptions including the level of market interest rates, the degree to which certain assets and liabilities with similar maturities or periods to repricing react to changes in market interest rates, the degree to
36
which non-maturity deposits react to changes in market rates, the expected prepayment rates on loans and investments, the degree to which early withdrawals occur on time deposits and other deposit flows. As a result, these computations should not be relied upon as indicative of actual results. Further, the computations do not reflect any actions that management may undertake in response to changes in interest rates.
Liquidity and Capital Position
Liquidity is the ability to meet current and future short-term financial
obligations. The Company further defines liquidity as the ability to respond to
the needs of depositors and borrowers as well as maintaining the flexibility to
take advantage of investment opportunities. The Companys primary sources of funds
consist of deposit inflows, loan repayments and sales, maturities, paydowns and
sales of investment and mortgage-backed securities, borrowings from the Federal
Home Loan Bank and repurchase agreements.
The Company has expanded its use of borrowings from the Federal Home Loan Bank to fund purchases of investments and residential mortgage loans while managing interest rate risk and liquidity. At June 30, 2006, total borrowings from the Federal Home Loan Bank amounted to $1.57 billion, exclusive of $15.7 million in purchase accounting adjustments, and the Company had the capacity to increase that total to $1.77 billion. Additional borrowing capacity would be available by pledging eligible securities as collateral. Depending on market conditions and the Companys liquidity and gap position, the Company may continue to borrow from the Federal Home Loan Bank or initiate borrowings through the repurchase agreement market. At June 30, 2006 the Companys repurchase agreement lines of credit totaled $100.0 million, $75.0 million of which was available on that date.
The Companys most liquid assets are cash and due from banks, short-term investments and debt securities. The levels of these assets are dependent on the Companys operating, financing, lending and investment activities during any given period. At June 30, 2006, cash and due from banks, short-term investments and debt securities maturing within one year amounted to $433.6 million, or 6.1% of total assets.
The Company believes that the cash and due from banks, short-term investments and debt securities maturing within one year, coupled with the borrowing line at the Federal Home Loan Bank and the available repurchase agreement lines at selected broker/dealers, provide for sufficient liquidity to meet its operating needs.
At June 30, 2006, the Company had commitments to originate loans, unused outstanding lines of credit, standby letters of credit and undisbursed proceeds of loans totaling $744.7 million. The Company anticipates that it will have sufficient funds available to meet its current loan commitments. Certificates of deposit maturing within one year from June 30, 2006 are $1.44 billion.
At June 30, 2006, the Companys Tier 1 leverage ratio, a primary measure of regulatory capital was $866.7 million, or 13.6%, which is above the threshold level of $318.3 million, or 5% to be considered well-capitalized. The Tier 1 risk-based capital ratio stood at 22.9% and the Total risk-based capital ratio stood at 23.9%. The Bank also exceeded all of its regulatory capital requirements with leverage capital of $645.8 million, or 10.2% of average assets, which is above the required level of $253.9 million or 4%, the Tier 1 risk-based capital ratio was 17.2% and the Total risk-based capital ratio was 18.2%. These ratios qualify the Bank as a well capitalized institution under federal capital guidelines.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Quantitative and qualitative disclosures about the Companys market risk appears under Item 2, Managements Discussion and Analysis of Financial Condition and Results of Operations, on pages 22 through 37 under the caption Asset and Liability Management and Management of Market and Interest Rate Risk.
Item 4. Controls and Procedures
The Companys management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) as of June 30, 2006. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.
Disclosure controls and procedures are our controls and other procedures that are designed to ensure that the information required to be disclosed by us in our reports filed or submitted under the Securities Exchange Act of 1934 (the Exchange Act) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports filed under the Exchange Act is accumulated and communicated to our
37
management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure in the second quarter 2006.
In addition, based on that evaluation, no change in the Companys internal control over financial reporting occurred during the quarter ended June 30, 2006 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are not involved in any pending legal proceedings other than as described
below and 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.
A conversion-related civil action was brought against the Company in June, 2004. This action was brought in U.S. District Court, New Haven, Connecticut. The plaintiffs are 10 entities who claim that their right to purchase stock in the Companys conversion offering was improperly limited by the Company because of its allegedly wrongful determination that those entities were acting in concert with other entities whose subscription rights were also restricted, and because the Company improperly communicated that determination to the plaintiffs. Monetary damages are sought based on the number of shares they allege they should have been allowed to purchase multiplied by the stocks initial appreciation following the conversion. The Company disputes the plaintiffs allegations and intends to defend the case vigorously. On November 3, 2005, the Court granted Summary Judgment in favor of the Company and denied the Summary Judgment motion of the plaintiffs. The plaintiffs appealed the decision of the District Court to the United States Court of Appeals for the Second Circuit. Both sides have briefed their positions and the Appeals Court will consider the appeal in its normal course of business.
Item 1A. Risk Factors
There have been no material
changes in our risk factors from those disclosed in our 2005 Annual Report on Form
10-K.
(a) | None. | |
(b) | Not applicable. | |
(c) | The following table sets forth information about the Companys stock repurchases for the three months ended June 30, 2006. |
(a) Total Number of Shares Purchased |
(b) Average Price Paid per Share (includes commission) |
(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
(d) Maximum Number (or Approximate Dollar Value) of Shares that may Yet Be Purchased Under the Plans or Programs |
|
Period |
||||
04/01/06 - 04/30/06 | 0 | $ - | 0 | 10,000,000 shares |
05/01/06 - 05/31/06 |
192,400 |
$14.0012 |
192,400 |
9,807,600 shares |
06/01/06 - 06/30/06 |
120,500 |
$14.0079 |
120,500 |
9,687,100 shares |
Total |
312,900 |
$14.0038 |
312,900 |
On January 31, 2006, the Companys second stock repurchase plan was announced and provides for the repurchase of up to 10.0 million shares of common stock of the Company. There is no set expiration date for this plan.
Item 3. Defaults Upon Senior Securities
None.
38
Item 4. Submission of Matters to a Vote of Security Holders
(a) | The Company
held its annual meeting on April 11, 2006 (Annual Meeting). |
|
(b) | The following
individuals were re-elected as directors for three-year terms at the Annual Meeting:
Robert J. Lyons, Jr., Eric A. Marziali, Julia M. McNamara, Peyton R. Patterson,
Gerald B. Rosenberg. The other continuing directors are: Roxanne J. Coady, John
F. Croweak, Sheila B. Flanagan, Richard J. Grossi, Joseph Rossi, Cornell Scott,
Nathaniel D. Woodson and Joseph A. Zaccagnino. |
|
(c) | There were
110,172,326 shares of Common Stock eligible to be voted at the Annual Meeting and
97,407,879 shares were represented at the meeting by the holders thereof, which
constituted a quorum. The items voted upon at the Annual Meeting and vote for each
proposal were as follows: |
1. | Election of directors for Three-Year Terms (Proposal 1). | ||||||
Director | For | Withheld | |||||
Robert J. Lyons, Jr. | 94,514,123 | 2,893,757 | |||||
Eric A. Marziali | 93,986,559 | 3,421,321 | |||||
Julia M. McNamara | 94,456,208 | 2,951,671 | |||||
Peyton R. Patterson | 93,733,010 | 3,674,869 | |||||
Gerald B. Rosenberg | 94,628,105 | 2,779,774 | |||||
There were no abstentions or broker non-votes for any of the nominees. | |||||||
2. | Ratification of Appointment of PricewaterhouseCoopers, LLP as independent auditors of the Company for the fiscal year ending December 31, 2006 (Proposal 2). |
For | Against | Abstain | |
93,110,665 | 1,148,624 | 148,590 | |
Item 5. Other Information
None.
Exhibit Number |
3.1 | Amended and
Restated Certificate of Incorporation of NewAlliance Bancshares, Inc. Incorporated
herein by reference is Exhibit 3.1 filed with the Companys Quarterly Report on
Form 10-Q, filed August 13, 2004. |
|
3.2 | Bylaws of
NewAlliance Bancshares, Inc. Incorporated herein by reference is Exhibit 3.2 filed
with the Companys Quarterly Report on Form 10-Q, filed August 13, 2004. |
|
4.1 | See Exhibit
3.1, Amended and Restated Certificate of Incorporation and Exhibit 3.2, Bylaws of
NewAlliance Bancshares, Inc. |
|
10.1 | NewAlliance
Bank Deferred Compensation Plan. Incorporated herein by reference is Exhibit 10.2
filed with the Registrants Registration Statement on Form S-1, Registration No.
333-109266, filed September 30, 2003. |
|
10.2 | Fourth Amendment
to NewAlliance Bank Supplemental Executive Retirement Plan. Incorporated herein
by reference is Exhibit 10.3.2 filed with Pre-Effective Amendment No. 1 to the Registrants Registration Statement on Form S-1, Registration No. 333-109266, filed December
12, 2003. |
|
10.2.1 | NewAlliance
Bank 2004 Supplemental Executive Retirement Plan. Incorporated herein by reference
is Exhibit 10.3.3 filed with Pre-Effective Amendment No. 1 to the Registrants Registration
Statement on Form S-1, Registration No. 333-109266, filed December 12, 2003. |
39
10.3 | NewAlliance
Bancshares, Inc. Employee Stock Ownership Plan Supplemental Executive Retirement
Plan. Incorporated herein by reference is Exhibit 10.4 filed with Pre-Effective
Amendment No. 1 to the Registrants Registration Statement on Form S-1, Registration
No. 333-109266, filed December 12, 2003. |
|
10.4 | The NewAlliance
Bank 401(k) Plan Supplemental Executive Retirement Plan. (Amended and Restated Effective
December 31, 2004) Incorporated herein by reference is Exhibit 10.4 filed with the
Companys Quarterly Report on Form 10-Q, filed November 9, 2005. |
|
10.5 | NewAlliance
Bank Executive Incentive Plan. Incorporated herein by reference is Exhibit 10.5
filed with the Companys Quarterly Report on Form 10-Q, filed May 8, 2006. |
|
10.6 | Employee Severance
Plan. Incorporated herein by reference is Exhibit 10.8 filed with Pre-Effective
Amendment No. 1 to the Registrants Registration Statement on Form S-1, Registration
No. 333-109266, filed December 12, 2003. |
|
10.7.1 | Amended and
Restated Employment Agreement between NewAlliance Bancshares and NewAlliance Bank
and Peyton R. Patterson, effective January 3, 2006. Incorporated herein by reference
is Exhibit 10.7.1 filed with the Companys Current Report on Form 8-K, filed January
6, 2006. |
|
10.7.2 | Amended and
Restated Employment Agreement between NewAlliance Bancshares and NewAlliance Bank
and Merrill B. Blanksteen, effective January 3, 2006. Incorporated herein by reference
is Exhibit 10.7.2 filed with the Companys Current Report on Form 8-K, filed January
6, 2006. |
|
10.7.3 | Amended and
Restated Employment Agreement between NewAlliance Bancshares and NewAlliance Bank
and Gail E.D. Brathwaite, effective January 3, 2006. Incorporated herein by reference
is Exhibit 10.7.3 filed with the Companys Current Report on Form 8-K, filed January
6, 2006. |
|
10.7.4 | Intentionally
omitted. |
|
10.7.5 | Amended and
Restated Employment Agreement between NewAlliance Bank and Diane L. Wishnafski,
effective January 3, 2006. Incorporated herein by reference is Exhibit 10.7.5 filed
with the Companys Current Report on Form 8-K, filed January 6, 2006. |
|
10.7.6 | Amended and
Restated Employment Agreement between NewAlliance Bank and Brian S. Arsenault, effective
June 27, 2006 (filed herewith). |
|
10.7.7 | Amended and
Restated Employment Agreement between NewAlliance Bank and J. Edward Diamond, effective
January 3, 2006. Incorporated herein by reference is Exhibit 10.7.7 filed with the
Companys Current Report on Form 8-K, filed January 6, 2006. |
|
10.7.8 | Amended and
Restated Employment Agreement between NewAlliance Bank and Donald T. Chaffee, effective
January 3, 2006. Incorporated herein by reference is Exhibit 10.7.8 filed with the
Companys Current Report on Form 8-K, filed January 6, 2006. |
|
10.7.9 | Form of Change
In Control Agreement dated as of January 3, 2006 between NewAlliance Bank and Paul
A. McCraven. Incorporated herein by reference is Exhibit 10.7.9 filed with the Companys Current Report on Form 8-K, filed January 6, 2006. |
|
10.7.10 | Employment
Agreement between NewAlliance Bank and Koon-Ping Chan, effective June 27, 2006 (filed
herewith). |
|
10.8.1 | Form of Stock
Option Agreement (for outside directors). Incorporated herein by reference is Exhibit
10.8.1 filed with the Companys Quarterly Report on Form 10-Q, filed August 9, 2005. |
|
10.8.2 | Form of Stock
Option Agreement (for employees, including senior officers). Incorporated herein
by reference is Exhibit 10.8.2 filed with the Companys Quarterly Report on Form
10-Q, filed August 9, 2005. |
|
10.9.1 | Form of Restricted
Stock Award Agreement (for outside directors). Incorporated herein by reference
is Exhibit 10.9.1 filed with the Companys Quarterly Report on Form 10-Q, filed
August 9, 2005. |
|
10.9.2 | Form of Restricted
Stock Award Agreement (for employees, including senior officers). Incorporated herein
by reference is Exhibit 10.9.2 filed with the Companys Quarterly Report on Form
10-Q, filed August 9, 2005. |
|
10.10 | NewAlliance
Bancshares, Inc. 2005 Long-Term Compensation Plan. Incorporated herein by reference
is Exhibit 4.3 filed with the Companys Registration Statement on Form S-8, filed
November 4, 2005. |
|
14 | Code of Ethics
for Senior Financial Officers. Incorporated herein by reference is Exhibit 14 filed
with the Companys Annual Report on Form 10-KT, filed March 30, 2004. |
|
21 | Subsidiaries
of NewAlliance Bancshares, Inc. and NewAlliance Bank. Incorporated herein by reference
is Exhibit 21 filed with the Companys Annual Report on Form 10-K, filed March 21,
2005. |
|
31.1 | Certification
of Peyton R. Patterson pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934 (filed herewith). |
|
32.2 | Certification
of Merrill B. Blanksteen pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934 (filed herewith). |
|
32.1 | Certification
of Peyton R. Patterson pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
|
32.2 | Certification
of Merrill B. Blanksteen pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
40
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. | |||
NewAlliance Bancshares, Inc. | |||
By: | /s/ Merrill
B. Blanksteen |
||
Merrill B. Blanksteen | |||
Executive Vice President, Chief Financial Officer and Treasurer | |||
(principal financial officer) | |||
Date: | August 7,
2006 |
41