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 March 31, 2009.
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was requires to submit and post such files). [ ] Yes [ X ] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer X | Accelerated filer | ||
Non-accelerated filer | Smaller reporting company |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [ X ] No
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
Common Stock (par value $.01) | 106,788,675 | ||||
Class | Outstanding at May 6, 2009 |
TABLE OF CONTENTS
Part I FINANCIAL INFORMATION | ||||
Page No. | ||||
Item 1. |
Financial Statements (Unaudited) | |||
Consolidated Balance Sheets at March 31, 2009 and December 31, 2008 | 3 | |||
Consolidated Statements of Income for the three months ended March 31, 2009 and 2008 | 4 | |||
Consolidated Statement of Changes in Stockholders Equity for the three months ended March 31, 2009 | 5 | |||
Consolidated Statements of Cash Flows for the three months ended March 31, 2009 and 2008 | 6 | |||
Notes to Unaudited Consolidated Financial Statements | 7 | |||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations | 25 | ||
Item 3. |
Quantitative and Qualitative Disclosures about Market Risk | 45 | ||
Item 4. |
Controls and Procedures | 45 | ||
Item 4T. |
Controls and Procedures | 45 | ||
Part II OTHER INFORMATION | ||||
Item 1. |
Legal Proceedings | 45 | ||
Item 1A. |
Risk Factors | 45 | ||
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds | 49 | ||
Item 3. |
Defaults Upon Senior Securities | 50 | ||
Item 4. |
Submission of Matters to a Vote of Security Holders | 50 | ||
Item 5. |
Other Information | 50 | ||
Item 6. |
Exhibits | 51 | ||
SIGNATURES |
2
NewAlliance Bancshares,
Inc.
Consolidated Balance Sheets
March 31, | December 31, | |||||||
(In thousands, except per share data) (Unaudited) | 2009 | 2008 | ||||||
Assets | ||||||||
Cash and due from banks, noninterest bearing |
$ | 137,381 | $ | 98,131 | ||||
Short term investments |
80,000 | 55,000 | ||||||
Cash and cash equivalents |
217,381 | 153,131 | ||||||
Investment securities available for sale (note 5) |
2,085,958 | 1,928,562 | ||||||
Investment securities held to maturity (note 5) |
312,095 | 309,782 | ||||||
Loans held for sale (includes $13,787 measured at fair value at March 31, 2009) |
20,413 | 5,361 | ||||||
Loans, net (note 6) |
4,882,113 | 4,912,874 | ||||||
Federal Home Loan Bank of Boston stock |
120,821 | 120,821 | ||||||
Premises and equipment, net |
58,307 | 59,419 | ||||||
Cash surrender value of bank owned life insurance |
137,476 | 136,868 | ||||||
Goodwill (note 7) |
527,167 | 527,167 | ||||||
Identifiable intangible assets (note 7) |
41,732 | 43,860 | ||||||
Other assets (note 8) |
95,136 | 101,673 | ||||||
Total assets |
$ | 8,498,599 | $ | 8,299,518 | ||||
Liabilities | ||||||||
Deposits (note 9) |
||||||||
Non-interest bearing |
$ | 494,412 | $ | 494,978 | ||||
Savings, interest-bearing checking and money market |
2,489,041 | 2,178,593 | ||||||
Time |
1,678,706 | 1,774,259 | ||||||
Total deposits |
4,662,159 | 4,447,830 | ||||||
Borrowings (note 10) |
2,341,761 | 2,376,496 | ||||||
Other liabilities |
100,502 | 93,976 | ||||||
Total liabilities |
7,104,422 | 6,918,302 | ||||||
Commitments and contingencies (note 14) |
||||||||
Stockholders Equity | ||||||||
Preferred stock, $0.01 par value; authorized 38,000 shares; none issued |
- | - | ||||||
Common stock, $0.01 par value; authorized 190,000 shares; issued 121,486 shares at March 31, 2009 and December 31, 2008 |
1,215 | 1,215 | ||||||
Additional paid-in capital |
1,245,544 | 1,245,679 | ||||||
Unallocated common stock held by ESOP |
(91,465 | ) | (92,380 | ) | ||||
Unearned restricted stock compensation |
(16,820 | ) | (18,474 | ) | ||||
Treasury stock, at cost (14,697 shares at March 31, 2009 and 14,427 shares at December 31, 2008) |
(203,531 | ) | (200,428 | ) | ||||
Retained earnings |
472,130 | 467,580 | ||||||
Accumulated other comprehensive loss (note 16) |
(12,896 | ) | (21,976 | ) | ||||
Total stockholders equity |
1,394,177 | 1,381,216 | ||||||
Total liabilities and stockholders equity |
$ | 8,498,599 | $ | 8,299,518 | ||||
See accompanying notes to consolidated financial statements.
3
NewAlliance Bancshares, Inc.
Consolidated Statements of Income
Three Months Ended | ||||||||
March 31, | ||||||||
(In thousands, except per share data) (Unaudited) | 2009 | 2008 | ||||||
Interest and dividend income | ||||||||
Residential real estate loans |
$ | 34,594 | $ | 33,278 | ||||
Commercial real estate loans |
17,617 | 18,887 | ||||||
Commercial business loans |
5,711 | 7,365 | ||||||
Consumer loans |
8,707 | 10,287 | ||||||
Investment securities |
27,962 | 30,393 | ||||||
Federal funds sold and other short-term investments |
164 | 284 | ||||||
Federal Home Loan Bank of Boston stock |
- | 1,720 | ||||||
Total interest and dividend income |
94,755 | 102,214 | ||||||
Interest expense | ||||||||
Deposits |
22,840 | 29,998 | ||||||
Borrowings |
23,922 | 26,210 | ||||||
Total interest expense |
46,762 | 56,208 | ||||||
Net interest income before provision for loan losses |
47,993 | 46,006 | ||||||
Provision for loan losses | 4,100 | 1,700 | ||||||
Net interest income after provision for loan losses |
43,893 | 44,306 | ||||||
Non-interest income | ||||||||
Depositor service charges |
5,953 | 6,632 | ||||||
Loan and servicing income (loss), net |
(181 | ) | 381 | |||||
Trust fees |
1,259 | 1,670 | ||||||
Investment management, brokerage & insurance fees |
2,250 | 2,532 | ||||||
Bank owned life insurance |
871 | 1,529 | ||||||
Net gain on securities |
1,866 | 1,138 | ||||||
Mortgage banking activity & loan sale income |
2,019 | 257 | ||||||
Other |
226 | 1,527 | ||||||
Total non-interest income |
14,263 | 15,666 | ||||||
Non-interest expense | ||||||||
Salaries and employee benefits (notes 11 & 12) |
21,231 | 23,689 | ||||||
Occupancy |
4,755 | 4,895 | ||||||
Furniture and fixtures |
1,475 | 1,686 | ||||||
Outside services |
5,350 | 4,273 | ||||||
Advertising, public relations, and sponsorships |
1,213 | 1,709 | ||||||
Amortization of identifiable intangible assets |
2,128 | 2,364 | ||||||
Merger related charges |
1 | 56 | ||||||
Other |
4,228 | 3,565 | ||||||
Total non-interest expense |
40,381 | 42,237 | ||||||
Income before income taxes |
17,775 | 17,735 | ||||||
Income tax provision (note 13) | 6,185 | 4,801 | ||||||
Net income |
$ | 11,590 | $ | 12,934 | ||||
Basic earnings per share (note 17) |
$ | 0.12 | $ | 0.13 | ||||
Diluted earnings per share (note 17) |
0.12 | 0.13 | ||||||
Weighted-average shares outstanding (note 17) |
||||||||
Basic |
99,254 | 100,277 | ||||||
Diluted |
99,270 | 100,330 | ||||||
Dividends per share |
$ | 0.070 | $ | 0.065 |
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 Three Months Ended March 31, 2009 | Shares | Common | Paid-in | Stock Held | Unearned | Treasury | Retained | Comprehensive | Stockholders | |||||||||||||||||||||||||
(In thousands, except per share data) (Unaudited) | Outstanding | Stock | Capital | by ESOP | Compensation | Stock | Earnings | Income (Loss) | Equity | |||||||||||||||||||||||||
Balance December 31, 2008 | 107,059 | $ | 1,215 | $ | 1,245,679 | $ | (92,380 | ) | $ | (18,474 | ) | $ | (200,428 | ) | $ | 467,580 | $ | (21,976 | ) | $ | 1,381,216 | |||||||||||||
Dividends declared ($0.07 per share) | (7,040 | ) | (7,040 | ) | ||||||||||||||||||||||||||||||
Allocation of ESOP shares, net of tax | (129 | ) | 915 | 786 | ||||||||||||||||||||||||||||||
Treasury shares acquired (note 15) | (270 | ) | (3,103 | ) | (3,103 | ) | ||||||||||||||||||||||||||||
Restricted stock expense | 1,654 | 1,654 | ||||||||||||||||||||||||||||||||
Stock option expense | 54 | 54 | ||||||||||||||||||||||||||||||||
Book (over) tax benefit of stock-based compensation | (60 | ) | (60 | ) | ||||||||||||||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||||
Net income |
11,590 | 11,590 | ||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax (note 16) |
9,080 | 9,080 | ||||||||||||||||||||||||||||||||
Total comprehensive income |
20,670 | |||||||||||||||||||||||||||||||||
Balance March 31, 2009 | 106,789 | $ | 1,215 | $ | 1,245,544 | $ | (91,465 | ) | $ | (16,820 | ) | $ | (203,531 | ) | $ | 472,130 | $ | (12,896 | ) | $ | 1,394,177 | |||||||||||||
See accompanying notes to consolidated financial statements.
5
NewAlliance Bancshares, Inc.
Consolidated Statements of Cash Flows
Three Months Ended | ||||||||
March 31, | ||||||||
(In thousands) (Unaudited) | 2009 | 2008 | ||||||
Cash flows from operating activities | ||||||||
Net income | $ | 11,590 | $ | 12,934 | ||||
Adjustments to reconcile net income to net cash provided by operating activities | ||||||||
Provision for loan losses |
4,100 | 1,700 | ||||||
Loss (gain) on OREO |
173 | (68 | ) | |||||
Restricted stock compensation expense |
1,654 | 1,922 | ||||||
Stock option compensation expense |
54 | 1,125 | ||||||
ESOP expense |
786 | 796 | ||||||
Amortization of identifiable intangible assets |
2,128 | 2,364 | ||||||
Net amortization/accretion of fair market adjustments from net assets acquired |
(872 | ) | (1,289 | ) | ||||
Net amortization/accretion of investment securities |
455 | (839 | ) | |||||
Change in deferred income taxes |
497 | 2,057 | ||||||
Depreciation and amortization of premises and equipment |
1,618 | 1,772 | ||||||
Net gain on securities |
(1,866 | ) | (1,138 | ) | ||||
Mortgage banking activity and loan sale income |
(2,019 | ) | (257 | ) | ||||
Proceeds from sales of loans held for sale |
150,713 | 21,709 | ||||||
Loans originated for sale |
(163,746 | ) | (26,151 | ) | ||||
Gain on sale of fixed assets |
(19 | ) | (4 | ) | ||||
Net loss on limited partnerships |
748 | 209 | ||||||
Increase in cash surrender value of bank owned life insurance |
(871 | ) | (1,529 | ) | ||||
Increase in other assets |
(446 | ) | (6,300 | ) | ||||
Increase in other liabilities |
6,526 | 11,422 | ||||||
Net cash provided by operating activities |
11,203 | 20,435 | ||||||
Cash flows from investing activities | ||||||||
Purchase of securities available for sale |
(320,147 | ) | (121,532 | ) | ||||
Purchase of securities held to maturity |
(21,451 | ) | (58,995 | ) | ||||
Proceeds from maturity, sales, calls and principal reductions of securities available for sale |
128,452 | 217,272 | ||||||
Proceeds from maturity, calls and principal reductions of securities held to maturity |
69,105 | 15,124 | ||||||
Proceeds from sales of fixed assets |
32 | - | ||||||
Net decrease (increase) in loans held for investment |
25,980 | (30,924 | ) | |||||
Proceeds from sales of other real estate owned |
1,096 | 517 | ||||||
Proceeds from bank owned life insurance |
263 | - | ||||||
Purchase of premises and equipment |
(498 | ) | (1,342 | ) | ||||
Net cash (used) provided by investing activities |
(117,168 | ) | 20,120 | |||||
Cash flows from financing activities | ||||||||
Net increase (decrease) in customer deposit balances |
214,367 | (116,044 | ) | |||||
Net (decrease) increase in short-term borrowings |
(11,270 | ) | 35,368 | |||||
Proceeds from long-term borrowings |
142,000 | 198,000 | ||||||
Repayments of long-term borrowings |
(164,679 | ) | (162,988 | ) | ||||
Book (over)/under tax benefit of stock-based compensation |
(60 | ) | 107 | |||||
Acquisition of treasury shares |
(3,103 | ) | (2,988 | ) | ||||
Dividends declared |
(7,040 | ) | (6,643 | ) | ||||
Net cash provided (used) by financing activities |
170,215 | (55,188 | ) | |||||
Net increase (decrease) in cash and cash equivalents |
64,250 | (14,633 | ) | |||||
Cash and equivalents, beginning of period |
153,131 | 160,879 | ||||||
Cash and equivalents, end of period |
$ | 217,381 | $ | 146,246 | ||||
Supplemental information | ||||||||
Cash paid for |
||||||||
Interest on deposits and borrowings |
$ | 47,180 | $ | 57,460 | ||||
Income taxes paid (refunded), net |
247 | (1,590 | ) | |||||
Noncash transactions |
||||||||
Loans transferred to other real estate owned |
707 | 177 |
See accompanying notes to consolidated financial statements.
6
NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
1. | Summary
of Significant Accounting Policies |
|
Financial
Statement Presentation |
||
The consolidated
financial statements of NewAlliance Bancshares, Inc. (the Company) have
been prepared in conformity with accounting principles generally accepted in the
United States of America. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. All significant intercompany transactions and balances have been
eliminated in consolidation. Amounts in prior period financial statements are reclassified
whenever necessary to conform to the current year presentation. These consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Companys Annual Report
on Form 10-K as of and for the year ended December 31, 2008. |
||
The preparation
of the consolidated financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues and
expenses and the disclosure of contingent assets and liabilities. Actual results
could differ from those estimates. |
||
Material
estimates that are particularly susceptible to significant near-term change relate
to the determination of the allowance for loan losses, the obligation and expense
for pension and other postretirement benefits, and estimates used to evaluate asset
impairment including investment securities, income tax contingencies and deferred
tax assets and liabilities and the recoverability of goodwill and other intangible
assets. |
||
2. | Recent
Accounting Pronouncements |
|
In April
2009, the Financial Accounting Standards Board (FASB) issued FASB Staff
Position (FSP) No. 157-4, Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly, (FSP FAS No. 157-4). FSP FAS No. 157-4
amends FASB Statement No. 157, Fair Value Measurements (SFAS No. 157) and provides additional guidance for estimating fair
value in accordance with SFAS 157 when the volume and level of activity for the
asset or liability have significantly decreased and also includes guidance on identifying
circumstances that indicate a transaction is not orderly for fair value measurements.
This FSP shall be applied prospectively with retrospective application not permitted.
This FSP shall be effective for interim and annual periods ending after June 15,
2009, with early adoption permitted for periods ending after March 15, 2009. An
entity early adopting this FSP must also early adopt FSP FAS 115-2 and FAS 124-2,
Recognition and Presentation of Other-Than-Temporary Impairments
(FSP FAS 115-2 and FAS 124-2). Additionally, if an entity elects to early adopt
either FSP FAS 107-1 and APB 28-1,Interim Disclosures about Fair Value
of Financial Instruments (FSP FAS 107-1 and APB 28-1) or FSP FAS 115-2
and FAS 124-2, it must also elect to early adopt this FSP. The Company has not elected
early application of this FSP and does not anticipate it to have a material impact
on the Companys consolidated financial statements. |
||
In April
2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments. This FSP amends
SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, SFAS No. 124, Accounting for Certain Investments Held by Not-for-Profit
Organizations, and EITF Issue No. 99-20, Recognition of Interest
Income and Impairment on Purchased Beneficial Interests and Beneficial Interests
That Continue to Be Held by a Transferor in Securitized Financial Assets,
to make the other-than-temporary impairments guidance more operational and to improve
the presentation of other-than-temporary impairments in the financial statements.
This FSP will replace the existing requirement that the entitys management
assert it has both the intent and ability to hold an impaired debt security until
recovery with a requirement that management assert it does not have the intent to
sell the security, and it is more likely than not it will not have to sell the security
before recovery of its cost basis. When an other-than-temporary impairment exists
under this stated assertion, the amount of impairment related to the credit loss
component would be recognized in earnings while the remaining amount would be recognized
in other comprehensive income. This FSP provides increased disclosure about the
credit and noncredit components of impaired debt securities that are not expected
to be sold and also requires increased and more frequent disclosures regarding expected
cash flows, credit losses, and an aging of securities with unrealized losses. Although
this FSP does not result in a change in the carrying amount of debt securities,
it does require that the portion of an other-than-temporary impairment not related
to a credit loss for a held-to-maturity security be recognized in a new category
of other comprehensive income and be amortized over the remaining life of the debt
security as an increase in the carrying value of the security. This FSP shall be
effective for interim and annual periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009. An entity may early
adopt this FSP only if it also elects to early adopt FSP FAS 157-4. Also, if an
entity elects to early adopt either FSP FAS 157-4 or FSP FAS 107-1 and APB 28-1,
the entity also is required to early adopt this FSP. The Company has not elected
early application of this FSP and does not anticipate that it will have a material
impact on the Companys consolidated financial statements. |
7
NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
In April
2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures
about Fair Value of Financial Instruments. This FSP amends the disclosure
requirements in FASB Statement No. 107, Disclosures about Fair Value of
Financial Instruments, to require disclosures about fair value of financial
instruments not measured on the balance sheet at fair value in interim financial
statements as well as in annual financial statements. Prior to this FSP, fair values
for these assets and liabilities were only disclosed annually. This FSP applies
to all financial instruments within the scope of SFAS No. 107 and requires all entities
to disclose the method(s) and significant assumptions used to estimate the fair
value of financial instruments. This FSP shall be effective for interim periods
ending after June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. An entity may early adopt this FSP only if it also elects to early
adopt FSP FAS No. 157-4 and FSP No. FAS 115-2 and FAS 124-2. This FSP does not require
disclosures for earlier periods presented for comparative purposes at initial adoption.
In periods after initial adoption, this FSP requires comparative disclosures only
for periods ending after initial adoption. The Company has not elected early application
of this FSP and does not anticipate that the adoption will have a material impact
on the Companys consolidated financial statements. |
||
In December
2008, the FASB issued FSP No. FAS 132(R)-1, Employers Disclosures
about Postretirement Benefit Plan Assets. This FSP amends FASB Statement
No. 132(R), Employers Disclosures about Pensions and Other Postretirement
Benefits to provide guidance on an employers disclosures about plan
assets of a defined benefit pension or other postretirement plan. Pursuant to the
FSP, the added disclosures include: (1) how investment allocation decisions are
made by management, (2) major categories of plan assets, and (3) significant concentrations
of risk. Additionally, the FSP requires an employer to disclose information about
the valuation of plan assets similar to that required under SFAS No. 157. Those disclosures include: (1) the
level within the fair value hierarchy in which fair value measurements of plan assets
fall, (2) information about the inputs and valuation techniques used to measure
the fair value of plan assets, and (3) a reconciliation of the beginning and ending
balances of plan assets valued using significant unobservable inputs. The new disclosures
are required to be included in financial statements for fiscal years ending after
December 15, 2009. Management believes that the FSP will not have a material impact
on the Companys consolidated financial statements. |
||
In April
2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of
Intangible Assets (FSP No. 142-3). FSP No. 142-3 amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS No. 142,
Goodwill and Other Intangible Assets (SFAS No. 142). The intent
of FSP No. 142-3 is to improve the consistency between the useful life of a recognized
intangible asset under SFAS No. 142 and the period of expected cash flows used to
measure the fair value of the asset under SFAS No. 141 (revised 2007), Business
Combinations and other applicable accounting literature. FSP No. 142-3
is effective for financial statements issued for fiscal years beginning after December
15, 2008. The adoption of FSP No. 142-3 did not have a material impact on the Companys consolidated financial statements. |
||
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments
and Hedging Activities (SFAS No. 161). SFAS No. 161 changes
the disclosure requirements regarding derivative instruments and hedging activities
and specifically requires (i) qualitative disclosures about objectives and strategies
for using derivatives, (ii) quantitative disclosures about fair value amounts of,
and gains and losses on, derivative instruments, and (iii) disclosures about credit
risk-related contingent features in derivative agreements. The new standard is effective
for financial statements issued for fiscal years beginning after November 15, 2008,
with early application encouraged. The adoption of SFAS No. 161 did not have a material
impact on the Companys consolidated financial statements. |
||
In February
2008, the FASB issued FASB Staff Position FAS No. 157-2, Effective Date
of FASB Statement No. 157 (FSP No. 157-2), which delays the
January 1, 2008 effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial
liabilities, to fiscal years beginning after November 15, 2008, and interim periods
within those fiscal years. The adoption of FSP No. 157-2 did not have a material
effect on the Companys consolidated financial statements. |
||
In December
2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS No. 141(R)) which replaces SFAS No. 141, Business
Combinations. SFAS No. 141(R) retains the fundamental requirements in
SFAS No. 141 that the acquisition method of accounting be used for all business
combinations and for an acquirer to be identified for each business combination.
SFAS No. 141(R) requires among other things, that acquisition-related transaction
and restructuring costs will be expensed rather than treated as part of the cost
of the acquisition; the acquiring entity in a business combination to recognize
all the assets acquired and liabilities assumed in the transaction; establishes
the acquisition-date fair value as the measurement objective for all assets acquired
and liabilities assumed; and requires the acquirer to provide certain disclosures
that will allow users of the financial statements to understand the nature and financial
effect of the business combination. SFAS No. 141(R) became effective on January
1, 2009. The adoption of SFAS No. 141 (R) would apply prospectively to any future
business combinations and is expected to have a significant effect on NewAlliances consolidated financial statements, when a business combination occurs. |
8
NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
3. | Fair Value Measurements | |||
Fair value
estimates are made as of a specific point in time based on the characteristics of
the financial instruments and relevant market information. In accordance with SFAS
No. 157, the fair value estimates are measured within the fair value hierarchy.
The hierarchy gives the highest priority to unadjusted quoted prices in active markets
for identical assets or liabilities (level 1 measurements) and the lowest priority
to unobservable inputs (level 3 measurements). The three levels of the fair value
hierarchy under SFAS No. 157 are described below: |
||||
Basis of Fair Value Measurement | ||||
Level 1 |
Unadjusted
quoted prices in active markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities; |
|||
Level 2 |
Quoted
prices in markets that are not active, or inputs that are observable either directly
or indirectly, for substantially the full term of the asset or liability; |
|||
Level 3 |
Prices
or valuation techniques that require inputs that are both significant to the fair
value measurement and unobservable (i.e., supported by little or no market activity). |
|||
When available,
quoted market prices are used. In other cases, fair values are based on estimates
using present value or other valuation techniques. These techniques involve uncertainties
and are significantly affected by the assumptions used and judgments made regarding
risk characteristics of various financial instruments, discount rates, estimates
of future cash flows, future expected loss experience and other factors. Changes
in assumptions could significantly affect these estimates. Derived fair value estimates
cannot be substantiated by comparison to independent markets and, in certain cases,
could not be realized in an immediate sale of the instrument. |
||||
Fair value
estimates are based on existing financial instruments without attempting to estimate
the value of anticipated future business and the value of assets and liabilities
that are not financial instruments. Accordingly, the aggregate fair value amounts
presented do not purport to represent the underlying market value of the Company. |
||||
SFAS No. 159, Fair Value Option |
||||
SFAS No.
159 allows for the irrevocable option to elect fair value accounting for the initial
and subsequent measurement for certain financial assets and liabilities on a contract-by-contract
basis that may otherwise not be required to be measured at fair value under other
accounting standards. The Company elected the fair value option as of January 1,
2009 for its portfolio of mortgage loans held for sale pursuant to forward loan
sale commitments originated after January 1, 2009 in order to reduce certain timing
differences and better match changes in fair values of the loans with changes in
the value of the derivative forward loan sale contracts used to economically hedge
them. As a result of the surge of refinances resulting from the recent drop in mortgage
rates within the industry, the balance of loans held for sale and derivative contracts
relating to those loans have increased significantly. The election under SFAS No.
159 relating to mortgage loans held for sale does not result in a transition adjustment
to retained earnings and instead changes in the fair value have an impact on earnings
as a component of noninterest income and noninterest expense. |
||||
As of March
31, 2009, mortgage loans held for sale pursuant to forward loan sale commitments
had a fair value of $13.8 million, which includes a positive fair value adjustment
of $131,000. |
||||
Assets
and Liabilities Measured at Fair Value on a Recurring Basis |
||||
The following
table details the financial instruments carried at fair value on a recurring basis
as of March 31, 2009 and December 31, 2008 and indicates the fair value hierarchy
of the valuation techniques utilized by the Company to determine the fair value: |
9
NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
March 31, 2009 | |||||||||||||||||
Quoted Prices in | |||||||||||||||||
Active Markets | Significant | Significant | |||||||||||||||
for Identical | Observable | Unobservable | |||||||||||||||
Assets | Inputs | Inputs | |||||||||||||||
(In thousands) | Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Securities Available for Sale | $ | 2,085,959 | $ | 206,153 | $ | 1,851,263 | $ | 28,543 | |||||||||
Mortgage Loans Held for Sale | 13,787 | - | 13,787 | - | |||||||||||||
Derivative Assets | 1,126 | - | 1,126 | - | |||||||||||||
Derivative Liabilities | (826 | ) | - | (826 | ) | - | |||||||||||
December 31, 2008 | |||||||||||||||||
Quoted Prices in | |||||||||||||||||
Active Markets | Significant | Significant | |||||||||||||||
for Identical | Observable | Unobservable | |||||||||||||||
Assets | Inputs | Inputs | |||||||||||||||
(In thousands) | Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Securities Available for Sale | $ | 1,928,563 | $ | 229,803 | $ | 1,672,134 | $ | 26,626 | |||||||||
The following
table presents additional information about assets measured at fair value on a recurring
basis for which the Company utilized Level 3 inputs to determine fair value. There
were no Level 3 assets measured on a recurring basis during the three months ended
March 31, 2008. |
|||||||||||||||||
Securities | ||||||
(In thousands) | Available for Sale | |||||
Beginning balance, January 1, 2009 | $ | 26,626 | ||||
Transfer into Level 3 |
- | |||||
Total gains (losses) - (realized/unrealized): |
||||||
Included in earnings |
- | |||||
Included in other comprehensive income |
1,917 | |||||
Purchases, issuances, and settlements |
- | |||||
Ending Balance, March 31, 2009 | $ | 28,543 | ||||
The following
is a description of the valuation methodologies used for instruments measured at
fair value. |
||||||
Securities
Available for Sale: Where quoted prices are available in an active market, securities
are classified within Level 1 of the valuation hierarchy. Level 1 securities include
highly liquid government bonds and exchange-traded equities. If quoted prices are
not available, then fair values are estimated by using pricing models (i.e. matrix
pricing) or quoted prices of securities with similar characteristics and are classified
within Level 2 of the valuation hierarchy. Examples of such instruments would include
mortgage-backed securities and municipal obligations. |
||||||
The Company
utilizes Interactive Data Corp., a third party, nationally-recognized pricing service
(pricing service) to estimate fair value measurements for 98.6% of its
investment securities portfolio. The pricing service evaluates each asset class
based on relevant market information considering observable data that may include
dealer quotes, reported trades, market spreads, cash flows, the U.S. Treasury yield
curve, the LIBOR swap yield curve, trade execution data, market prepayment speeds,
credit information and the bonds terms and conditions, among other things.
The fair value prices on all investment securities are reviewed for reasonableness
by management through an extensive process. This review process includes an analysis
of changes in the LIBOR / swap curve, the treasury curve, mortgage rates and credit
spreads as well as a review of the securities inventory list which details issuer
name, coupon and maturity date for unusual market price fluctuations and no adjustments
were made to the pricing. Also, management assessed the valuation techniques used
by the pricing service based on a review of their pricing methodology to ensure
proper hierarchy classifications. |
||||||
The Company
did not use the pricing service for its Level 3 securities which includes auction
rate certificates and a pooled trust preferred security. At March 31, 2009, these
securities comprised 1.4%, or $28.5 million, of the Companys total investment
portfolio. The Company owns auction rate certificates which are pools of government
guaranteed student loans issued by state |
10
NewAlliance
Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
student loan
departments. Due to the lack of liquidity in the auction rate market, the Company
obtained a price from the market maker that factored in credit risk and liquidity
premiums to determine a current fair value market price. The pooled trust preferred
security was not priced by the pricing service at March 31, 2009 and therefore,
management calculated a price by using the Bloomberg AA rated bank yield curve to
discount the cash flows of the investment. The low level of the three month LIBOR,
the general widening of credit spreads for all non-government guaranteed asset classes
and the lack of liquidity in the fixed income markets due to capital constraints,
were all factors in the determination of the current fair value market price. |
||
Mortgage
Loans Held for Sale: Fair values were estimated utilizing quoted prices for
similar assets in active markets. Any change in the valuation of mortgage loans held for sale is based upon the
change in market interest rates between closing the loan and the measurement date.
As the loans are sold to the secondary market, the market prices are
obtained from Freddie Mac and represent a delivery price which reflects the underlying
price Freddie Mac would pay the company for an immediate sale on these mortgages. |
||
Derivatives: Derivative instruments related to loans held for sale are carried at fair value.
Fair value is determined through quotes obtained from actively traded mortgage markets. Any change in fair value
for rate lock commitments to the borrower is based upon the change in market
interest rates between making the rate lock commitment and the measurement date
and, for forward loan sale commitments to the investor, is based upon the change
in market interest rates from entering into the forward loan sales contract and
the measurement date. Both the rate lock commitments to the borrowers and the forward
loan sale commitments to investors are undesignated derivatives pursuant to the
requirements of SFAS No. 133, however, the Company has not designated them as hedging
instruments. Accordingly, they are marked to fair value through earnings. |
||
At March 31,
2009, the effects of fair value measurements for interest rate lock commitment derivatives
and forward loan sale commitments were as follows (mortgage loans held for sale
are shown for informational purposes only): |
March 31, 2009 | |||||||||
Notional or | |||||||||
Principal | Fair Value | ||||||||
(In thousands) | Amount | Adjustment | |||||||
Rate Lock Commitments | $ | 72,792 | $ | 1,126 | |||||
Forward Sales Commitments | 82,528 | (826 | ) | ||||||
Mortgage Loans Held for Sale | 13,656 | 131 | |||||||
The Company
sells its fixed rate mortgage with original terms of 15 years and over loans on a servicing released basis and receives a servicing released
premium upon sale. The servicing value has been included in the pricing of the rate
lock commitments and loans held for sale. The Company estimates a fallout rate of
approximately 10% based upon historical averages in determining the fair value of
rate lock commitments. Although, the use of historical averages is based upon unobservable
data, the Company believes that this input is insignificant to the valuation and
therefore has concluded that the fair value measurements meet the Level 2 criteria.
The collection of upfront fees from the borrower is the driver of the Companys
low fallout rate. If this practice were to change, the fallout rate would most likely
increase and the Company would reassess the significance of the fallout rate on
the fair value measurement. |
||
Prior to January
1, 2009, the mortgage loans held for sale and the derivatives associated with those
loans had balances of notional amounts and fair value adjustments that did not have
a material impact on the financial statements. |
||
11
NewAlliance
Bancshares, Inc.
Notes to Unaudited Consolidated Financial
Statements
Assets
and Liabilities Measured at Fair Value on a Nonrecurring Basis
The following
tables detail the financial instruments carried at fair value on a nonrecurring
basis as of March 31, 2009 and December 31, 2008 and indicate the fair value hierarchy
of the valuation techniques utilized by the Company to determine the fair value: |
March 31, 2009 | |||||||||||||||
Quoted Prices in | |||||||||||||||
Active Markets | Significant | Significant | |||||||||||||
for Identical | Observable | Unobservable | |||||||||||||
Assets | Inputs | Inputs | |||||||||||||
(In thousands) | Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||
Loan Servicing Rights | $ | 2,378 | $ | - | $ | - | $ | 2,378 | |||||||
Impaired Loans | 9,779 | - | - | 9,779 | |||||||||||
December 31, 2008 | |||||||||||||||
Quoted Prices in | |||||||||||||||
Active Markets | Significant | Significant | |||||||||||||
for Identical | Observable | Unobservable | |||||||||||||
Assets | Inputs | Inputs | |||||||||||||
(In thousands) | Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||
Loan Servicing Rights | $ | 3,001 | $ | - | $ | - | $ | 3,001 | |||||||
Impaired Loans | 8,284 | - | - | 8,284 | |||||||||||
The following is a description of the valuation methodologies used for instruments measured at fair value. | ||
Loan Servicing
Rights: A loan servicing right asset represents the amount by which the present
value of the estimated future net cash flows to be received from servicing loans
are expected to more than adequately compensate the Company for performing the servicing.
The fair value of servicing rights is estimated using a present value cash flow
model. The most important assumptions used in the valuation model are the anticipated
rate of the loan prepayments and discount rates. Adjustments are only recorded when
the discounted cash flows derived from the valuation model are less than the carrying
value of the asset. As such, measurement at fair value is on a nonrecurring basis.
Although some assumptions in determining fair value are based on standards used
by market participants, some are based on unobservable inputs and therefore are
classified in Level 3 of the valuation hierarchy. |
||
Impaired
Loans: Impaired loans for which the Company expects to receive less than the
contracted balance are written down to fair value. Consequently, measurement at
fair value is on a nonrecurring basis. These loans are written down through a specific
reserve within the Banks total loan loss reserve allowance. The fair value
of these assets are classified within Level 3 of the valuation hierarchy and are
estimated based on collateral values supported by appraisals. |
||
4. | Derivative Financial Instruments | |
In the ordinary
course of business, the Company uses various derivative financial instruments to
service the financial needs of customers and to reduce its exposure to fluctuations
in interest rates. The Company considers its strategic use of derivatives to be
a prudent method of managing interest-rate sensitivity, as it prevents earnings
from being exposed to undue risk posed by changes in interest rates. The Company
accounts for derivatives and hedging activities in accordance with SFAS No. 133,
Accounting for Derivative Instruments and Certain Hedging Activities,
as amended, which requires that all derivative instruments be recorded on the
statement of condition at their fair values. The Company does not enter into derivative
transactions for speculative purposes, does not have any derivatives designated
as hedging instruments, nor is party to a master netting agreement as of March 31,
2009. |
||
Loan Commitments
and Forward Loan Sale Commitments: The Company enters into contractual commitments,
interest rate lock commitments with borrowers, to finance residential mortgage loans.
Primarily to mitigate the interest rate risk on these commitments, the Company also
enters to mandatory and best effort forward loan sale delivery
commitments with investors. The interest rate lock commitments and the forward loan
delivery commitments meet the definition of a derivative in SFAS No. 133, however,
the Company has not designated them as hedging instruments. Upon closing the loan,
the loan commitment expires and the Company records a loan held for sale subject
to the same forward loan sale commitment. Prior to January 1, 2009, the Company
accounted for loans held for sale at the lower or cost or fair value in accordance
with SFAS No. |
12
NewAlliance
Bancshares, Inc.
Notes to Unaudited Consolidated Financial
Statements
65,Accounting
for Certain Mortgage Banking Activities. Fluctuations in the fair value
of loan commitments, loans held for sale, and forward loan sale commitments generally
move in opposite directions, and the net impact of the changes in these valuations
on net income is generally inconsequential to the financial statements. |
||
As a result
of the decrease in mortgage rates at the end of 2008 and the beginning of 2009,
the banking industry has seen a large increase in mortgage loan refinances and hence,
the Companys committed loans and forward loan sale commitments have significantly
increased. The Company has elected the fair value option pursuant to SFAS No. 159
for loans held for sale originated after January 1, 2009 and therefore, those loans
held for sale will be recorded in the statement of condition at fair value with
any gains and losses recorded in earnings. See Footnote 3, Fair Value Measurements,
for additional information. |
||
The following table summarizes the Companys derivative positions at and for the three months ended March 31, 2009: |
Notional or | Fair Value | ||||||
(In thousands) | Principal Amount | Adjustment (1) | |||||
Interest Rate Lock Commitments | 72,792 | 1,126 | |||||
Forward Sales Commitments | 82,528 | (826 | ) | ||||
(1) An immaterial portion of these amounts was attributable to changes in instrument-specific credit risk. | ||
The following two tables present the fair values of the Companys derivative instruments and their effect on the Statement of Income: | ||
Fair Values of Derivative Instruments | ||
Asset Derivatives | Liability Derivatives | |||||||||||||
March 31, 2009 | ||||||||||||||
Balance Sheet | Balance Sheet | |||||||||||||
(In thousands) | Location | Fair Value | Location | Fair Value | ||||||||||
Derivatives not designated as | ||||||||||||||
hedging instruments under |
||||||||||||||
Statement 133 |
||||||||||||||
Interest rate contracts |
Other Assets | $ | 1,126 | Other Liabilities | $ | 826 | ||||||||
Total derivatives not designated as | ||||||||||||||
hedging instruments under |
||||||||||||||
Statement 133 |
$ | 1,126 | $ | 826 | ||||||||||
Effect of Derivative Instruments on the Statement of Income |
For the Three Months | ||||||||
Ended | ||||||||
March 31, 2009 | ||||||||
Location of Gain or (Loss) | Amount of Gain or | |||||||
Recognized in Income on | (Loss) Recognized in | |||||||
(In thousands) | Derivatives | Income on Derivatives | ||||||
Derivatives not designated as | ||||||||
hedging instruments under |
||||||||
Statement 133 |
||||||||
Interest rate contracts |
Non-interest income | $ | 300 | |||||
Total derivatives not designated as | ||||||||
hedging instruments under |
||||||||
Statement 133 |
$ | 300 | ||||||
13
NewAlliance
Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
5. | Investment Securities | |
The following
table presents the amortized cost, gross unrealized gains, gross unrealized losses
and estimated fair values of investment securities at March 31, 2009 and December
31, 2008. |
March 31, 2009 | December 31, 2008 | ||||||||||||||||||||||||||||
Gross | Gross | Gross | Gross | ||||||||||||||||||||||||||
Amortized | unrealized | unrealized | Fair | Amortized | unrealized | unrealized | Fair | ||||||||||||||||||||||
(In thousands) | Cost | gains | losses | value | cost | gains | losses | value | |||||||||||||||||||||
Available for sale | |||||||||||||||||||||||||||||
U.S. Treasury obligations |
$ | 596 | $ | - | $ | - | $ | 596 | $ | 596 | $ | 1 | $ | - | $ | 597 | |||||||||||||
U.S. Government sponsored |
|||||||||||||||||||||||||||||
enterprise obligations |
206,358 | 3,322 | (96 | ) | 209,584 | 228,844 | 4,586 | (81 | ) | 233,349 | |||||||||||||||||||
Corporate obligations |
8,168 | - | (609 | ) | 7,559 | 8,178 | - | (232 | ) | 7,946 | |||||||||||||||||||
Other bonds and obligations |
45,654 | 163 | (5,136 | ) | 40,681 | 45,654 | 128 | (6,854 | ) | 38,928 | |||||||||||||||||||
Marketable and trust preferred equity securities |
66,246 | 26 | (22,523 | ) | 43,749 | 66,747 | 103 | (16,451 | ) | 50,399 | |||||||||||||||||||
Mortgage-backed securities |
1,742,563 | 48,174 | (6,948 | ) | 1,783,789 | 1,576,430 | 30,019 | (9,106 | ) | 1,597,343 | |||||||||||||||||||
Total available for sale |
2,069,585 | 51,685 | (35,312 | ) | 2,085,958 | 1,926,449 | 34,837 | (32,724 | ) | 1,928,562 | |||||||||||||||||||
Held to maturity | |||||||||||||||||||||||||||||
Mortgage-backed securities |
301,535 | 10,725 | - | 312,260 | 299,222 | 8,832 | (38 | ) | 308,016 | ||||||||||||||||||||
Other bonds |
10,560 | 261 | - | 10,821 | 10,560 | 186 | - | 10,746 | |||||||||||||||||||||
Total held to maturity |
312,095 | 10,986 | - | 323,081 | 309,782 | 9,018 | (38 | ) | 318,762 | ||||||||||||||||||||
Total securities |
$ | 2,381,680 | $ | 62,671 | $ | (35,312 | ) | $ | 2,409,039 | $ | 2,236,231 | $ | 43,855 | $ | (32,762 | ) | $ | 2,247,324 | |||||||||||
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 March 31, 2009. |
March 31, 2009 | |||||||||||||||||||||
Less Than One Year | More Than One Year | Total | |||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | ||||||||||||||||
(In thousands) | Value | losses | value | losses | value | losses | |||||||||||||||
U. S. Government sponsored enterprise obligations | $ | 9,472 | $ | 78 | $ | 718 | $ | 18 | $ | 10,190 | $ | 96 | |||||||||
Corporate obligations | 7,559 | 609 | - | - | 7,559 | 609 | |||||||||||||||
Other bonds and obligations | 6,307 | 2,584 | 25,448 | 2,552 | 31,755 | 5,136 | |||||||||||||||
Marketable and trust preferred equity obligations | 3,459 | 618 | 21,730 | 21,905 | 25,189 | 22,523 | |||||||||||||||
Mortgage-backed securities | 35,151 | 3,519 | 10,245 | 3,429 | 45,396 | 6,948 | |||||||||||||||
Total securities with unrealized losses |
$ | 61,948 | $ | 7,408 | $ | 58,141 | $ | 27,904 | $ | 120,089 | $ | 35,312 | |||||||||
Of the securities
summarized above, 36 issues have unrealized losses for less than twelve months and
31 have unrealized losses for twelve months or more. Management believes that no
individual unrealized loss as of March 31, 2009 represents an other-than-temporary
impairment, based on its detailed monthly review of the securities portfolio. Among
other things, the other-than-temporary impairment review of the investment securities
portfolio focuses on the combined factors of percentage and length of time by which
an issue is below book value as well as consideration of company specific (cash
flow interruptions), broad market details and the Companys intent and ability
to retain its investment for a period of time sufficient to allow for the anticipated
recovery in market value. The Company also considers whether the depreciation is
due to interest rates or credit risk. The following paragraphs outline the Companys position related to unrealized losses in its investment securities portfolio
at March 31, 2009. |
||
The unrealized
losses reported on mortgage-backed securities primarily relate to AAA rated securities
issued by private institutions. Widening in non-agency mortgage spreads is the primary
factor for the unrealized losses reported on AAA rated securities issued by private
institutions. The unrealized loss is concentrated in four private-label mortgage-backed
securities which are substantially paid down, well seasoned and of an earlier vintage
that have not been significantly affected by high delinquency levels or vulnerable
to lower collateral coverage as seen in later issued pools. None of the securities
are backed by sub-prime mortgage loans and none have suffered losses. These securities
are still paying principal and interest and are expected to continue to pay their
contractual cash flows. Managements review of the above factors and issuer
specific data concluded that these private-label mortgage-backed securities are
not other-than-temporarily impaired. |
||
The unrealized
loss on other bonds and obligations relates to auction rate certificates and a mortgage
mutual fund. The certificates were issued by a Wall Street underwriting firm and
are pools of government-guaranteed student loans that are issued by state student
loan departments. In the first half of 2008, the auction process for auction rate
certificates began to freeze resulting from the problems in the credit markets.
In 2008, the underwriter entered into a settlement agreement with several state
regulatory agencies, whereby they have agreed to repurchase these certificates from
both their retail and institutional customers at par. The institutional buy-back
of these securities is scheduled on or around June 30, 2010. These securities are |
14
NewAlliance
Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
currently
rated AAA and are still paying their contractual cash flows and are expected to
continue to pay their contractual cash flows. Unrealized losses in this category
also relate to a position in a short-term adjustable rate mortgage mutual fund that
holds positions in non-agency mortgage-backed securities that are facing negative
mark to market pressures due to widening spreads in non-agency mortgage products
and are not due to customer redemptions, forced selling or losses taken on investments.
The fund carries a weighted average underlying investment credit rating of AA and
it continues to pay normal monthly dividends. |
||
The Bank owns
trust preferred securities with amortized cost of $47.7 million, of which $6.8 million
are pooled trust preferred, with $4.8 million rated AAA and $2.0 million rated AA.
The remaining $40.9 million are individual names broken out as follows: $18.6
million rated A+ to A-, $9.9 million rated BBB+ to BBB and $12.4 million rated BB.
The unrealized losses reported for trust preferred equity securities relate to the
financial and liquidity stresses in the fixed income market and not to any credit
impairment of the issuers. Although the ratings on some issues have been reduced
since December 31, 2008, there have not been any disruptions in the cash flows on
any of these securities and all are currently paying the contractual principal and
interest payments. In accordance with the Companys internal policies for review
for possible other-than-temporary impairment, a detailed review of certain trust
preferred equity securities was completed. This review included an analysis of collateral
reports, stress default levels and financial ratios of the underlying issuers and
concluded that there was no other-than-temporary impairment at the end of the period.
All trust preferred equity securities carried below market value are current and
no impairment of cash flows is anticipated. |
||
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, which may be until maturity. |
||
6. | Loans | |||||||||
The composition of the Companys loan portfolio is as follows: | ||||||||||
March 31, | December 31, | |||||||||
(In thousands) | 2009 | 2008 | ||||||||
Residential real estate | $ | 2,514,712 | $ | 2,524,638 | ||||||
Commercial real estate | 1,082,437 | 1,077,200 | ||||||||
Construction | ||||||||||
Residential |
17,988 | 21,380 | ||||||||
Commercial |
135,492 | 143,610 | ||||||||
Commercial business | 441,811 | 458,952 | ||||||||
Consumer | ||||||||||
Home equity and equity lines of credit |
720,120 | 714,444 | ||||||||
Other |
20,188 | 22,561 | ||||||||
Total consumer |
740,308 | 737,005 | ||||||||
Total loans |
4,932,748 | 4,962,785 | ||||||||
Allowance for loan losses |
(50,635 | ) | (49,911 | ) | ||||||
Total loans, net |
$ | 4,882,113 | $ | 4,912,874 | ||||||
At March 31,
2009 and December 31, 2008, the Companys residential real estate loan, residential
construction loan, home equity loan and equity lines of credit portfolios are entirely
collateralized by one to four family homes and condominiums, the majority of which
are located in Connecticut and Massachusetts. The commercial real estate loan and
commercial construction portfolios are collateralized primarily by multi-family,
commercial and industrial properties located predominately in Connecticut and Massachusetts.
A variety of different assets, including accounts receivable, inventory and property,
and plant and equipment, collateralize the majority of the commercial business loan
portfolio. The Company does not originate or directly invest in sub prime loans. |
||
15
NewAlliance
Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
The following
table provides a summary of activity in the allowance for loan losses. |
At or For the Three Months | |||||||||
Ended March 31, | |||||||||
(In thousands) | 2009 | 2008 | |||||||
Balance at beginning of period | $ | 49,911 | $ | 43,813 | |||||
Provisions charged to operations | 4,100 | 1,700 | |||||||
Charge-offs | |||||||||
Residential real estate loans |
500 | 51 | |||||||
Commercial real estate loans |
503 | - | |||||||
Commercial construction loans |
1,781 | - | |||||||
Commercial business loans |
805 | 270 | |||||||
Consumer loans |
159 | 146 | |||||||
Total charge-offs |
3,748 | 467 | |||||||
Recoveries | |||||||||
Residential real estate loans |
34 | 3 | |||||||
Commercial real estate loans |
- | 12 | |||||||
Commercial construction loans |
- | - | |||||||
Commercial business loans |
207 | 320 | |||||||
Consumer loans |
131 | 33 | |||||||
Total recoveries |
372 | 368 | |||||||
Net charge-offs | 3,376 | 99 | |||||||
Balance at end of period | $ | 50,635 | $ | 45,414 | |||||
Nonperforming Assets | ||
Nonperforming
assets include loans for which the Company does not accrue interest (nonaccrual
loans), loans 90 days past due and still accruing interest, renegotiated loans due
to a weakening in the financial condition of the borrower and other real estate
owned. There were no accruing loans included in the Companys nonperforming
assets as of March 31, 2009 and December 31, 2008. As of March 31, 2009 and December
31, 2008, nonperforming assets were: |
||
March 31, | December 31, | ||||||||
(In thousands) | 2009 | 2008 | |||||||
Nonaccrual loans | $ | 50,122 | $ | 38,331 | |||||
Other real estate owned | 1,382 | 2,023 | |||||||
Total nonperforming assets |
$ | 51,504 | $ | 40,354 | |||||
Troubled debt restructured loans included in nonaccrual loans above | $ | 1,144 | $ | - | |||||
16
NewAlliance
Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
7. | Goodwill and Identifiable Intangible Assets | |
The changes
in the carrying amount of goodwill and identifiable intangible assets for the three
months ended March 31, 2009 are summarized as follows: |
Total | |||||||||||||
Core Deposits | Identifiable | ||||||||||||
and Customer | Intangible | ||||||||||||
(In thousands) | Goodwill | Relationship | Assets | ||||||||||
Balance, December 31, 2008 | $ | 527,167 | $ | 43,860 | $ | 43,860 | |||||||
Amortization expense | - | (2,128 | ) | (2,128 | ) | ||||||||
Balance, March 31, 2009 | $ | 527,167 | $ | 41,732 | $ | 41,732 | |||||||
Estimated amortization expense for the year ending: | |||||||||||||
Remaining 2009 |
6,373 | 6,373 | |||||||||||
2010 |
7,811 | 7,811 | |||||||||||
2011 |
7,556 | 7,556 | |||||||||||
2012 |
7,556 | 7,556 | |||||||||||
2013 |
7,461 | 7,461 | |||||||||||
Thereafter |
4,975 | 4,975 | |||||||||||
The components
of identifiable intangible assets are core deposit and customer relationships and
had the following balances at March 31, 2009: |
||
Original | Balance | |||||||||||
Recorded | Cumulative | March 31, | ||||||||||
(In thousands) | Amount | Amortization | 2009 | |||||||||
Core deposit and customer relationships |
$ | 86,908 | $ | 45,176 | $ | 41,732 | ||||||
8. | Other Assets | |
Selected components of other assets are as follows: |
March 31, | December 31, | ||||||||
(In thousands) | 2009 | 2008 | |||||||
Deferred tax asset, net | $ | 24,665 | $ | 30,339 | |||||
Accrued interest receivable | 34,865 | 35,285 | |||||||
Investments in limited partnerships and other investments | 8,449 | 9,171 | |||||||
All other | 27,157 | 26,878 | |||||||
Total other assets |
$ | 95,136 | $ | 101,673 | |||||
9. | Deposits | |
A summary of deposits by account type is as follows: |
March 31, | December 31, | ||||||||
(In thousands) | 2009 | 2008 | |||||||
Savings | $ | 1,651,874 | $ | 1,463,341 | |||||
Money market | 477,569 | 346,522 | |||||||
NOW | 359,598 | 368,730 | |||||||
Demand | 494,412 | 494,978 | |||||||
Time | 1,678,706 | 1,774,259 | |||||||
Total deposits |
$ | 4,662,159 | $ | 4,447,830 | |||||
17
NewAlliance
Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
10. | Borrowings | |
The following is a summary of the Companys borrowed funds: |
March 31, | December 31, | ||||||||
(In thousands) | 2009 | 2008 | |||||||
FHLB advances (1) | $ | 2,167,536 | $ | 2,190,914 | |||||
Repurchase agreements | 148,259 | 159,530 | |||||||
Mortgage loans payable | 1,281 | 1,317 | |||||||
Junior subordinated debentures issued to affiliated trusts (2) | 24,685 | 24,735 | |||||||
Total borrowings |
$ | 2,341,761 | $ | 2,376,496 | |||||
(1) | Includes fair
value adjustments on acquired borrowings, in accordance with SFAS No. 141, Business
Combinations, of $5.1 million and $5.8 million at March 31, 2009 and December
31, 2008, respectively. The acquisition fair value adjustments (premiums) are being
amortized as an adjustment to interest expense on borrowings over their remaining
terms using the level yield method. |
||
(2) | Includes fair
value adjustments on acquired borrowings, in accordance with SFAS No. 141, Business
Combinations, of $50,000 and $100,000 at March 31, 2009 and December 31,
2008, respectively. The trusts were organized to facilitate the issuance of trust
preferred securities. The Company acquired these subsidiaries when it acquired
Alliance Bancorp of New England, Inc. and Westbank Corporation, Inc. The affiliated
trusts are wholly-owned subsidiaries of the Company and the payments of these securities
are irrevocably and unconditionally guaranteed by the Company. The acquisition fair
value adjustments (premiums) are being amortized as an adjustment to interest expense
on borrowings over their remaining terms using the level yield method. |
||
Federal Home
Loan Bank of Boston (FHLB) advances are secured by the Companys investment
in FHLB stock, a blanket security agreement and other eligible investment securities.
This agreement requires the Bank to maintain as collateral certain qualifying assets,
principally mortgage loans. Investment securities currently maintained as collateral
are all U.S. Agency hybrid adjustable rate mortgage-backed securities. At March
31, 2009 and December 31, 2008, the Bank was in compliance with the FHLB collateral
requirements. At March 31, 2009, the Company could immediately borrow an additional $275.5
million from the FHLB, inclusive of a line of credit of approximately $20.0 million.
Additional borrowing capacity of approximately $940.1 million 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 $106.8 million as of March 31, 2009, all of which was available on
that date. Repurchase agreement lines of credit with three large broker-dealers
totaled $125.0 million at March 31, 2009, with availability of $100.0 million. At
March 31, 2009, all of the Companys $2.16 billion outstanding FHLB advances
were at fixed rates ranging from 0.74% to 8.17%. The weighted average rate for all
FHLB advances at March 31, 2009 was 4.31%. |
||
11. | Pension and Other Postretirement Benefit Plans | |
The Company
provides various defined benefit and other postretirement benefit plans (postretirement
health and life insurance benefits) to substantially all employees hired prior to
January 1, 2008. The Company also has supplemental retirement plans (the Supplemental
Plans) that provide benefits for certain key executive officers. Benefits
under the supplemental plans are based on a predetermined formula and are reduced
by other benefits. The liability arising from these plans is being accrued over
the participants remaining periods of service so that at the expected retirement
dates, the present value of the annual payments will have been expensed. |
||
The following
table presents the amount of net periodic pension cost for the three months ended
March 31, 2009 and 2008. |
||
18
NewAlliance
Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
Supplemental | ||||||||||||||||||||||||
Executive | Other Postretirement | |||||||||||||||||||||||
Qualified Pension | Retirement Plans | Benefits | ||||||||||||||||||||||
(In thousands) | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | ||||||||||||||||||
Service cost - benefits earned during the period | $ | 809 | $ | 787 | $ | 113 | $ | 134 | $ | 55 | $ | 49 | ||||||||||||
Interest cost on projected benefit obligation | 1,430 | 1,363 | 195 | 177 | 89 | 93 | ||||||||||||||||||
Expected return on plan assets | (1,741 | ) | (1,798 | ) | - | - | - | - | ||||||||||||||||
Amortization: | - | - | ||||||||||||||||||||||
Transition |
- | - | - | - | 13 | 13 | ||||||||||||||||||
Prior service cost |
13 | 13 | 2 | 2 | - | - | ||||||||||||||||||
Loss (gain) |
204 | - | - | - | (43 | ) | (20 | ) | ||||||||||||||||
Net periodic benefit cost |
$ | 715 | $ | 365 | $ | 310 | $ | 313 | $ | 114 | $ | 135 | ||||||||||||
In connection
with its conversion to a state-chartered stock bank, the Company established an
employee stock ownership plan (ESOP) to provide substantially all employees
of the Company the opportunity to become stockholders. The ESOP borrowed $109.7
million of a $112.0 million line of credit from the Company and used the funds to
purchase 7,454,562 shares of common stock in the open market subsequent to the subscription
offering. The loan will be repaid principally from the Banks discretionary
contributions to the ESOP over a remaining period of 25 years. The unallocated ESOP
shares are pledged as collateral on the loan. |
||
At March 31,
2009, the loan had an outstanding balance of $99.3 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 stockholders equity as unearned compensation.
The Company will recognize compensation cost equal to the fair value of the ESOP
shares during the periods in which they are committed to be released. To the extent
that the fair value of the Companys ESOP shares differs from the cost of such
shares, this difference will be credited or debited to equity. The Company will
receive a tax deduction equal to the cost of the shares released to the extent of
the principal paydown on the loan by the ESOP. As the loan is internally leveraged,
the loan receivable from the ESOP to the Company is not reported as an asset nor
is the debt of the ESOP shown as a liability in the Companys financial statements.
Dividends on unallocated shares are used to pay the ESOP debt. The ESOP compensation
expense for the three months ended March 31, 2009 and 2008 was approximately $ 710,000
and $730,000, respectively. The amount of loan repayments made by the ESOP is used
to reduce the unallocated common stock held by the ESOP. |
||
The ESOP shares as of March 31, 2009 were as follows: |
Shares released for allocation | 1,224,957 | |||||
Unreleased shares | 6,229,605 | |||||
Total ESOP shares |
7,454,562 | |||||
Market value of unreleased shares at March 31, 2009 (in thousands) | $ | 73,136 | ||||
12. | Stock-Based Compensation | |
The Company
provides compensation benefits to employees and non-employee directors under its
2005 Long-Term Compensation Plan (the LTCP) which was approved by shareholders.
The Company accounts for stock-based compensation using the fair value recognition
provisions of revised SFAS No. 123 (SFAS No. 123R), Share Based
Payment, which was adopted using the modified prospective transition method
effective January 1, 2006. Under SFAS No. 123R, the fair value of stock option and
restricted stock awards, measured at grant date, is amortized to compensation expense
on a straight-line basis over the vesting period. |
||
The LTCP allows
for the issuance of up to 11.4 million Options or Stock Appreciation Rights and
up to 4.6 million Stock Awards or Performance Awards. |
||
Option Awards | ||
Options awarded
to date are for a term of ten years and total approximately 9.1 million shares.
Substantially all of these options were awarded on the original award date of June
17, 2005 and these 2005 option awards had the following vesting schedule: 40% vested
at year-end 2005 and 20% vested at year-end 2006, 2007 and 2008, respectively. Subsequent
awards have vesting periods of either three or four years. The Company has assumed
a 0.4% forfeiture rate as the majority of the options have been awarded to senior
level management. Compensation expense recorded on options for the three months
ended March 31, 2009 |
19
NewAlliance
Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
and 2008 was
$54,000 and $1.1 million, respectively, or after tax expense of approximately $35,000
and $730,000, respectively. Under the terms of the LTCP, additional awards are likely
to be granted, which will increase the amount of expense in future periods. |
||
There were
no options granted to employees during the three months ended March 31, 2009 and
options to purchase 59,250 shares were granted during the three months ended March
31, 2008. Using the Black-Scholes option pricing model, the weighted-average grant
date fair value was $1.86 for the options which were granted in 2008. The weighted-average
related assumptions for the three months ended March 31, 2008 are presented in the
following table. |
2008 | |||||
Risk-free interest rate | 2.80 | % | |||
Expected dividend yield | 2.15 | % | |||
Expected volatility | 16.11 | % | |||
Expected life (years) | 6.25 | ||||
The risk-free interest rate was determined using the U.S. Treasury yield curve in effect at the time of the grant. | ||
The expected
life for options granted during the three months ended March 31, 2008 was determined
by applying the simplified method as allowed by Staff Accounting Bulletin No. 107. |
||
A summary
of option activity as of March 31, 2009 and changes during the period ended is presented
below. |
Weighted- | ||||||||||||||
Weighted- | Average | Aggregate | ||||||||||||
Average | Remaining | Intrinsic | ||||||||||||
Exercise | Contractual | Value | ||||||||||||
Shares | Price | Term | ($000) | |||||||||||
Options outstanding at beginning of year | 8,422,666 | $ | 14.40 | |||||||||||
Granted | - | - | ||||||||||||
Exercised | - | - | ||||||||||||
Forfeited/cancelled | (1,725 | ) | 13.27 | |||||||||||
Expired | (1,000 | ) | 14.39 | |||||||||||
Options outstanding at March 31, 2009 | 8,419,941 | $ | 14.40 | 6.29 | $ | - | ||||||||
Options exercisable at March 31, 2009 | 8,207,605 | $ | 14.40 | 6.23 | $ | - | ||||||||
The following table summarizes the nonvested options during the three months ended March 31, 2009. | ||
Weighted-average | |||||||||
Grant-Date | |||||||||
Shares | Fair Value | ||||||||
Nonvested at January 1, 2009 | 247,494 | $ | 2.60 | ||||||
Granted | - | - | |||||||
Vested | (33,433 | ) | 2.31 | ||||||
Forfeited / Cancelled | (1,725 | ) | 2.11 | ||||||
Nonvested at March 31, 2009 | 212,336 | $ | 2.65 | ||||||
Restricted Stock Awards | ||
To date, approximately
3.5 million shares of restricted stock have been awarded under the LTCP. The majority
of these shares were awarded in 2005 and these 2005 awards have a vesting schedule
of 15% per year for six years and 10% in the seventh year. Subsequent awards have
vesting schedules of either three or four years. The associated expense is recorded
based on the vesting schedules. Compensation expense recorded on restricted stock
for the three months ended March 31, 2009 and 2008 was approximately $1.7 million
and $1.9 million or after tax expense of approximately $1.1 million and $1.2 million,
respectively. The Company anticipates that it will record expense of approximately
$6.4 million, $6.3 million, $4.2 million and $29,000 in calendar years 2009 through
2012, respectively. Under the terms of the LTCP, additional awards are likely to
be granted, which will increase the amount of expense recognized in future periods. |
20
The following table summarizes the nonvested restricted stock awards during the three months ended March 31, 2009. | ||||||||||
Weighted-average | ||||||||||
Grant-Date | ||||||||||
Shares | Fair Value | |||||||||
Nonvested at January 1, 2009 | 1,656,933 | $ | 14.33 | |||||||
Granted | - | - | ||||||||
Vested | (451,456 | ) | 13.97 | |||||||
Forfeited / Cancelled | (937 | ) | 13.12 | |||||||
Nonvested at March 31, 2009 | 1,204,540 | $ | 14.33 | |||||||
13. | Income Taxes | |
The Company had transactions in which the related tax effect was recorded directly to stockholders equity or goodwill instead
of operations. Transactions in which the tax effect was recorded directly to stockholders equity included the tax effects of
unrealized gains and losses on available for sale securities and excess tax benefits related to the vesting of restricted stock.
Deferred taxes charged to goodwill were in connection with prior acquisitions. The Company had a net deferred tax asset of
$24.7 million and $30.3 million at March 31, 2009 and December 31, 2008, respectively. As of March 31, 2009 and 2008, the Company has a valuation allowance of $9.1 million and $9.0 million, respectively, against charitable contributions that are expected to expire in 2009 unused. The increase in the valuation allowance for the three months ended March 31, 2009 is $50,000. Management estimates a total $200,000 increase in the valuation allowance is needed in 2009. As the increase in the valuation allowance results from changes in judgment concerning current years estimated income, the $200,000 increase is treated an adjustment to the annual effective tax rate and not as a discrete item in the quarter. Management expects that the valuation allowance will increase by $50,000 per quarter for the remainder of the year. |
The components of income tax expense are summarized as follows: | ||||||||
Three Months Ended | ||||||||
March 31, | ||||||||
(In thousands) | 2009 | 2008 | ||||||
Current tax expense | ||||||||
Federal |
$ | 5,500 | $ | 2,724 | ||||
State |
188 | 20 | ||||||
Total current |
5,688 | 2,744 | ||||||
Deferred tax expense, net of valuation reserve | ||||||||
Federal |
497 | 2,057 | ||||||
State |
- | - | ||||||
Total deferred |
497 | 2,057 | ||||||
Total income tax expense |
$ | 6,185 | $ | 4,801 | ||||
The allocation of changes in net deferred tax assets involving items charged to income, items charged directly to shareholders equity and items charged to goodwill is as follows: | ||||||||
Three Months Ended | ||||||||
March 31, | ||||||||
(In thousands) | 2009 | 2008 | ||||||
Deferred tax asset allocated to: | ||||||||
Stockholders equity, tax effect of net unrealized gain on investment securities available for sale, net of valuation allowance |
$ | 5,177 | $ | 798 | ||||
Stockholders equity, tax impact of adoption of EITF 06-04 |
- | (572 | ) | |||||
Goodwill |
- | (256 | ) | |||||
Income |
497 | 2,057 | ||||||
Total change in deferred tax assets, net |
$ | 5,674 | $ | 2,027 | ||||
21
The Company adopted the provisions of FIN 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: | |||||
March 31, | |||||
(In thousands) | 2009 | ||||
Balance, beginning of period | $ | 421 | |||
Additions for tax positions of current year |
- | ||||
Additions for tax positions of prior year |
9 | ||||
Reductions for tax positions of prior year |
- | ||||
Balance, end of period | $ | 430 | |||
Included in the balance at March 31, 2009 are $430,000 of tax positions for which the ultimate deductibility is highly uncertain
and for which the disallowance of the tax position would affect the annual effective tax rate. The Company anticipates that
$30,000 of the unrecognized tax benefits will reverse in the next twelve months due to statute expirations. The Company
recognizes interest and penalties accrued related to unrecognized tax benefits as a component of income tax expense. As of
March 31, 2009, the Company has accrued approximately $64,000 in interest and penalties. |
||
The Company is generally no longer subject to federal, state or local income tax examinations by tax authorities for the years
before 2005. In the third quarter of 2008, the IRS commenced an examination of the 2006 and 2007 tax years for Westbank. As
of March 31, 2009, the IRS has not proposed any significant adjustments to Westbanks tax returns. |
||
14. | Commitments and Contingencies | |
The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments consist primarily of commitments to extend credit and standby letters of
credit. Commitments to extend credit are agreements to lend to customers as long as there is no violation of any terms or
covenants established in the contract. Commitments generally have fixed expiration dates or other termination clauses that may
require payment of a fee. The Company monitors customer compliance with commitment terms. Since many of the
commitments could expire without being drawn upon, the total commitment amounts do not necessarily represent future cash
requirements. These commitments consist principally of unused commercial and consumer lines of credit. Standby letters of
credit generally are contingent upon the failure of the customer to perform according to the terms of an underlying contract with
a third party. The credit risks associated with commitments to extend credit and standby letters of credit are essentially the same
as those involved with extending loans to customers and are subject to normal credit policies. Collateral may be obtained based
on managements assessment of the customers creditworthiness. |
The table below summarizes the Companys commitments and contingencies discussed above. | |||||||||
March 31, | December 31, | ||||||||
(In thousands) | 2009 | 2008 | |||||||
Loan origination commitments | $ | 169,251 | $ | 108,948 | |||||
Unadvanced portion of construction loans | 71,563 | 82,525 | |||||||
Standby letters of credit | 7,515 | 7,908 | |||||||
Unadvanced portion of lines of credit | 616,908 | 608,043 | |||||||
Total commitments |
$ | 865,237 | $ | 807,424 | |||||
Other Commitments | ||
As of March 31, 2009 and December 31, 2008, the Company was contractually committed under limited partnership agreements
to make additional partnership investments of approximately $1.8 million for each period which constitutes the Companys
maximum potential obligation to these partnerships. The Company is obligated to make additional investments in response to
formal written requests, rather than a funding schedule. Funding requests are submitted when the partnerships plan to make
additional investments. |
||
Legal Proceedings | ||
We are not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of
business. We believe that those routine proceedings involve, in the aggregate, amounts which are immaterial to the financial
condition and results of operations of NewAlliance Bancshares, Inc. |
22
15. | Stockholders Equity | |
At March 31, 2009 and December 31, 2008, stockholders equity amounted to $1.39 billion and $1.38 billion, respectively,
representing 16.4% and 16.6% of total assets, respectively. The Company paid cash dividends totaling $0.07 per share on
common stock during the three months ended March 31, 2009. |
||
Dividends | ||
The Company and the Bank are subject to dividend restrictions imposed by various regulators. Connecticut banking laws limit
the amount of annual dividends that the Bank may pay to the Company to an amount that approximates the 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. |
||
Treasury Shares | ||
Share Repurchase Plan | ||
On January 31, 2006, the Companys Board of Directors authorized a repurchase plan of up to an additional 10.0 million shares
or approximately 10% of the then outstanding Company common stock. Under this plan the Company has repurchased 7.0
million shares of common stock at a weighted average price of $13.16 per share as of March 31, 2009. During the first quarter
of 2009, approximately 164,000 shares were repurchased. There is no set expiration date for this repurchase plan. |
||
Other | ||
Upon vesting of shares of restricted stock, plan participants may choose to have the Company withhold a number of shares necessary to satisfy tax withholding requirements. The withheld shares are classified as treasury shares by the Company. For the three months ended March 31, 2009, 106,000 shares were returned to the Company for this purpose. | ||
Regulatory Capital | ||
Capital guidelines of the Federal Reserve Board and the Federal Deposit Insurance Corporation (FDIC) require the Company
and its banking subsidiary to maintain certain minimum ratios, as set forth below. At March 31, 2009, the Company and the
Bank were deemed to be well capitalized under the regulations of the Federal Reserve Board and the FDIC, respectively, and
in compliance with the applicable capital requirements. |
||
The following table provides information on the capital ratios. |
To Be Well | ||||||||||||||||||||
For Capital | Capitalized Under | |||||||||||||||||||
Adequacy | Prompt Corrective | |||||||||||||||||||
Actual | Purposes | Action Provisions | ||||||||||||||||||
(Dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||
NewAlliance Bank | ||||||||||||||||||||
March 31, 2009 |
||||||||||||||||||||
Tier 1 Capital (to Average Assets) |
$ | 685,144 | 8.8 | % | $ | 311,352 | 4.0 | % | $ | 389,190 | 5.0 | % | ||||||||
Tier 1 Capital (to Risk Weighted Assets) |
685,144 | 15.1 | 181,418 | 4.0 | 272,127 | 6.0 | ||||||||||||||
Total Capital (to Risk Weighted Assets) |
735,779 | 16.2 | 362,836 | 8.0 | 453,546 | 10.0 | ||||||||||||||
December 31, 2008 |
||||||||||||||||||||
Tier 1 Capital (to Average Assets) |
$ | 735,144 | 9.5 | % | $ | 308,308 | 4.0 | % | $ | 385,385 | 5.0 | % | ||||||||
Tier 1 Capital (to Risk Weighted Assets) |
735,144 | 16.2 | 181,978 | 4.0 | 272,967 | 6.0 | ||||||||||||||
Total Capital (to Risk Weighted Assets) |
785,055 | 17.3 | 363,955 | 8.0 | 454,944 | 10.0 | ||||||||||||||
NewAlliance Bancshares, Inc. | ||||||||||||||||||||
March 31, 2009 |
||||||||||||||||||||
Tier 1 Capital (to Average Assets) |
$ | 859,374 | 11.0 | % | $ | 311,906 | 4.0 | % | $ | 389,882 | 5.0 | % | ||||||||
Tier 1 Capital (to Risk Weighted Assets) |
859,374 | 18.9 | 182,024 | 4.0 | 273,036 | 6.0 | ||||||||||||||
Total Capital (to Risk Weighted Assets) |
910,008 | 20.0 | 364,048 | 8.0 | 455,060 | 10.0 | ||||||||||||||
December 31, 2008 |
||||||||||||||||||||
Tier 1 Capital (to Average Assets) |
$ | 853,628 | 11.1 | % | $ | 308,873 | 4.0 | % | $ | 386,091 | 5.0 | % | ||||||||
Tier 1 Capital (to Risk Weighted Assets) |
853,628 | 18.7 | 182,537 | 4.0 | 273,806 | 6.0 | ||||||||||||||
Total Capital (to Risk Weighted Assets) |
903,539 | 19.8 | 365,075 | 8.0 | 456,343 | 10.0 |
23
16. | Other Comprehensive Income | |||||||
The following table presents the components of other comprehensive income and the related tax effects for the three months ended March 31, 2009 and 2008. | ||||||||
Three Months Ended | ||||||||
March 31, | ||||||||
(In thousands) | 2009 | 2008 | ||||||
Net income | $ | 11,590 | $ | 12,934 | ||||
Other comprehensive income, before tax | ||||||||
Unrealized gains on securities |
||||||||
Unrealized holding gains, arising during the period |
16,123 | 3,487 | ||||||
Reclassification adjustment for gains included in net income |
(1,866 | ) | (1,138 | ) | ||||
Other comprehensive income, before tax | 14,257 | 2,349 | ||||||
Income tax expense, net of valuation allowance | (5,177 | ) | (798 | ) | ||||
Other comprehensive income, net of tax | 9,080 | 1,551 | ||||||
Comprehensive income | $ | 20,670 | $ | 14,485 | ||||
17. | Earnings Per Share | |||||||
The calculation of basic and diluted earnings per share for the three months ended March 31, 2009 and 2008 is presented below. | ||||||||
Three Months Ended | ||||||||
March 31, | ||||||||
(In thousands, except per share data) | 2009 | 2008 | ||||||
Net income | $ | 11,590 | $ | 12,934 | ||||
Average common shares outstanding for basic EPS | 99,254 | 100,277 | ||||||
Effect of dilutive stock options and unvested stock awards | 16 | 53 | ||||||
Average common and common-equivalent shares for dilutive EPS | 99,270 | 100,330 | ||||||
Net income per common share: | ||||||||
Basic |
$ | 0.12 | $ | 0.13 | ||||
Diluted |
0.12 | 0.13 | ||||||
24
Forward-Looking Statements
This report may contain certain forward-looking statements as that term is defined in the U.S. federal securities laws.
Forward-looking statements are based on certain assumptions and describe future plans, strategies, and expectations of management and are generally identified by use of the word plan, believe, expect, intend, anticipate, estimate, project, or similar expressions. Managements ability to predict results or the actual effects of its plans or strategies is inherently uncertain. Accordingly, actual results may differ materially from anticipated results.
Factors that could have a material adverse effect on the operations of NewAlliance Bancshares, Inc. (NewAlliance or the Company) and its subsidiaries include, but are not limited to:
| Changes in the interest rate environment may reduce the net interest margin and/or the volumes and values of loans made or held as well as the value of other financial assets held; | |
| General economic or business conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, a deterioration in credit quality and/or a reduced demand for credit or other services; | |
| Adverse changes may occur in the securities markets impacting the value of NewAlliances investments; | |
| Competitive pressures among depository and other financial institutions may increase significantly and may decrease the profit margin associated with its business; | |
| Recent government initiatives including the Emergency Economic Stabilization Act of 2008 (EESA) are expected to have a profound effect on the financial services industry and could dramatically change the competitive environment of the Company; | |
| Other legislative or regulatory changes, including those related to residential mortgages and changes in accounting standards, may adversely affect the businesses in which NewAlliance is engaged; | |
| Local, state or federal taxing authorities may take tax positions that are adverse to NewAlliance; | |
| Expected cost savings associated with completed mergers may not fully be realized or realized within expected time frames; | |
| Deposit attrition, customer loss or revenue loss following completed mergers may be greater than expected; | |
| Competitors of NewAlliance may have greater financial resources and develop products that enable them to compete more successfully than NewAlliance; and | |
| Costs or difficulties related to the integration of acquired businesses may be greater than expected. | |
| Unfavorable changes related to economic stress and dislocation may impact the Companys vendors, counter-parties, and other entities on which the company has a dependence. |
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Except as required by applicable law or regulation, management undertakes no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date on which such statements were made.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand NewAlliance Bancshares, Inc., our operations and our present business environment. We believe transparency and clarity are the primary goals of successful financial reporting. We remain committed to increasing the transparency of our financial reporting, providing our stockholders with informative financial disclosures and presenting an accurate view of our financial disclosures, financial position and operating results.
MD&A is provided as a supplement toand should be read in conjunction withour Consolidated Financial Statements (unaudited) and the accompanying notes thereto contained in Part I, Item 1, of this report as well as our Annual Report on Form 10-K for the year ended December 31, 2008. The following sections are included in MD&A:
| Our Business a general description of our business, our objectives and regulatory considerations. |
| Critical Accounting Estimates a discussion of accounting estimates that require critical judgments and estimates. |
| Recent Accounting Changes a discussion of recently adopted accounting pronouncements or changes. |
| Operating Results an analysis of our Companys consolidated results of operations for the periods presented in our Consolidated Financial Statements. |
| Financial Condition and Management of Market and Interest Rate Risk an overview of financial condition and market and interest rate risk. |
25
Our Business
General
By assets, NewAlliance is the third largest banking institution headquartered in Connecticut and the fourth largest based in New England with consolidated assets of $8.50 billion and stockholders equity of $1.39 billion at March 31, 2009. Its business philosophy is to operate as a community bank with local decision-making authority. NewAlliance delivers financial services to individuals, families and businesses throughout Connecticut and Western Massachusetts through its 89 banking offices, 105 ATMs and internet website (www.newalliancebank.com). NewAlliance common stock is traded on the New York Stock Exchange under the symbol NAL.
The Companys results of operations depend primarily on net interest income, which is the difference between the income earned on its loan and securities portfolios and its cost of funds, consisting of the interest paid on deposits and borrowings. Results of operations are also affected by the Companys provision for loan losses, income and expenses pertaining to other real estate owned, gains and losses from sales of loans and securities and non-interest income and expenses. Non-interest income primarily consists of fee income from depositors and wealth management services and bank owned life insurance (BOLI). Non-interest expenses consist principally of compensation and employee benefits, occupancy, data processing, amortization of acquisition related intangible assets, marketing, professional services and other operating expenses.
Results of operations are also significantly affected by general economic and competitive conditions and changes in interest rates as well as government policies and actions of regulatory authorities. Future changes in applicable laws, regulations or government policies may materially affect the Company.
Our Objectives
NewAlliance seeks to continually deliver superior value to its customers, stockholders, employees and communities through achievement of its core operating objectives which are to:
| Increase core deposit relationships with a focus on checking and savings accounts; | |
| Build high quality, profitable loan portfolios using organic, purchase and acquisition strategies; | |
| Increase the non-interest income component of total revenues through development of banking-related fee income and growth in wealth management services; | |
| Grow through a disciplined acquisition strategy, supplemented by de-novo branching; | |
| Improve operating efficiencies; | |
| Utilize technology to enhance superior customer service and products; and | |
| Maintain a rigorous risk identification and management process. |
Significant factors management reviews to evaluate achievement of the Companys operating objectives and its operating results and financial condition include, but are not limited to: net income and earnings per share, performance of acquisitions and integration activities, return on equity and assets, net interest margin, non-interest income, operating expenses related to total assets and efficiency ratio, asset quality, loan and deposit growth, capital management, liquidity and interest rate sensitivity levels, customer service standards, market share and peer comparisons.
Regulatory Considerations
NewAlliance and its subsidiaries are subject to numerous examinations by federal and state banking regulators, as well as the Securities and Exchange Commission. Please refer to NewAlliances Annual Report on Form 10-K for the year ended December 31, 2008 for additional disclosures with respect to laws and regulations affecting the Companys businesses.
Critical Accounting Estimates
Our Consolidated Financial Statements are prepared in accordance with GAAP. In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our
26
Consolidated Financial Statements are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
We believe that our most critical accounting policies, and those which involve the most complex subjective decisions or assessments relate to income taxes, pension and other postretirement benefits, goodwill and intangible assets, the allowance for loan losses and other-than-temporary impairment of investments. None of the Companys critical accounting estimates have changed during the quarter. A brief description of our current policies involving significant management valuation judgments follows:
Income Taxes
Management uses the asset and liability method of accounting for income taxes in which 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.
Significant management judgment is required in determining income tax expense and deferred tax assets and liabilities. Some judgments are subjective and involve estimates and assumptions about matters that are inherently uncertain. In determining the valuation allowance, we use historical and forecasted future operating results, based upon approved business plans, including a review of the eligible carryforward periods, tax planning opportunities and other relevant considerations. Management believes that the accounting estimate related to the valuation allowance is a critical accounting estimate because the underlying assumptions can change from period to period. For example, tax law changes or variances in future projected operating performance could result in a change in the valuation allowance.
The reserve for tax contingencies contains uncertainties because management is required to make assumptions and to apply judgment to estimate the exposures associated with our various filing positions. The effective income tax rate is also affected by changes in tax law, entry into new tax jurisdictions, the level of earnings and the results of tax audits.
Pension and Other Postretirement Benefits
Management uses key assumptions that include discount rates, expected return on plan assets, benefits earned, interest costs, mortality rates, increases in compensation, and other factors. The two most critical assumptionsestimated return on plan assets and the discount rateare important elements of plan expense and asset/liability measurements. These critical assumptions are evaluated at least annually on a plan basis. Other assumptions are evaluated periodically and are updated to reflect actual experience and expectations for the future.
Goodwill and Identifiable Intangible Assets
We evaluate goodwill and identifiable intangible assets for impairment annually or whenever events or changes in circumstances indicate the carrying value of the goodwill or identifiable intangible assets may not be recoverable. We complete our impairment evaluation by performing internal valuation analyses based on discounted cash flow modeling techniques, considering publicly available market information and using an independent valuation firm, as appropriate. These types of analyses contain uncertainties because they require management to make assumptions and to apply judgment to estimate industry economic factors and the profitability of future business strategies.
Allowance for Loan Losses
The allowance for loan losses reflects managements best estimate of probable losses inherent in the loan portfolio. The adequacy of the allowance is determined based upon a detailed evaluation of the portfolio and sub-portfolios through a process which considers numerous factors, including levels and direction of delinquencies, non-performing loans and assets, risk ratings, estimated credit losses using both internal and external portfolio reviews, current economic and market conditions, concentrations, portfolio volume and mix, changes in underwriting, experience of staff, historical loss rates over the business cycle and current economic trends. All of these factors may be susceptible to significant change.
Other-Than-Temporary Impairment of Investments
We conduct a periodic review of our investment securities portfolio to determine if the value of any security has declined below its cost or amortized cost, and whether such decline is other-than-temporary. If such decline is deemed other-than-temporary, the security is written down to a new cost basis and the resulting loss is reported within non-interest income in the consolidated statement of income. Factors considered by management include, but are not limited to: intent and ability to retain the investment for a period of time sufficient to allow for the anticipated recovery in market value, percentage and length of time which an issue is below book value, financial condition and near-term prospects of the issuer including their ability to meet contractual obligations in a timely manner and whether the decline in fair value appears to be issuer specific or, alternatively, a reflection of general market or industry conditions. Adverse changes in managements assessment of the factors used to determine that a security was not other-than-temporarily impaired could lead to additional impairment charges.
27
A complete discussion of critical accounting estimates can be found in the Companys most recent Annual Report on Form 10-K (fiscal year ended December 31, 2008).
Recent Accounting Changes
We adopted the following new accounting pronouncements on January 1, 2009:
FASB Staff Position (FSP) No. 157-2, Effective date of FASB Statement No. 157 (FSP No. 157-2). FSP No. 157-2 requires disclosure of nonfinancial assets and liabilities in accordance with SFAS No. 157, Fair Value Measurements. For further information, see Note 3 in the Notes to the Unaudited Consolidated Financial Statements.
FSAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (SFAS No. 161). SFAS No. 161 changes the disclosure requirements regarding derivative instruments and hedging activities.
FSP No. 142-3, Determination of the Useful Life of Intangible Assets (FSP No. 142-2). This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 (revised 2007), Business Combinations (SFAS No. 141(R)). SFAS No. 141(R) replaces SFAS No. 141 Business Combinations and became effective on January 1, 2009. SFAS No. 141(R) applies prospectively to any future business combinations and is expected to have a significant effect on the Companys consolidated financial statements, when a business combination occurs.
The adoption of these new accounting pronouncements did not have a material impact on the Companys consolidated financial statements as of March 31, 2009.
Operating Results
Executive Overview
The current economic crisis which began in the latter half of 2007 and is expected to continue throughout 2009 has been one of the most difficult financial and economic episodes in modern history. During the past 15 to 18 months, there have been many government initiatives instituted to help stem the crisis and get the economy turned around including the Emergency Economic Stabilization Act (EESA) which was signed into law on October 3, 2008. One of the objectives of EESA is to infuse capital into select institutions thereby helping to restore confidence in the banking system. Two of the present initiatives underway include the Financial Stability Plan and the American Recovery and Reinvestment Act. The objectives of the Financial Stability Plan are to: a) stabilize the financial system and restore confidence in the market place b) revitalize lending and increase credit c) create a Public-Private Investment Fund to buy up toxic assets and d) keep people in their homes. The objective of the American Recovery and Reinvestment Act is to provide a stimulus to the U.S. economy and includes federal tax cuts, expansion of unemployment benefits and other social welfare provisions and domestic spending. However, stress on consumers remains high due to elevated unemployment rates, rising mortgage delinquencies and home foreclosures, and credit remaining tight. Consequently, the Company is operating in a very challenging environment in which to thrive.
The Company reported earnings of $11.6 million, or $0.12 per diluted share, for the first quarter of 2009 compared to $12.9 million or $0.13 per diluted share for the first quarter of 2008. Although this is a decrease of $1.3 million, or $0.01 per diluted share from the first quarter of 2008, we are extremely pleased with these results given the economic environment. Our success has come from growth in our core business operations, mainly core deposits and originated loans, bolstered by solid asset quality and exceptional capital levels.
Growth in core deposits has been due in part to new product offerings, marketing efforts and a continued flight to safety by depositors who are searching for a bank they consider to be safe and well capitalized. Core deposits increased $471.8 million from March 31, 2008 and $309.9 million since December 31, 2008. The shift away from higher cost time deposits and the increase in core deposits has had the effect of both significantly lowering our cost of funds and providing ample liquidity to fund loan originations and reduce our borrowings.
We expect deposit competition in our market area to remain intense as a key focus for the banking industry continues to be the generation of deposits to enhance liquidity and asset growth in a tight credit market. This has manifested itself in higher deposit pricing relative to reference indexes such as the LIBOR or Treasury curves than we experienced in more stable periods. We plan to continue the pricing strategy to retain maturing time deposits, within reason, and to grow core deposits.
28
The decrease in conforming mortgage interest rates, caused by government purchases of mortgage securities, and a reduced number of competitors who have the ability and liquidity to retain mortgage loans were catalysts for the surge of mortgage originations that occurred during the first quarter. With ample liquidity and capital and access to the secondary mortgage market, we were able to increase our market share and post mortgage originations of approximately $290.0 million during the quarter. Of these originations, approximately $157.0 million were fixed rate mortgages with terms of 15 years and over and therefore, were originated for sale. Total mortgage banking activity and loan sale income was $2.0 million and $257,000 for the three months ended March 31, 2009 and 2008, respectively. The current quarter income of $2.0 million includes approximately $430,000 in unrealized fair value gains related to loan commitments and mortgage loans held for sale. We anticipate originations will decrease slightly from first quarter levels, but still be running higher than prior year activity. Through prudent risk management practices, sound credit polices, no direct exposure to sub prime mortgage lending and sufficient capital and liquidity, we are confident that we are positioned well in these difficult economic times.
Net interest income benefited from an increase in the average balance of interest-earning assets of $271.5 million and a decrease in the cost of interest-bearing liabilities of $9.5 million. The decline in the yield on interest-earning assets of 61 basis points was mitigated by the drop in the rate on interest-bearing liabilities of 72 basis points. The decrease in the yield on interest-earning assets was primarily due to a reduced yield on the loan portfolio due to rate cuts by the Federal Reserve Bank, the absence of a dividend from the Federal Home Loan Bank of Boston (FHLB) and a decline in the yield on investment securities due to a decrease in market interest rates resulting from the current economic conditions. The decrease in the rate on liabilities was mainly due to our deposit mix improving as higher cost time deposits were replaced with lower cost core deposits and reductions in the rates paid on core deposits coupled with a decrease in the average balance and rate of FHLB borrowings. For the three months ended March 31, 2009 the net interest margin was 2.58% as compared to 2.56% for the same period in 2008.
At NewAlliance we consider asset quality and prudent lending practices to be major strengths of our institution, however, consumers and businesses are under considerable economic pressure which has translated into increasing trends in delinquencies, net charge-offs and nonperforming loans. In response to risks in its loan portfolio, the Company recorded a loan loss provision of $4.1 million for the quarter ended March 31, 2009.
The three loan portfolio segments that we consider to have the highest risk are construction loans to commercial developers for residential development, and a small segment of our residential real estate and home equity loans. The Company has a carrying value of $45.3 million of commercial construction loans for residential development. All of these loans are collateralized and carry a reserve allocation of $3.1 million, which includes $246,000 in specific reserves. This segment has total delinquencies of $7.5 million, all of which are in the over 90 day category. Within the residential and home equity portfolios, we have a watch list of approximately $115.0 million that is being more closely monitored due to a drop in credit score of 20 points or more and a score that falls below 660. As of March 31, 2009 total delinquencies for residential real estate and home equity loans are $31.9 million, which includes $23.2 million in the over 90 day category. Of the $23.2 million over 90 days delinquent, approximately $7.9 million is from this watch list.
In the midst of deteriorating market conditions the Companys asset quality remains solid and a cornerstone of our success. For the three months ended March 31, 2009, net charge-offs were $3.4 million, or on an annualized basis, 0.27% of average loans and a loan loss provision of $4.1 million was recorded. During the comparative year period, a loan loss provision of $1.7 million and net charge-offs of $99,000 were recorded. Nonperforming loans at March 31, 2009 increased 30.8% to $50.1 million since December 31, 2008 and as a percentage of total loans is 1.02% compared to 0.77% at year end. While the increase in nonperforming loans is higher than prior periods, the low absolute level of nonperforming loans the Company has previously recorded causes even modest increases in nonperforming loans to result in a large percentage change. The bulk of the nonperforming increase is in residential real estate and is a result of economic and financial pressures. We continue to be proactive in our efforts to address credit quality and expect that combined with our stringent underwriting standards, it will remain manageable in future periods.
The Company remains well capitalized by regulatory standards with a Tier 1 leverage ratio of 11.02%, compared to the regulatory well capitalized benchmark of 5.0%. Our capital level has remained strong throughout this economic crisis without Federal assistance. Therefore, the Company has not applied for funds from the Troubled Asset Relief Program (TARP). One of our challenges is to continuously search for the best use for our capital that will grow the franchise and enhance shareholder value. The Company has completed six acquisitions since 2004, the most recent being in the first quarter of 2007. While the volatility over the past 15 - 18 months has not been conducive to widespread acquisition activity, we feel that there are opportunities in the current environment on which we may be able to capitalize as a result of our flexibility and capital strength. Key tactics include leveraging consumers flight to safety to capture market share, acquire banks that provide earnings accretion and seize opportunities to purchase regional branch divestitures.
Looking forward, our key business priorities for 2009 include: a) strengthening the margin; b) building core fee income; c) maintaining flat expenses; d) aggressively managing credit quality and e) seizing opportunities to grow the franchise. As demonstrated by our results outlined above, these priorities are not new to us but rather a continuation of our Community Bank philosophy.
29
Selected financial data, ratios and per share data are provided in Table 1. | |||||||
Table 1: Selected Data | |||||||
Three Months Ended | |||||||
March 31, | |||||||
(Dollars in thousands, except per share data) | 2009 | 2008 | |||||
Condensed Income Statement | |||||||
Interest and dividend income | $ | 94,755 | $ | 102,214 | |||
Interest expense | 46,762 | 56,208 | |||||
Net interest income before provision for loan losses | 47,993 | 46,006 | |||||
Provision for loan losses | 4,100 | 1,700 | |||||
Net interest income after provision for loan losses | 43,893 | 44,306 | |||||
Non-interest income | 14,263 | 15,666 | |||||
Operating expenses | 40,380 | 42,181 | |||||
Merger related charges | 1 | 56 | |||||
Income before income taxes | 17,775 | 17,735 | |||||
Income tax provision | 6,185 | 4,801 | |||||
Net income | $ | 11,590 | $ | 12,934 | |||
Weighted average shares outstanding | |||||||
Basic |
99,254,242 | 100,277,267 | |||||
Diluted |
99,270,068 | 100,330,148 | |||||
Earnings per share | |||||||
Basic |
$ | 0.12 | $ | 0.13 | |||
Diluted |
0.12 | 0.13 | |||||
Financial Ratios | |||||||
Return on average assets (1) | 0.55 | % | 0.64 | % | |||
Return on average equity (1) | 3.35 | 3.66 | |||||
Net interest margin (1) | 2.58 | 2.56 | |||||
Non-GAAP Ratios | |||||||
Efficiency ratio (2) | 65.71 | 69.24 | |||||
Tangible common equity ratio (3) | 10.10 | 10.67 | |||||
Per share data | |||||||
Book value per share | $ | 13.06 | $ | 13.03 | |||
Tangible book value per share | 7.73 | 7.70 | |||||
(1) | Annualized. | |
(2) | The efficiency ratio represents the ratio of non-interest expenses, net of OREO expenses, to the sum of net interest income and non-interest income, excluding security and limited partnership net gains or losses. The efficiency ratio is not a financial measurement required by accounting principles generally accepted in the United States of America. However management believes such information is useful to investors in evaluating Company performance. | |
(3) | The tangible common equity ratio excludes goodwill, identifiable intangible assets and junior subordinated debentures. This ratio is not a financial measurement required by accounting principles generally accepted in the United States of America. However, management believes such information is useful to investors in evaluating Company performance. |
Average Balances, Interest, Average
Yields/Cost and Rate/Volume Analysis
Table 2 below sets 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 3 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 change attributable to rate and volume (change in rate multiplied by change in volume), which is prorated between the changes in rate and volume.
30
Table 2: Average Balance Sheets for the Three Months Ended March 31, 2009 and 2008 | |||||||||||||||||||||||
Three Months Ended March 31, | |||||||||||||||||||||||
2009 | 2008 | ||||||||||||||||||||||
Average | Average | ||||||||||||||||||||||
Average | Yield/ | Average | Yield/ | ||||||||||||||||||||
(Dollars in thousands) | Balance | Interest | Rate | Balance | Interest | Rate | |||||||||||||||||
Interest-earning assets | |||||||||||||||||||||||
Loans |
|||||||||||||||||||||||
Residential real estate |
$ | 2,562,872 | $ | 34,594 | 5.40 | % | $ | 2,396,849 | $ | 33,278 | 5.55 | % | |||||||||||
Commercial real estate |
1,221,406 | 17,617 | 5.77 | 1,199,161 | 18,887 | 6.30 | |||||||||||||||||
Commercial business |
449,237 | 5,711 | 5.09 | 456,668 | 7,365 | 6.45 | |||||||||||||||||
Consumer |
737,867 | 8,707 | 4.72 | 687,913 | 10,287 | 5.98 | |||||||||||||||||
Total loans |
4,971,382 | 66,629 | 5.36 | 4,740,591 | 69,817 | 5.89 | |||||||||||||||||
Fed funds sold and other short-term investments |
54,489 | 164 | 1.20 | 28,668 | 284 | 3.96 | |||||||||||||||||
Federal Home Loan Bank of Boston stock |
120,821 | - | - | 114,127 | 1,720 | 6.03 | |||||||||||||||||
Securities |
2,303,684 | 27,962 | 4.86 | 2,295,532 | 30,393 | 5.30 | |||||||||||||||||
Total securities, short-term investments |
|||||||||||||||||||||||
and federal home loan bank stock |
2,478,994 | 28,126 | 4.54 | 2,438,327 | 32,397 | 5.31 | |||||||||||||||||
Total interest-earning assets |
7,450,376 | $ | 94,755 | 5.09 | % | 7,178,918 | $ | 102,214 | 5.70 | % | |||||||||||||
Non-interest earning assets |
916,407 | 946,738 | |||||||||||||||||||||
Total assets |
$ | 8,366,783 | $ | 8,125,656 | |||||||||||||||||||
Interest-bearing liabilities | |||||||||||||||||||||||
Deposits |
|||||||||||||||||||||||
Money Markets |
$ | 413,045 | $ | 1,917 | 1.86 | % | $ | 492,249 | $ | 3,221 | 2.62 | % | |||||||||||
NOW |
346,492 | 236 | 0.27 | 381,017 | 517 | 0.54 | |||||||||||||||||
Savings |
1,537,733 | 6,763 | 1.76 | 998,291 | 5,750 | 2.30 | |||||||||||||||||
Certificates |
1,739,439 | 13,924 | 3.20 | 1,942,892 | 20,510 | 4.22 | |||||||||||||||||
Total interest-bearing deposits |
4,036,709 | 22,840 | 2.26 | 3,814,449 | 29,998 | 3.15 | |||||||||||||||||
Repurchase agreements |
159,932 | 537 | 1.34 | 189,980 | 1,149 | 2.42 | |||||||||||||||||
FHLB advances and other borrowings |
2,207,021 | 23,385 | 4.24 | 2,170,195 | 25,061 | 4.62 | |||||||||||||||||
Total interest-bearing liabilities |
6,403,662 | 46,762 | 2.92 | % | 6,174,624 | 56,208 | 3.64 | % | |||||||||||||||
Non-interest-bearing demand deposits |
486,398 | 459,678 | |||||||||||||||||||||
Other non-interest-bearing liabilities |
90,826 | 76,440 | |||||||||||||||||||||
Total liabilities |
6,980,886 | 6,710,742 | |||||||||||||||||||||
Equity |
1,385,897 | 1,414,914 | |||||||||||||||||||||
Total liabilities and equity |
$ | 8,366,783 | $ | 8,125,656 | |||||||||||||||||||
Net interest-earning assets |
$ | 1,046,714 | $ | 1,004,294 | |||||||||||||||||||
Net interest income |
$ | 47,993 | $ | 46,006 | |||||||||||||||||||
Interest rate spread |
2.17 | % | 2.05 | % | |||||||||||||||||||
Net interest margin (net interest income |
|||||||||||||||||||||||
as a percentage of total interest-earning assets |
2.58 | % | 2.56 | % | |||||||||||||||||||
Ratio of total interest-earning assets |
|||||||||||||||||||||||
to total interest-bearing liabilitites |
116.35 | % | 116.26 | % | |||||||||||||||||||
31
Table 3: Rate/Volume Analysis | ||||||||||||||
Three Months Ended | ||||||||||||||
March 31, 2009 | ||||||||||||||
Compared to | ||||||||||||||
Three Months Ended | ||||||||||||||
March 31, 2008 | ||||||||||||||
Increase (Decrease) | ||||||||||||||
Due to | ||||||||||||||
(In thousands) | Rate | Volume | Net | |||||||||||
Interest-earning assets | ||||||||||||||
Loans |
||||||||||||||
Residential real estate |
$ | (943 | ) | $ | 2,259 | $ | 1,316 | |||||||
Commercial real estate |
(1,615 | ) | 345 | (1,270 | ) | |||||||||
Commercial business |
(1,536 | ) | (118 | ) | (1,654 | ) | ||||||||
Consumer |
(2,287 | ) | 707 | (1,580 | ) | |||||||||
Total loans |
(6,381 | ) | 3,193 | (3,188 | ) | |||||||||
Fed funds sold and other short-term investments |
(276 | ) | 156 | (120 | ) | |||||||||
Federal Home Loan Bank of Boston stock |
(1,815 | ) | 95 | (1,720 | ) | |||||||||
Securities |
(2,539 | ) | 108 | (2,431 | ) | |||||||||
Total securities, short-term investments |
||||||||||||||
and federal home loan bank stock |
(4,630 | ) | 359 | (4,271 | ) | |||||||||
Total interest-earning assets |
$ | (11,011 | ) | $ | 3,552 | $ | (7,459 | ) | ||||||
Interest-bearing liabilities | ||||||||||||||
Deposits |
||||||||||||||
Money market |
$ | (840 | ) | $ | (464 | ) | $ | (1,304 | ) | |||||
NOW |
(238 | ) | (43 | ) | (281 | ) | ||||||||
Savings |
(1,583 | ) | 2,596 | 1,013 | ||||||||||
Time |
(4,595 | ) | (1,991 | ) | (6,586 | ) | ||||||||
Total interest bearing deposits |
(7,256 | ) | 98 | (7,158 | ) | |||||||||
Repurchase agreements |
(451 | ) | (161 | ) | (612 | ) | ||||||||
FHLB advances and other borrowings |
(2,095 | ) | 419 | (1,676 | ) | |||||||||
Total interest-bearing liabilities |
$ | (9,802 | ) | $ | 356 | $ | (9,446 | ) | ||||||
Increase in net interest income | $ | (1,209 | ) | $ | 3,196 | $ | 1,987 | |||||||
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 2, net interest income for the quarter ended March 31, 2009 was $48.0 million,
an increase of $2.0 million from March 31, 2008. The increase is due to a significant
reduction in higher-priced certificate of deposit accounts, the reductions in rates
on core accounts, the reduction in borrowing costs and growth in the loan portfolio,
partially offset by the effect of the decline in adjustable rate commercial and
consumer loans, the suspension of the quarterly dividend on FHLB stock and a reduction
in income from the securities portfolio due to the decline in interest rates and
market conditions. Although a portion of earning assets repriced at reduced rates
from a year ago, we counterbalanced that through managing our funding costs and
as a result, the net interest margin increased two basis points to 2.58% at March
31, 2009 from 2.56% from the same period in the prior year. |
||
Interest and
dividend income decreased $7.5 million to $94.8 million at March 31, 2009 compared
to $102.2 million at March 31, 2008 comprised of a decrease of $11.0 million due to
rate, partially offset by a $3.5 million increase due to volume. The decline in rate
was primarily due to a) newly originated loans and adjustable or variable rate loans
that were reset at reduced rates due to the rate cuts imposed by the Federal Reserve
Bank (FRB) throughout 2008, b) the absence of a quarterly dividend from
the FHLB and c) a decline in the average yield in the investment securities portfolio
due to a decline in market interest rates resulting from the current economic conditions.
Loan yields have also been negatively impacted by the increase in nonperforming
loans. |
32
As a voluntary
member of the FHLB, the Company is required to invest in stock of the FHLB in an
amount based partly upon its outstanding advances from the FHLB. Stock is purchased
at par value. Upon redemption of the stock, which is at the discretion of the FHLB,
the Company would receive an amount equal to the par value of the stock. At its
discretion, the FHLB may also declare dividends on its stock. Such dividends amounted
to $0 and $1.7 million for the three months ended March 31, 2009 and 2008, respectively. |
||
On February
26, 2009, the FHLB advised its members that, while it currently meets all its regulatory
capital requirements, it is focusing on preserving capital in response to ongoing
market volatility, and accordingly, has suspended its quarterly dividend and has
extended the moratorium on excess stock purchases, primarily due to other-than-temporary
impairment charges on its private-label mortgage-backed securities. The FHLB has
stated that it expects and intends to hold its private-label mortgage- backed securities
to maturity. Dividends from the FHLB for the remainder of 2009 are unlikely. |
||
Strong loan
growth helped to mitigate the effect of the decline in interest income as loan portfolio
volume accounted for approximately $3.2 million of the increase to interest income.
The average balance for the period rose $230.8 million as three of the four loan
categories experienced increases in the average balance, with the residential real
estate portfolio the main driver of growth. The Company, with ready liquidity and
capital, was able to take advantage of pricing opportunities in our lending area
as competition was diminished throughout 2008 and remained somewhat diminished during
the first quarter of 2009. |
||
The cost of
funds for the quarter ended March 31, 2009 decreased $9.4 million to $46.8 million,
compared to $56.2 million for the same period a year ago. The Companys strategy
during this period was to bring down deposit costs while being mindful of competitor
pricing and continued focus on the increase of core deposits. As a result the Company
experienced a decrease of 89 basis points on the average rate paid on interest-bearing
deposits with a corresponding decrease of $7.2 million in interest expense on deposits.
This decrease was primarily in time deposits as interest expense in this category
decreased $6.6 million due to the average balances and average yield paid decreasing $203.5
million and 102 basis points, respectively. The decrease in time deposit costs was
partially offset by an increase in interest expense on savings accounts as the average
balance for the period rose $539.4 million; however, when combined with the decline
in the average rate paid of 54 basis points, interest expense on savings accounts
increased moderately by $1.0 million. Savings accounts increased due to targeted
marketing campaigns and migration from maturing time deposits as they repriced at
reduced rates. |
||
FHLB advances
and other borrowing costs decreased $2.3 million primarily due to the decline in
the average rate paid on FHLB advances as the Company was able to replace maturing
advances with new advances at substantially lower rates. Due to the growth in core
deposits, the Company has been able to lessen its reliance on FHLB advances to fund
loan originations, purchase investments and manage liquidity. |
||
Provision for Loan Losses | ||
The provision
for loan losses (provision) is based on managements periodic assessment
of the adequacy of the allowance for loan losses 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 recorded a provision for loan losses
of $4.1 million for the three months ended March 31, 2009. The primary factors that
influenced managements decision to record this provision were increasing trends
in delinquencies, net charge-offs of $3.4 million for the quarter and an increase
in nonperforming loans. The first quarter increase in non-performing loans of $11.8
million was primarily related to an increase in residential and commercial real
estate loans, partially offset by a decrease in commercial construction loans. Further
details about non-performing loans can be found in the Asset Quality
and Allowance for Loan Losses sections beginning on page 39. Future
provisions for loan losses may be deemed necessary if economic conditions do not
improve or continue to deteriorate. A provision for loan losses of $1.7 million was
recorded for the three months ended March 31, 2008, based on growth in the portfolio,
the level of net charge-offs, and nonperforming loans at that time. |
||
At March 31,
2009, the allowance for loan losses was $50.6 million, which represented 1.03% of
total loans and 101.02% of nonperforming loans. This compared to the allowance for
loan losses of $49.9 million at December 31, 2008 which represented 130.21% of nonperforming
loans and 1.01% of total loans. |
33
Table 4: Non-Interest Income | |||||||||||||||||
Three Months Ended | |||||||||||||||||
March 31, | Change | ||||||||||||||||
(Dollars in thousands) | 2009 | 2008 | Amount | Percent | |||||||||||||
Depositor service charges | $ | 5,953 | $ | 6,632 | $ | (679 | ) | (10 | )% | ||||||||
Loan and servicing income (loss), net | (181 | ) | 381 | (562 | ) | (148 | ) | ||||||||||
Trust fees | 1,259 | 1,670 | (411 | ) | (25 | ) | |||||||||||
Investment management, brokerage & insurance fees | 2,250 | 2,532 | (282 | ) | (11 | ) | |||||||||||
Bank owned life insurance | 871 | 1,529 | (658 | ) | (43 | ) | |||||||||||
Net gain on securities | 1,866 | 1,138 | 728 | 64 | |||||||||||||
Mortgage banking activity & loan sale income | 2,019 | 257 | 1,762 | 686 | |||||||||||||
Other | 226 | 1,527 | (1,301 | ) | (85 | ) | |||||||||||
Total non-interest income |
$ | 14,263 | $ | 15,666 | $ | (1,403 | ) | (9 | )% | ||||||||
Non-Interest Income | ||
As displayed
in Table 4, non-interest income decreased $1.4 million to $14.3 million for the three
months ended March 31, 2009 from the prior year period. The main drivers of the
decrease were depositor service charges, loan and servicing income, trust fees,
bank-owned life insurance (BOLI) and other income. These decreases were
partially offset by an increase in net gain on securities and increased mortgage
banking and loan sale income. |
| Depositor
service charges decreased due to a decline in overdraft fees, point of sale fees
and merchant services income. The Company eliminated debit card point-of-sale fees
in the first quarter of 2008 for promotional and competitive reasons. The decrease
in overdraft fees and merchant services income is due to the low levels of consumer
spending brought about by the slowing economy. These decreases were partially offset
by increased debit card revenue resulting from expanded card usage due in part to
a rewards program initiated in 2008, which offers cash rewards to customers
who use their debit cards. |
|||
| Loan and servicing
income declined due primarily to a write-down of $475,000 of the Banks mortgage
servicing asset and fewer commercial real estate prepayment fees and letters of
credit. The decline in interest rates has caused prepayment speeds to accelerate,
thereby reducing the value of the servicing asset. |
|||
| Trust fees
declined primarily due to a decrease in assets under management. The assets under
management declined primarily as a result of the decline in the market value of
the assets, which caused the reduction in the amount of management fees earned. |
|||
| BOLI income
decreased due to a decline in the average yield earned as a result of current market
interest rates. |
|||
| Other income
decreased due to: a) net loss of $748,000 recorded on limited partnerships during
the first quarter of 2009 due to the decline in the fair-value of the underlying
investments, b) a decrease in amounts earned on the outstanding balances of bank
checks processed by a third-party vendor due to the decline in market interest rates
and c) the prior year receipt of approximately $500,000 from the partial redemption
of the Companys stake in Visa Inc., following Visas initial public offering. |
|||
| Net gain on
securities increased due to the gains recorded on the sale of mortgage-backed securities.
These securities were sold at a premium and were sold in order to reduce prepayment
risk, to fund the pay-off of FHLB advances and to increase liquidity. |
|||
| Mortgage banking
activity & loan sale income increased $1.8 million due to a greater number of
mortgage loans originated for sale, sold in the secondary market and the effect
of originations that were in the pipeline at March 31, 2009 to be sold. The increased
origination activity has been driven by the low interest rate environment and the
continued dislocation in the credit markets which has reduced the number of competitors
in the short term. Combined with the Companys adequate liquidity and capital
position we were able to increase our market share. |
34
Table 5: Non-Interest Expense | |||||||||||||||||
Three Months Ended | |||||||||||||||||
March 31, | Change | ||||||||||||||||
(Dollars in thousands) | 2009 | 2008 | Amount | Percent | |||||||||||||
Salaries and employee benefits | $ | 21,231 | $ | 23,689 | $ | (2,458 | ) | (10 | )% | ||||||||
Occupancy | 4,755 | 4,895 | (140 | ) | (3 | ) | |||||||||||
Furniture and fixtures | 1,475 | 1,686 | (211 | ) | (13 | ) | |||||||||||
Outside services | 5,350 | 4,273 | 1,077 | 25 | |||||||||||||
Advertising, public relations, and sponsorships | 1,213 | 1,709 | (496 | ) | (29 | ) | |||||||||||
Amortization of identifiable intangible assets | 2,128 | 2,364 | (236 | ) | (10 | ) | |||||||||||
Merger related charges | 1 | 56 | (55 | ) | (98 | ) | |||||||||||
Other | 4,228 | 3,565 | 663 | 19 | |||||||||||||
Total non-interest expense |
$ | 40,381 | $ | 42,237 | $ | (1,856 | ) | (4 | )% | ||||||||
Non-Interest Expense | ||
As displayed
in Table 5, non-interest expense decreased $1.8 million to $40.4 million for the three
months ended March 31, 2009 from $42.2 million for the same period a year ago. The
main drivers of the decrease were salaries and employee benefits and advertising,
public relations and sponsorships. These decreases were partially offset by increases
in outside services and other expense. |
| Salaries and
employee benefits decreased as a result of reduced stock option expense as the majority
of options granted to date became fully vested on December 31, 2008 and decreased
salaries due to the prior year severance payment for an executive no longer with
the Company, partially offset by current year employee severance payments. These
decreases were partially offset by increased pension plan expense due to the decline
in the value of the pension assets and changes in assumptions for 2009. |
|||
| Advertising,
public relations and sponsorships declined primarily due to a reduction in expenses
related to various media advertising and bonus campaigns to promote free savings
and home equity products. |
|||
| Outside services
increased primarily due to consulting costs associated with a performance optimization
project undertaken in 2008 to improve the overall effectiveness and revenue performance
of the Company. Consulting costs related to the performance optimization project
in the first quarter were approximately $600,000 and are not anticipated to be incurred
in future quarters. Outside services also increased due to charges incurred for
outsourcing general internal audit work, data processing and consulting costs related
to human resource projects. |
|||
| Other expenses
increased primarily as a result of the increase in the FDIC assessment for deposit
insurance. The Banks assessment cost rose approximately $760,000 from the first
quarter of last year due to a seven basis point increase in the assessment rate
bringing it to twelve basis points. For the remainder of 2009, the assessment rate
is expected to increase up to 16 basis points. Additionally, the FDIC has proposed
a special one-time assessment of up to 20 basis points payable in the 3rd
quarter. These increases and the exhaustion of the Companys one-time credit
established by the Federal Deposit Insurance Reform Act of 2005 will have a substantial
effect on deposit insurance premium expense in 2009. |
Income Tax Provision | ||
The income
tax expense for the three months ended March 31, 2009 and 2008 was $6.2 million and $4.8
million, respectively. The effective tax rate for these periods was 34.8% and 27.1%,
respectively. |
||
The increase
in the effective tax rate for the three months ended March 31, 2009 is primarily
due to the reduction of $924,000 of unrecognized tax benefits for tax positions recognized
in the first quarter of 2008 resulting from a final settlement of an IRS audit and
to the decrease in the tax benefit associated with bank owned life insurance and
the dividend received deduction. |
35
Financial Condition | ||
Financial Condition Summary | ||
From December
31, 2008 to March 31, 2009, total assets and total liabilities increased $199.1 million
and $186.1 million, respectively, due mainly to increases in cash and cash equivalents,
loans held for sale, investments and deposits, partially offset by decreases in
borrowings. Stockholders equity increased $13.0 million. |
||
Investment Securities | ||
The following
table presents the amortized cost and fair value of investment securities at March
31, 2009 and December 31, 2008. |
||
Table 6: Investment Securities | |||||||||||||||||
March 31, 2009 | December 31, 2008 | ||||||||||||||||
Amortized | Fair | Amortized | Fair | ||||||||||||||
(In thousands) | cost | value | cost | value | |||||||||||||
Available for sale | |||||||||||||||||
U.S. Treasury obligations |
$ | 596 | $ | 596 | $ | 596 | $ | 597 | |||||||||
U.S. Government sponsored enterprise obligations |
206,358 | 209,584 | 228,844 | 233,349 | |||||||||||||
Corporate obligations |
8,168 | 7,559 | 8,178 | 7,946 | |||||||||||||
Other bonds and obligations |
45,654 | 40,681 | 45,654 | 38,928 | |||||||||||||
Marketable and trust preferred equity securities |
66,246 | 43,749 | 66,747 | 50,399 | |||||||||||||
Mortgage-backed securities |
1,742,563 | 1,783,789 | 1,576,430 | 1,597,343 | |||||||||||||
Total available for sale |
2,069,585 | 2,085,958 | 1,926,449 | 1,928,562 | |||||||||||||
Held to maturity | |||||||||||||||||
Mortgage-backed securities |
301,535 | 312,260 | 299,222 | 308,016 | |||||||||||||
Other bonds |
10,560 | 10,821 | 10,560 | 10,746 | |||||||||||||
Total held to maturity |
312,095 | 323,081 | 309,782 | 318,762 | |||||||||||||
Total securities |
$ | 2,381,680 | $ | 2,409,039 | $ | 2,236,231 | $ | 2,247,324 | |||||||||
At March 31,
2009, the Company had total investments of $2.40 billion, or 28.2%, of total assets.
The increase of $159.7 million, from $2.24 billion at December 31, 2008 was primarily
the result of purchasing mortgage-backed securities. The Companys increase
in the investment portfolio was funded primarily by the growth in deposits and loan
principal repayments. While the Company prefers lending as the primary use of its
excess cash flows, the investment portfolio serves a secondary role in generating
revenue while managing interest-rate risk and liquidity. |
||
The available
for sale and held to maturity securities portfolios are primarily composed of mortgage-backed
securities. Mortgage-backed securities comprised 85.5% and 96.6% of the total available
for sale and held to maturity securities portfolios, respectively, at March 31,
2009, the majority of which are issued by FNMA and FHLMC. The duration of the mortgage-backed
securities portfolio was 1.20 years at March 31, 2009 compared to 1.55 years at
December 31, 2008. |
||
The Companys underlying investment strategy has been to purchase FNMA and FHLMC hybrid
adjustable rate mortgage-backed securities, and seasoned 15 and 20 year Government
Sponsored Enterprise (GSE) fixed rate mortgage-backed securities. The
Company has focused on the purchases of these securities due to their attractive
spreads versus funding costs 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 securities. The average life for mortgage-backed securities,
when purchased, would range between two and four years and the maturity dates for
Agency obligations would range between one and five years. |
||
SFAS No. 115
Accounting for Certain Investments in Debt and Equity Securities,
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 March 31, 2009, $2.09 billion, or 87.0%, of the portfolio,
was classified as available for sale and $312.1 million of the portfolio was classified
as held to maturity. Securities available for sale are carried at estimated fair
value. Additional information about fair value measurements can be found in Note
3 of the Notes to Unaudited Consolidated Financial Statements. |
||
The net unrealized
gain on securities classified as available for sale as of March 31, 2009 was $16.4
million compared to an unrealized gain of $2.1 million as of December 31, 2008. The
appreciation in the market value of securities available for sale was primarily
due to the increase in the fair value of mortgage-backed securities, partially offset
by declining values of trust |
36
preferred
equity securities and privately issued mortgage-backed securities. The changes in
unrealized gains and losses on the investment portfolio are primarily due to credit
spreads, liquidity and fluctuations in market interest rates during the period. |
||
The net unrealized
gain on mortgage-backed securities is primarily from agency mortgage-backed securities
issued by FNMA and FHLMC, partially offset by unrealized losses on mortgage-backed
securities issued by private institutions primarily due to widening in non-agency
mortgage spreads. In addition to the changes in market interest rates, the unrealized
gain on agency mortgage-backed securities are also due in part to the program initiated
by the Federal Reserve to purchase the direct obligations of housing-related GSEs, Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, and mortgage-backed
securities backed by Fannie Mae, Freddie Mac, and Ginnie Mae. The goal of these
purchases is to drive down long-term fixed mortgage rates to stimulate the housing
market as spreads on GSE debt and on GSE-issued mortgages had widened as benchmark
treasury and London Interbank Offered Rate (LIBOR) rates declined. |
||
The unrealized
loss on mortgage-backed securities issued by private institutions is concentrated
in four private-label mortgage-backed securities which are substantially paid down,
well seasoned and of an earlier vintage that have not been significantly affected
by high delinquency levels or vulnerable to lower collateral coverage as seen in
later issued pools. None of the securities are backed by sub-prime mortgage loans
and none have suffered losses. These securities are all rated AAA, are still paying
principal and interest and are expected to continue to pay their contractual cash
flows. Managements review of the above factors and issuer specific data concluded
that these private-label mortgage-backed securities are not other-than- temporarily
impaired. |
||
The Bank owns
trust preferred securities with amortized cost of $47.7 million, of which $6.8 million
are pooled trust preferred, with $4.8 million rated AAA and $2.0 million rated AA.
The remaining $40.9 million are individual names broken out as follows: $18.6
million rated A+ to A-, $9.9 million rated BBB+ to BBB and $12.4 million rated BB.
The unrealized losses reported for trust preferred equity securities relate to the
financial and liquidity stresses in the fixed income market and not to any credit
impairment of the issuers. Although the ratings on some issues have been reduced
since December 31, 2008, there have not been any disruptions in the cash flows on
any of these securities and all are currently paying the contractual principal and
interest payments. In accordance with the Companys internal policies for review
of other-than-temporary impairment, a detailed review of certain trust preferred
equity securities was completed. This review included an analysis of collateral
reports, stress default levels and financial ratios of the underlying issuers and
concluded that there was no other-than-temporary impairment at the end of the period.
All trust preferred equity securities carried below market value are current and
no impairment of cash flows is anticipated. |
||
The unrealized
loss on other bonds and obligations relates to auction rate certificates and a mortgage mutual fund.
The auction rate certificates were issued by a Wall Street underwriting firm and
are pools of government-guaranteed student loans that are issued by state student
loan departments. In the first half of 2008, the auction process for auction rate
certificates began to freeze resulting from the problems in the credit markets.
These securities are currently rated AAA and are still paying their contractual
cash flows and are expected to continue to pay their contractual cash flows. In
2008, the underwriter entered into a settlement agreement with several state regulatory
agencies, whereby they have agreed to repurchase these certificates from both their
retail and institutional customers at par. The institutional buy-back of these securities
is scheduled on or around June 30, 2010. Unrealized losses in this category also
relate to a position in a short-term adjustable rate mortgage mutual fund that holds
positions in non-agency mortgage-backed securities that are facing negative mark
to market pressures due to widening spreads in non-agency mortgage products and
are not due to customer redemptions, forced selling or losses taken on investments.
The fund carries a weighted average underlying investment credit rating of AA and
it continues to pay normal monthly dividends. |
||
Management
has performed a review of all investments with unrealized losses and determined
that none of these investments had other-than-temporary impairment. The Company
has the ability and intent to hold all of these securities for the time necessary
to recover the unrealized losses which may be until maturity. The Company does not
own or plan on investing in securities backed by sub-prime mortgage collateral. |
37
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, home equity loans and lines of credit and other consumer loans. Table 7 displays
the balances of the Companys loan portfolio as of March 31, 2009 and December
31, 2008. |
Table 7: Loan Portfolio | ||||||||||||||||
March 31, 2009 | December 31, 2008 | |||||||||||||||
Percent of | Percent of | |||||||||||||||
(Dollars in thousands) | Amount | Total | Total | |||||||||||||
Residential real estate | $ | 2,514,712 | 51.0 | % | $ | 2,524,638 | 50.9 | % | ||||||||
Residential real estate construction | 17,988 | 0.3 | 21,380 | 0.4 | ||||||||||||
Total residential real estate |
2,532,700 | 51.3 | 2,546,018 | 51.3 | ||||||||||||
Commercial real estate | 1,082,437 | 21.9 | 1,077,200 | 21.7 | ||||||||||||
Commercial real estate construction | 135,492 | 2.8 | 143,610 | 2.9 | ||||||||||||
Total commercial real estate |
1,217,929 | 24.7 | 1,220,810 | 24.6 | ||||||||||||
Commercial business | 441,811 | 9.0 | 458,952 | 9.2 | ||||||||||||
Home equity and equity lines of credit | 720,120 | 14.6 | 714,444 | 14.4 | ||||||||||||
Other consumer | 20,188 | 0.4 | 22,561 | 0.5 | ||||||||||||
Total loans |
$ | 4,932,748 | 100.0 | % | $ | 4,962,785 | 100.0 | % | ||||||||
As shown in
Table 7, gross loans were $4.93 billion, down $30.0 million, at March 31, 2009 from
year-end 2008. The Company experienced a decrease in most loan categories due to
higher levels of residential mortgage prepayments offsetting originations and diminished
business loan demand. |
||
Residential
real estate loans continue to represent the largest segment of the Companys
loan portfolio as of March 31, 2009, comprising 51.3% of total loans. The decrease
of $13.3 million from December 31, 2008 was primarily due to prepayments outweighing
new originations for portfolio during the quarter attributable to the decline in
interest rates to historically low levels and customers refinancing to lock-in fixed
rate mortgages. Although the Company had significant originations of both adjustable
and fixed rate mortgages of approximately $290.0 million during the first quarter,
approximately $132.0 million was originated for portfolio and the remainder was sold
in the secondary market. The Company currently sells all originated fixed rate residential
real estate loans with terms of 15 years and over, except for certain long term
fixed rate loans to borrowers in low to moderate income areas. The Company anticipates
that mortgage activity will continue to be robust while interest rates remain low,
but not at the level experienced in the first quarter. The residential real estate
loan portfolio has a weighted average FICO score of 750 and an updated weighted
average loan to value ratio of 63%. Included in residential real estate is a purchased
portfolio, which is made up of prime loans individually underwritten by the Company
to our underwriting criteria, and includes adjustable-rate and 10 and 15 year fixed-rate
residential real estate loans with property locations throughout the United States
with no significant exposure in any particular state. At March 31, 2009 the Companys purchased portfolio had an outstanding balance of approximately $668.0 million
with the largest concentration in Connecticut and Massachusetts at 18.2%, followed
by California and New York, which each make up approximately 13.0%. |
||
Commercial
real estate loans and commercial business loans decreased $20.0 million. The decrease
was primarily attributable to commercial loans and commercial construction loans
partially offset by an increase in commercial real estate loans. In general, loan
growth has slowed due to current economic conditions and elevated levels of stress
on businesses. Additionally, we are finding fewer opportunities in the short term
that meet our underwriting and credit quality standards. Therefore, our originations
have been dominated by financing requests from current customers and less from new
customers. The commercial construction portfolio of $135.5 million includes approximately $45.3
million of loans to commercial borrowers for residential housing development, $17.2
million of which are for condominium projects. The decrease in commercial construction
is partly due to loans completing the construction phase and converting to fully
amortizing commercial real estate loans and to a lesser extent through a negotiated
settlement and further charge-offs on nonperforming condominium projects. The commercial
real estate and commercial loan portfolios continue to have increased delinquencies
and nonperforming loans in 2009, partially offset by declines in the construction
portfolio. See the Asset Quality and Allowance for Loan Losses sections following this discussion for further information concerning charge-offs
and the loan loss allowance. Although the Companys commercial portfolios have
declined, our long term strategy continues to be that of building a larger percentage
of the Companys assets in commercial loans including real estate and other
business loans. We remain an active commercial lender and will continue promoting
strong business development efforts to obtain new business banking relationships,
while maintaining strong credit quality and profitability. We believe that our status
as a healthy regional community bank focused on relationship banking |
38
bodes well
for us to retain customers and to be a source for new businesses shifting away from
larger banks in search of more personalized lending services. |
||
Home equity
loans and lines of credit increased $5.7 million from December 31, 2008 to March
31, 2009. These products were promoted by the Company through competitive pricing
and marketing campaigns as the Company is committed to growing this loan segment
while maintaining credit quality as an alternative to first mortgage loans. The
weighted average FICO score and updated weighted average loan to value ratio for
home equity loans and lines of credit is 746 and 65%, respectively. Loan growth
has been from organic originations in the Companys market area, none of which
is subprime. |
||
Asset Quality | ||
Loans are
placed on nonaccrual if collection of principal or interest in full is in doubt,
if the loan has been restructured, or if any payment of principal or interest is
past due 90 days or more. A loan may be returned to accrual status if it has demonstrated
sustained contractual performance or if all principal and interest amounts contractually
due are reasonably assured of repayment within a reasonable period. |
||
As displayed
in Table 8, nonperforming assets at March 31, 2009 increased to $51.5 million compared
to $40.4 million at December 31, 2008. The increase is primarily due to loans secured
by residential one-to-four family loans, commercial real estate and commercial business
loans. The increase in nonperforming residential loans of $9.0 million was due to
current economic conditions including factors such as the rise in unemployment rates
and declines in the median sales price of residential homes. There are less than
100 loans in the residential nonperforming category totaling $21.6 million, representing
less than one percent of the total residential portfolio. The Company routinely
updates FICO scores and LTV ratios and continues to originate loans with superior
credit characteristics. Through continued heightened account monitoring, collections
and workout efforts, the bank is committed to mortgage solution programs to assist
homeowners to remain in their homes. As it has been its practice historically, the
Company does not originate sub-prime loans. Included in nonperforming residential
loans are approximately $1.1 million in restructured loans which have been modified
from their original contractual terms. |
||
The increase
in nonperforming commercial real estate and commercial business loans was primarily
due to the general deterioration of economic conditions. The decline in nonperforming
commercial construction loans relates to condominium projects within the residential
housing development segment primarily due to charge-offs recorded against three
relationships of $1.8 million and the sale of a nonperforming loan. As of March
31, 2009, the construction to permanent segment of commercial construction loans
had no delinquencies, nonaccruals, impairment or adversely classified loans. |
||
If current
economic conditions persist or deteriorate further, there will be added stress on
our loan portfolios. The Company believes, however, that its historical practice
of prudent underwriting, the relatively modest size of its residential construction
portfolio and strong average FICO scores combined with low loan to value ratios
associated with its residential portfolio are significant advantages in keeping
asset quality manageable. Nonperforming loans as a percent of total loans outstanding
at March 31, 2009 was 1.02%, compared to 0.77% at December 31, 2008. |
Table 8: Nonperforming Assets | |||||||||
March 31, | December 31, | ||||||||
(Dollars in thousands) | 2009 | 2008 | |||||||
Nonaccruing loans (1) | |||||||||
Real estate loans |
|||||||||
Residential (one- to four-family) |
$ | 21,616 | $ | 12,634 | |||||
Commercial real estate loans |
10,970 | 8,201 | |||||||
Commercial construction |
7,459 | 10,234 | |||||||
Total real estate loans |
40,045 | 31,069 | |||||||
Commercial business |
8,495 | 5,863 | |||||||
Consumer loans |
|||||||||
Home equity and equity lines of credit |
1,559 | 1,304 | |||||||
Other consumer |
23 | 95 | |||||||
Total consumer loans |
1,582 | 1,399 | |||||||
Total nonaccruing loans |
50,122 | 38,331 | |||||||
Real estate owned | 1,382 | 2,023 | |||||||
Total nonperforming assets |
$ | 51,504 | $ | 40,354 | |||||
Total nonperforming loans as a percentage of total loans (2) |
1.02 | 0.77 | |||||||
Total nonperforming assets as a percentage of total assets |
0.61 | 0.49 |
39
(1) | Nonaccrual
loans include all loans 90 days or more past due, restructured loans and other loans,
which have been identified by the Company as presenting uncertainty with respect
to the collectability of interest or principal. |
||
(2) | Total loans
are stated at their principal amounts outstanding, net of deferred fees and fair
value adjustments on acquired loans. |
Allowance for Loan Losses | ||
Deteriorating
market conditions have been affecting loan portfolios since the latter part of 2007.
As displayed in Table 9 below, the Company recorded net charge-offs of $3.4 million,
during the three months ended March 31, 2009, compared to net charge-offs of $99,000
for the three months ended March 31, 2008. Commercial construction for residential
development, specifically condominium projects with charge-offs of $1.8 million,
was the main driver of total net charge-offs for the current quarter. Net charge-offs
of $503,000 and $466,000 were recorded against the commercial and residential real
estate portfolios, respectively, primarily due to continued adverse economic and
housing pressures. As a result of the net charge-offs, increases in nonaccrual and
adversely classified loans and delinquency indicators, a provision for loan losses
of $4.1 million was recorded for the three months ended March 31, 2009 compared to
a provision of $1.7 million for the three months ended March 31, 2008. Management
believes that the allowance for loan losses is adequate and consistent with asset
quality and delinquency indicators. The Company had a loan loss allowance of $50.6
million, or 1.03% of total loans and $49.9 million, or 1.01% of total loans at March
31, 2009 and December 31, 2008, respectively. |
||
The allowance
for loan losses to nonperforming loans ratio at March 31, 2009 was 101.02% compared
to 130.21% at December 31, 2008 and 239.16 at March 31, 2008. This ratio has declined
because growth in the allowance is not proportional to growth in nonperforming loans due to 1) classification of nonperforming loans is a backward looking
indicator, often loans with credit weaknesses are identified and allocated higher levels of reserves if appropriate
before becoming nonperforming, 2) the majority of the Companys nonperforming loans are secured by real estate
collateral and while the entire loan is classified as nonperforming, only the amount of estimated losses would have been
captured in the allowance for loan losses, 3) the growth in nonperforming loans this quarter was concentrated in
residential real estate loans in which the loss in event of default is traditionally low, 4) certain nonperforming loans
have already been partially charged-off to the expected net realizable value and 5) a portion of the allowance is to
cover losses established under SFAS No. 5, Accounting for Contingencies for performing loans. Performing
loans have not grown at the same rate that nonperforming loans have. The Company
employs a formal quarterly process to assess the adequacy of the Companys
allowance for loan losses. The process is designed to adequately capture inherent
losses in the loan portfolio. |
Table 9: Schedule of Allowance for Loan Losses | ||||||||||
At or For the Three Months | ||||||||||
Ended March 31, | ||||||||||
(Dollars in thousands) | 2009 | 2008 | ||||||||
Balance at beginning of period | $ | 49,911 | $ | 43,813 | ||||||
Provision for loan losses | 4,100 | 1,700 | ||||||||
Charge-offs | ||||||||||
Residential real estate loans |
500 | 51 | ||||||||
Commercial real estate loans |
503 | - | ||||||||
Commercial construction loans |
1,781 | - | ||||||||
Commercial business loans |
805 | 270 | ||||||||
Consumer loans |
159 | 146 | ||||||||
Total charge-offs |
3,748 | 467 | ||||||||
Recoveries | ||||||||||
Residential real estate loans |
34 | 3 | ||||||||
Commercial real estate loans |
- | 12 | ||||||||
Commercial construction loans |
- | - | ||||||||
Commercial business loans |
207 | 320 | ||||||||
Consumer loans |
131 | 33 | ||||||||
Total recoveries |
372 | 368 | ||||||||
Net charge-offs | 3,376 | 99 | ||||||||
Balance at end of period | $ | 50,635 | $ | 45,414 | ||||||
Net charge-offs to average loans (annualized) | 0.27 | % | 0.01 | % | ||||||
Allowance for loan losses to total loans | 1.03 | 0.95 | ||||||||
Allowance for loan losses to nonperforming loans | 101.02 | 239.16 | ||||||||
Net charge-offs to allowance for loan losses | 6.67 | 0.22 | ||||||||
Total recoveries to total charge-offs | 9.93 | 78.80 |
40
Loans held for Sale | ||
Loans held
for sale were $20.4 million at March 31, 2009, and increase of $15.1 million, from
December 31, 2008. The Company currently sells all originated fixed rate residential
real estate loans with terms of 15 years and over, except for certain long term
fixed rate loans to borrowers in low to moderate income areas. The increase is due
to a greater number of fixed rate residential mortgage loan originations attributable
to the historically low level of interest rates and the continued dislocation in
the credit markets which reduced the number of competitors in the short term. These
factors, combined with the Companys adequate liquidity and capital allowed
us to increase our market share. During the current quarter, the Company funded
approximately $157.0 million in mortgage loans originated for sale. The Company originates
both fixed-rate mortgage loans and small business loans (SBA) for sale
in the secondary market. |
||
Goodwill and Identifiable Intangible Assets | ||
At March 31,
2009, the Company had intangible assets of $568.9 million, a decrease of $2.1 million,
from $571.0 million at December 31, 2008. The decrease is due to year-to-date amortization
expense for core deposit and customer relationships. |
||
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 the 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 and more
frequently if circumstances exist that indicates a possible reduction in the fair
value of the business below its carrying value. The Company engaged an external
third party to perform its annual test for goodwill impairment during the first
quarter of 2009. The analysis performed evaluated the fair value of the reporting
unit using a combination of four valuation methodologies including; the Public Market
Peers approach, the Comparable Transactions approach, the Control Premium approach
and a Discounted Cash Flow approach. Based on the analysis, the Company concluded
an impairment charge was not deemed necessary. No events or circumstances subsequent
to the analysis through March 31, 2009 indicate that the carrying value of the Companys goodwill may not be recoverable. |
||
Sources of Funds | ||
Cash flows
from deposits, loan and mortgage-backed securities repayments, securities sales
proceeds and maturities, borrowings and earnings are the primary sources of the
Companys funds available for use in its lending and investment activities
and in meeting its operational needs. While scheduled loan and securities repayments
are a relatively stable source of funds, deposit flows and loan and investment security
prepayments are influenced by prevailing interest rates and local and economic conditions
and are inherently uncertain. The borrowings primarily include FHLB advances and
repurchase agreement borrowings. See Note 10 of Notes to Unaudited Consolidated
Financial Statements contained elsewhere within this Report for further borrowings
information. |
||
The Company
attempts to control the flow of funds in its deposit accounts according to its need
for funds and the cost of alternative sources of funding. A Loan and Deposit Pricing
Committee meets weekly to determine pricing and marketing initiatives. It influences
the flow of funds primarily by the pricing of deposits, which is affected to a large
extent by competitive factors in its market area and asset/liability management
strategies. |
||
Deposits | ||
The Company
receives retail and commercial deposits through its main office and 88 other banking
offices throughout Connecticut (77 locations) and Massachusetts (12 locations).
Customers can also access their accounts through ATMs, internet banking and
telephone banking. Customer deposits generated through the NewAlliance banking network
are the largest source of funds used to support asset growth. |
Table 10: Deposits | ||||||||||
March 31, | December 31, | |||||||||
(In thousands) | 2009 | 2008 | ||||||||
Savings | $ | 1,651,874 | $ | 1,463,341 | ||||||
Money market | 477,569 | 346,522 | ||||||||
NOW | 359,598 | 368,730 | ||||||||
Demand | 494,412 | 494,978 | ||||||||
Time | 1,678,706 | 1,774,259 | ||||||||
Total deposits |
$ | 4,662,159 | $ | 4,447,830 | ||||||
41
As displayed
in Table 10, deposits increased $214.3 million compared to December 31, 2008. The
Companys strategy has been to increase core deposits and reduce rates paid
on interest bearing deposits, particularly on time deposits, in order to improve
the net interest margin and the interest rate spread while continuing to build core
relationships. Through well-designed product offerings, the Company has been able
to grow core deposits by $309.9 million, particularly through the Companys
free savings product. The Bank has also been focused on growing core deposits by
launching the products, Essential Checking and Essential Savings, which
encompasses an interest-bearing checking, a competitively priced savings account
and a cash rewards debit card. Also positively impacting deposit balances was the
transfer of approximately $60.0 million of the Banks Trust department customer
funds, awaiting investment or distribution, from institutional money market funds
and into a money market account within the Bank. Partially offsetting the growth
in core deposits was a decrease in time deposit accounts of approximately $95.6 million,
as the Company repriced maturing CDs at reduced rates causing retention of
time deposits to drop. However, the Company was able to retain some of the attrition
in time deposit accounts through the free savings and essential products that offer
competitive interest rates. |
||
Borrowings | ||
NewAlliance
also uses various types of short-term and long-term borrowings in meeting funding
needs. While customer deposits remain the primary source for funding loan originations,
management uses short-term and long-term borrowings as a supplementary funding source
for loan growth and other liquidity needs when the cost of these funds are favorable
compared to alternative funding, including deposits. |
||
The Company
is a member of the FHLB which is part of the Federal Home Loan Bank System. Members
are required to own capital stock in the FHLB and borrowings are collateralized
by certain home mortgages or securities of the U.S. Government and its agencies. |
||
The following
table summaries the Companys recorded borrowings at March 31, 2009. |
Table 11: Borrowings | ||||||||||
March 31, | December 31, | |||||||||
(In thousands) | 2009 | 2008 | ||||||||
FHLB advances (1) | $ | 2,167,536 | $ | 2,190,714 | ||||||
Repurchase agreements | 148,259 | 159,530 | ||||||||
Mortgage loans payable | 1,281 | 1,317 | ||||||||
Junior subordinated debentures issued to affiliated trusts (2) | 24,685 | 24,935 | ||||||||
Total borrowings |
$ | 2,341,761 | $ | 2,376,496 | ||||||
(1) | Includes fair
value adjustments on acquired borrowings, in accordance with SFAS No. 141, Business
Combinations, of $5.1 million and $5.8 million at March 31, 2009 and December
31, 2008, respectively. The acquisition fair value adjustments (premiums) are being
amortized as an adjustment to interest expense on borrowings over their remaining
terms using the level yield method. |
|||
(2) | Includes fair
value adjustments on acquired borrowings, in accordance with SFAS No. 141, Business
Combinations, of $50,000 and $100,000 at March 31, 2009 and December 31,
2008, respectively. The trusts were organized to facilitate the issuance of trust
preferred securities. The Company acquired these subsidiaries when it acquired
Alliance Bancorp of New England, Inc. and Westbank Corporation, Inc. The affiliated
trusts are wholly-owned subsidiaries of the Company and the payments of these securities
are irrevocably and unconditionally guaranteed by the Company. 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. |
Borrowings
were $2.34 billion at March 31, 2009, a decrease of $34.7 million from the balance
recorded at December 31, 2008, and was mainly in FHLB advances. The decrease in
FHLB advances was primarily due to principal paydowns and maturing advances, partially
offset by new advances at reduced rates. The Company was also able lessen its reliance
on borrowings from the FHLB by utilizing excess customer deposits to originate loans,
invest in securities and meet other liquidity needs, while managing interest rate
risk. At March 31, 2009, all of the Companys outstanding FHLB advances were
at fixed rates ranging from 0.74% to 8.17%. |
||
Stockholders Equity | ||
Total stockholders equity equaled $1.39 billion at March 31, 2009, an increase of 13.0 million
compared to $1.38 billion at December 31, 2008. The increase was primarily due to
year to date earnings of $11.6 million and an increase in the fair market value of
available for sale investment securities of $9.1 million, net of tax. The increase
in equity was partially offset by a $7.0 million payment of cash dividends declared
on our common stock during the three months ended March 31, 2009 and treasury |
42
shares acquired
for $1.7 million, representing approximately 164,000 shares of our common stock.
For information regarding our compliance with applicable capital requirements, see
Liquidity and Capital Position below. |
||
Dividends
declared for the year to date period ended March 31, 2009 were $0.07 per share compared
to $0.065 per share for the same period last year. On April 28, 2009, we declared
a $0.07 per share cash dividend payable on May 19, 2009 to shareholders of record
on May 8, 2009. This will be the Companys 20th consecutive quarterly
dividend payment. Book value per share amounted to $13.06 and $12.90 at March 31,
2009 and December 31, 2008, respectively, and tangible book value amounted to $7.73
and $7.57 at the same dates, respectively. |
||
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 mitigated
as the majority have implied government guarantees. There is no direct sub-prime
mortgage exposure in the investment portfolio. 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 and spreads. 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 numerous 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 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.
By its strategy of limiting the Banks risk to rising interest rates, the Bank
is also limiting the benefit of falling interest rates. |
||
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 March 31, 2009, 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 $147.0 million,
or negative 1.73% 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 a 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 a range of interest rate scenarios, the estimated net interest
margin over the next 12 months should decline by less than |
43
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 yield curve as of March 31, 2009 was utilized. This yield
curve was utilized due to the recent excessive volatility in the rate markets as
well as due to the comments from various Federal Reserve Bank officials that interest
rates would likely remain flat for an extended period. As of March 31, 2009, the
Companys estimated exposure as a percentage of estimated net interest income
for the next twelve-month period as compared to the forecasted net interest income
in the base case scenario are as follows: |
Percentage change in | |||||||
estimated net interest income | |||||||
over twelve months | |||||||
100 basis point upward shock in interest rates | 2.03 | % | |||||
25 basis point downward shock in interest rates | -0.57 | % | |||||
As of March
31, 2009, a downward rate shock of 25 basis points was a realistic representation
of the risk of falling rates as the Federal Reserve has reduced the overnight lending
rate target to a range between 0.00% and 0.25%. For an increase in rates, an upward
rate shock of 100 basis points is also a relevant representation of potential risk
given the possibility of the economy rebounding in the second half of the year due
to the recent reductions in the federal funds rate and the recently announced government
stimulus package. |
||
Based on the
scenarios above, net interest income would increase slightly in the 12-month period
after an upward movement in rates, and would decrease slightly after a downward
movement 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 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
previously expanded its use of borrowings from the Federal Home Loan Bank of Boston
to fund loan growth while managing interest rate risk and liquidity; however during
the first quarter of 2009 the Company was able to reduce its reliance on the FHLB
due to the growth in core deposits. At March 31, 2009, total borrowings from the
Federal Home Loan Bank amounted to $2.16 billion, exclusive of $5.1 million in purchase
accounting adjustments, and the Company had the immediate capacity to increase that
total to $2.46 billion. Additional borrowing capacity of approximately $940.1 million
would be readily available by pledging eligible investment 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 March 31, 2009 the Companys repurchase
agreement lines of credit with three large broker dealers totaled $125.0 million, $100.0
million of which was available on that date. Agreement terms vary based on the collateral
submitted. |
||
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 March 31, 2009, cash and due from banks, short-term investments and debt securities
maturing within one year amounted to $341.6 million, or 4.0% of total assets. |
||
NewAlliances main source of liquidity at the parent company level is dividends from NewAlliance
Bank. The main uses of liquidity are payments of dividends to common stockholders,
repurchase of NewAlliances common stock, and the payment of principal and
interest to holders of trust preferred securities. |
||
Management
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. |
44
At March 31,
2009, the Company had commitments to originate loans, unused outstanding lines of
credit and standby letters of credit totaling $865.2 million. Commitments generally
have fixed expiration dates or other termination clauses, therefore, total commitment
amounts do not necessarily represent future cash requirements. Management anticipates
that it will have sufficient funds available to meet its current loan commitments.
Time deposits maturing within one year from March 31, 2009 amount to $1.33 billion. |
||
At March 31,
2009, the Companys Tier 1 leverage ratio, a primary measure of regulatory
capital was $859.4 million, or 11.02%, which is above the threshold level of $389.9
million, or 5.0% to be considered well-capitalized. The Tier 1 risk-based
capital ratio stood at 18.9% and the Total risk-based capital ratio stood at 20.0%.
The Bank also exceeded all of its regulatory capital requirements with leverage
capital of $685.1 million, or 8.8% of average assets, which is above the required
level of $389.2 million or 4.0%. The Tier 1 risk-based capital ratio was 15.1% and
the Total risk-based capital ratio was 16.2%. 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, under the caption Management of Market and Interest Rate
Risk on pages 43 through 44. |
||
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 March 31, 2009.
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 management, including the
principal executive officer and principal financial officer, as appropriate to allow
timely decisions regarding required disclosure in the first quarter 2009. |
||
In addition,
based on that evaluation, no change in the Companys internal control over
financial reporting occurred during the quarter ended March 31, 2009 that has materially
affected, or is reasonably likely to materially affect, the Companys internal
control over financial reporting. |
||
Item 4T. Controls and Procedures | ||
Not applicable. | ||
PART II - OTHER INFORMATION | ||
Item 1. Legal Proceedings | ||
There are
no material legal proceedings or other litigation. See the caption Legal Proceedings under Footnote 14 Commitments and Contingencies in Part I, Item
I, Financial Statements (Unaudited) of this Form 10-Q. |
||
Item 1A. Risk Factors | ||
An investment
in our common stock involves certain risks inherent to our business. The material
risks and uncertainties that management believes affect the Company are described
below. To understand these risks and to evaluate an investment in our common stock,
you should read this entire report, including the following risk factors. |
||
If any of
the following risks actually occur, the Companys financial condition and results
of operations could be materially and adversely affected. If this were to happen,
the value of the Companys common stock could decline significantly. |
||
Changes
in interest rates and spreads could have a negative impact on earnings and results
of operations, which could have a negative impact on the value of NewAlliance stock.
|
45
NewAlliances earnings and financial condition are dependent to a large degree upon net
interest income, which is the difference between interest earned from loans and
investments and interest paid on deposits and borrowings. The narrowing of interest
rate spreads, meaning the difference between interest rates earned on loans and
investments and the interest rates paid on deposits and borrowings, could adversely
affect NewAlliances earnings and financial condition. The Company cannot predict
with certainty or control changes in interest rates. Regional and local economic
conditions and the policies of regulatory authorities, including monetary policies
of the Federal Reserve Board, affect interest income and interest expense. The Company
has ongoing policies and procedures designed to manage the risks associated with
changes in market interest rates. |
||
However, changes
in interest rates still may have an adverse effect on NewAlliances profitability.
For example, high interest rates could also affect the amount of loans that we originate,
because higher rates could cause customers to apply for fewer mortgages, or cause
depositors to shift funds from accounts that have a comparatively lower cost, to
accounts with a higher cost or experience customer attrition due to competitor pricing.
If the cost of interest-bearing deposits increases at a rate greater than the yields
on interest-earning assets increase, net interest income will be negatively affected.
Changes in the asset and liability mix may also affect net interest income. Similarly,
lower interest rates cause higher yielding assets to prepay and floating or adjustable
rate assets to reset to lower rates. If the Bank is not able to reduce its funding
costs sufficiently, due to either competitive factors or the maturity schedule of
existing liabilities, then the Banks net interest margin will decline. |
||
Credit
market conditions may impact NewAlliances investments. Significant credit market anomalies may impact the valuation and liquidity of the Companys investment securities. The problems of numerous financial institutions have reduced market liquidity, increased normal bid-asked spreads and increased the uncertainty of market participants. Such illiquidity could reduce the market value of the Companys investments, even those with no apparent credit exposure. The valuation of the Companys investments requires judgment and as market conditions change investment values may also change. |
||
Weakness
in the markets for residential or commercial real estate, including the secondary
residential mortgage loan markets, could reduce NewAlliances net income and
profitability. Beginning in 2007 and continuing into 2009, softening residential housing markets, increasing delinquency and default rates, and increasingly volatile and constrained secondary credit markets began affecting the mortgage industry generally. NewAlliances financial results may be adversely affected by changes in real estate values. Decreases in real estate values could adversely affect the value of property used as collateral for loans and investments. If poor economic conditions result in decreased demand for real estate loans, the Companys net income and profits may decrease. |
||
The declines
in home prices in many markets across the U.S., along with the reduced availability
of mortgage credit, also may result in increases in delinquencies and losses in
NewAlliances portfolio of loans related to residential real estate construction
and development. Further declines in home prices coupled with a worsening economic
recession and associated increases in unemployment levels could drive losses beyond
that which is provided for in NewAlliances allowance for loan losses. In that
event, NewAlliances earnings could be adversely affected. |
||
Additionally,
recent weakness in the secondary market for residential lending could have an adverse
impact upon the Companys profitability. Significant ongoing disruptions in
the secondary market for residential mortgage loans have limited the market for
and liquidity of most mortgage loans other than conforming Fannie Mae and Freddie
Mac loans. The effects of ongoing mortgage market challenges, combined with the
ongoing correction in residential real estate market prices and reduced levels of
home sales, could result in further price reductions in single family home values,
adversely affecting the value of collateral securing mortgage loans held, mortgage
loan originations and gains on sale of mortgage loans. Continued declines in real
estate values and home sales volumes, and financial stress on borrowers as a result
of job losses, or other factors, could have further adverse effects on borrowers
that result in higher delinquencies and greater charge-offs in future periods, which
would adversely affect NewAlliances financial condition or results of operations. |
||
NewAlliance
may experience higher levels of loan losses due to current economic conditions.
The current economic conditions have led to declines in collateral values and stress on the cash flows of borrowers, therefore, NewAlliances allowance for loan losses may need to be increased, or may be deemed insufficient by various regulatory agencies. Such agencies may require the Bank to recognize an increase to the allowance for loan losses. Any increases in the allowance for loan losses will result in a decrease in net income and, possibly capital, and may have a material adverse effect on NewAlliances financial condition and results of operations. See the sections titled Allowance for Loan Losses and Classification of Assets and Loan Review in Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operation, located in the Companys most recent Annual Report on Form 10-K for further discussion related to the process for determining the appropriate level of the allowance for loan losses. |
||
If the
goodwill that the Company has recorded in connection with its acquisitions becomes
impaired, it could have a negative impact on the Companys profitability. |
46
Applicable accounting standards require that the purchase method of accounting be
used for all business combinations. Under purchase accounting, if the purchase price
of an acquired company exceeds the fair value of the companys net assets,
the excess is carried on the acquirers balance sheet as goodwill. At March
31, 2009, the Company had approximately $527.2 million of goodwill on its balance
sheet. Companies must evaluate goodwill for impairment at least annually. Write-downs
of the amount of any impairment, if necessary, are to be charged to the results
of operations in the period in which the impairment occurs. There can be no assurance
that future evaluations of goodwill will not result in findings of impairment and
related write-downs, which may have a material adverse effect on NewAlliances
financial condition and results of operations. |
||||
NewAlliances business strategy of growth through acquisitions could have
an impact on earnings and results of operations that may negatively impact the value
of NewAlliance stock. In recent years, NewAlliance has focused, in part, on acquisitions. Over the past four years, the Company has acquired four banking institutions, a non-depository trust company and a registered investment advisory firm. From time to time in the ordinary course of business, the Company engages in preliminary discussions with potential acquisition targets. As of the date of this filing, there are no binding or definitive agreements, plans, arrangements, or understandings for such acquisitions by the Company. Although our business strategy includes both internal expansion and acquisitions, there can be no assurance that, in the future, we will successfully identify suitable acquisition candidates, complete acquisitions successfully, integrate acquired operations into our existing operations or expand into new markets. Further, there can be no assurance that acquisitions will not have an adverse effect upon our operating results while the operations of the acquired businesses are being integrated into our operations. In addition, once integrated, acquired operations may not achieve levels of profitability comparable to those achieved by our existing operations, or otherwise perform as expected. Further, transaction-related expenses or expenses related to the work on transactions that do not close, may adversely affect our earnings. These adverse effects on our earnings and results of operations may have a negative impact on the value of our stock. |
||||
The impact on the Company and the Bank of recently enacted legislation, in particular
the Emergency Economic Stabilization Act of 2008 and its implementing regulations
cannot be predicted at this time. On October 3, 2008, President Bush signed into law the EESA, which includes the TARP. The legislation was in response to the financial crises affecting the banking system and financial markets. EESA is expected to have a profound effect on the financial services industry. The effect of programs developed under EESA, including the TARP and Capital Purchase Program (CPP), could dramatically change the competitive environment of the Company. |
||||
TARP gave the Treasury authority to deploy up to $700.0 billion into the financial
system with an objective of improving liquidity in capital markets. On October 14,
2008, Treasury announced plans to direct $250.0 billion of this authority into preferred
stock investments in banks (the CPP), the first $125.0 billion of which has been
allocated to nine major financial institutions. By the end of December 2008, an
additional $100.0 billion was allocated to American International Group, the Federal
Reserve Bank of New York, Citigroup and U.S. automakers, GM and Chrysler. In January
2009, the remaining $350.0 billion was also released by Congress. The general terms
of this preferred stock program are as follows for a participating bank: |
||||
- | Pay 5% dividends
on the Treasurys preferred stock for the first five years, and then 9% dividends
thereafter (not tax deductible); |
|||
- | Cannot increase
common stock dividends for three years while Treasury is an investor; |
|||
- | Cannot redeem
the Treasury preferred stock for three years unless the participating bank raises
high-quality private capital; |
|||
- | Must receive
Treasurys consent to buy back their own stock; |
|||
- | Treasury receives
warrants entitling Treasury to buy participating banks common stock equal
to 15% of Treasurys total investment in the participating bank, and |
|||
- | Participating
bank executives must agree to certain compensation restrictions, and restrictions
on the amount of executive compensation which is tax deductible. |
|||
The Company is not participating in the CPP, however, the actual impact that EESA
and the implementation of its programs, or any other governmental program will have
on the financial markets and the Company cannot reliably be determined at this time. |
||||
Strong competition within NewAlliances market areas may limit growth and
profitability. |
||||
Competition in the banking and financial services industry is intense. In our market
areas, we compete with commercial banks, savings institutions, mortgage brokerage
firms, credit unions, finance companies, mutual funds, insurance companies, and
brokerage and investment banking firms operating locally and elsewhere. As we grow,
we will be expanding into market areas where we may not be as well known as other
institutions that have been operating in those areas for some time. In addition,
larger banking institutions have become increasingly active in our market areas.
Many of these competitors have substantially greater resources and lending limits
than we have and may offer certain services that we do not or cannot efficiently
provide. Our profitability depends upon our continued ability to successfully compete
in our market areas. The greater resources and deposit and loan products offered
by some of our competitors may limit our ability to grow profitably. |
47
NewAlliance is subject to extensive government regulation and supervision. | ||||
NewAlliance, primarily through NewAlliance Bank and certain non-bank subsidiaries,
is subject to extensive federal and state regulation and supervision. Banking regulations
are primarily intended to protect depositors funds, federal deposit insurance
funds and the banking system as a whole, not stockholders. These regulations affect
the Companys lending practices, capital structure, investment practices, dividend
policy and growth, among other things. Congress and federal regulatory agencies
continually review banking laws, regulations and policies for possible changes.
Changes to statutes, regulations or regulatory policies, including changes in interpretation
or implementation of statutes, regulations or policies, could affect the Company
in substantial and unpredictable ways. Such changes could subject the Company to
additional costs, limit the types of financial services and products we may offer
and/or increase the ability of non-banks to offer competing financial services and
products, among other things. Failure to comply with laws, regulations or policies
could result in sanctions by regulatory agencies, civil money penalties and/or reputation
damage, which could have a material adverse effect on the Companys business,
financial condition and results of operations. While NewAlliance has policies and
procedures designed to prevent any such violations, there can be no assurance that
such violations will not occur. See the section captioned Supervision and
Regulation in Item 1. located in the Companys most recent Annual Report
on Form 10-K for further information. |
||||
NewAlliance may not pay stockholders dividends if NewAlliance is not able
to receive dividends from its subsidiary, NewAlliance Bank. |
||||
Cash dividends from NewAlliance Bank and our liquid assets are our principal sources
of funds for paying cash dividends on our common stock. Unless we receive dividends
from NewAlliance Bank or choose to use our liquid assets, we may not be able to
pay dividends. NewAlliance Banks ability to pay us dividends is subject to
its ability to earn net income and to meet certain regulatory requirements. |
||||
NewAlliances stock price can be volatile. | ||||
NewAlliances stock price can fluctuate widely in response to a variety of factors
including: |
||||
| actual or
anticipated variations in quarterly operating results; |
|||
| recommendations
by securities analysts; |
|||
| new technology
used, or services offered, by competitors; |
|||
| significant
acquisitions or business combinations, strategic partnerships, joint ventures or
capital commitments by or involving the Company or the Companys competitors; |
|||
| failure to
integrate acquisitions or realize anticipated benefits from acquisitions; |
|||
| operating
and stock price performance of other companies that investors deem comparable to
NewAlliance; |
|||
| news reports
relating to trends, concerns and other issues in the financial services industry; |
|||
| changes in
government regulations; and |
|||
| geopolitical
conditions such as acts or threats of terrorism or military conflicts. |
|||
General market fluctuations, industry factors and general economic and political
conditions and events, such as economic slowdowns or recessions, interest rate changes,
credit loss trends or currency fluctuations could also cause NewAlliances
stock price to decrease regardless of the Companys operating results. |
||||
NewAlliance may not be able to attract and retain skilled people. | ||||
NewAlliances success depends, in large part, on its ability to attract and
retain key people. Competition for the best people in most activities engaged in
by the Company can be intense and we may not be able to hire people or to retain
them. The unexpected loss of services of one or more of the Companys key personnel
could have a material adverse impact on the business because of their skills, knowledge
of the market, years of industry experience and the difficulty of promptly finding
qualified replacement personnel. |
||||
NewAlliance continually encounters technological change. | ||||
The financial services industry is continually undergoing rapid technological change
with frequent introductions of new technology-driven products and services. The
effective use of technology can increase efficiency and enable financial institutions
to better serve customers and to reduce costs. However, some new technologies needed
to compete effectively result in incremental operating costs. The Companys
future success depends, in part, upon its ability to address the needs of its customers
by using technology to provide products and services that will satisfy customer
demands, as well as to create additional efficiencies in operations. Many of the
Companys competitors have substantially greater resources to invest in technological
improvements. The Company may not be able to effectively implement new technology-driven
products and services or be successful in marketing these products and services
to its customers. Failure to successfully keep pace with technological change affecting
the financial services industry could have a material adverse impact on the Companys business and, in turn, its financial condition and results of operations. |
48
NewAlliances controls and procedures may fail or be circumvented. | ||
Management
regularly reviews and updates the Companys internal controls, disclosure controls
and procedures, and corporate governance policies and procedures. Any system of
controls, however well designed and operated, is based in part on certain assumptions
and can provide only reasonable, not absolute, assurances that the objectives of
the system are met. Any failure or circumvention of the controls and procedures
or failure to comply with regulations related to controls and procedures could have
a material adverse effect on the Companys business, results of operations
and financial condition. |
||
Customer information may be obtained and used fraudulently. | ||
Risk of theft
of customer information resulting from security breaches by third parties exposes
the Company to reputation risk and potential monetary loss. The Company has exposure
to fraudulent use of our customers personal information resulting from its
general business operations through loss or theft of the information and through
customer use of financial instruments, such as debit cards. |
||
Changes
in accounting standards can materially impact NewAlliances financial statements.
|
||
NewAlliances accounting policies and methods are fundamental to how the Company records
and reports its financial condition and results of operations. From time to time,
the Financial Accounting Standards Board or regulatory authorities change the financial
accounting and reporting standards that govern the preparation of our financial
statements. These changes can be hard to predict and can materially impact how we
record and report our financial condition and results of operations. In some cases,
we could be required to apply a new or revised standard retroactively, resulting
in the Company restating prior period financial statements. |
||
Changes
and interpretations of tax laws and regulations may adversely impact NewAlliances financial statements. |
||
Local, state
or federal tax authorities may interpret tax laws and regulations differently than
NewAlliance and challenge tax positions that NewAlliance has taken on its tax returns.
This may result in the disallowance of deductions or differences in the timing of
deductions and result in the payment of additional taxes, interest or penalties
that could materially affect NewAlliances performance. |
||
Unprecedented
disruption and significantly increased risk in the financial markets. |
||
The banking
industry experienced unprecedented turmoil in 2008 as some of the worlds major
financial institutions collapsed, were seized or were forced into mergers as the
credit markets tightened and the economy headed into a recession and has eroded
confidence in the worlds financial system. As we have seen in the past year
there have been unintended consequences (i.e. investors are hesitant to invest in
the financial sector for fear of losing their investment) from the measures taken
by the Government in an effort to stabilize the economy such as, the FDICs
proposal for a special one-time assessment of up to 20 basis points payable in the
third quarter of 2009, which will have a substantial effect on NewAlliances
deposit insurance premium expense in 2009. There may also be other ways in which
NewAlliance Bank will be impacted by the current crisis that we cannot currently
predict or mitigate, but we will continue to navigate this landscape for the long-term
benefit of our shareholders. |
||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | ||
(a) None. | ||
(b) Not applicable. | ||
(c) The following
table sets forth information about the Companys stock repurchases for the
three months ended March 31, 2009. |
49
Issuer Purchases of Equity Securities |
(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 | |||||
January 1-31, 2009 | (1) | 201,993 | $ 12.06 | 103,283 | 3,097,157 shares |
February 1-28, 2009 | 0 | $ - | 0 | 3,097,157 shares | |
March 1-31, 2009 | (2) | 67,841 | $ 9.83 | 60,410 | 3,036,747 shares |
Total | 269,834 | $ 11.50 | 163,693 |
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. |
||
(1) | Includes 98,710
shares which represent common stock withheld by the Company to satisfy tax withholding
requirements on the vesting of shares under the Companys benefit plans. |
|
(2) | Includes 7,431
shares which represent common stock withheld by the Company to satisfy tax withholding
requirements on the vesting of shares under the Companys benefit plans. |
|
Item 3. Defaults Upon Senior Securities | ||
None. | ||
Item 4. Submission of Matters to a Vote of Security Holders | ||
(a) | The Company
held its annual meeting on April 20, 2009 (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 and
Gerald B. Rosenberg. The other continuing directors are: Douglas K. Anderson, Roxanne
J. Coady, Sheila B. Flanagan, Carlton L. Highsmith, Joseph H. Rossi, Nathaniel D.
Woodson and Joseph A. Zaccagnino. |
|
(c) | There were
106,788,675 shares of Common Stock eligible to be voted at the Annual Meeting and
93,075,511 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. | 91,409,027 | 1,666,484 | |||||
Eric A. Marziali | 91,435,789 | 1,639,722 | |||||
Julia M. McNamara | 91,368,118 | 1,707,393 | |||||
Peyton R. Patterson | 90,687,516 | 2,387,995 | |||||
Gerald B. Rosenberg | 91,401,780 | 1,673,731 | |||||
50
2. | Ratification
of Appointment of PricewaterhouseCoopers, LLP as independent auditors of the Company
for the fiscal year ending December 31, 2009 (Proposal 2). |
For | Against | Abstain | |||||
92,224,465 | 513,380 | 337,666 | |||||
3. | To transact
any other business that properly comes before the annual meeting or at any adjournment
of the meeting, in accordance with the determination of a majority of NewAlliances board of directors (Proposal 3). |
For | Against | Abstain | |||||
41,469,023 | 46,065,898 | 5,540,590 | |||||
Item 5. Other Information | |||
None. | |||
Item 6. Exhibits | |||
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 | Amended and Restated Bylaws of NewAlliance Bancshares, Inc. | ||
4.1 | See Exhibit 3.1, Amended and Restated Certificate of Incorporation and Exhibit 3.2, Bylaws of NewAlliance Bancshares, Inc. | ||
10.1 | (Intentionally omitted.) | ||
10.2 | Amended and
Restated NewAlliance Bank Supplemental Executive Retirement Plan. Incorporated herein
by reference is Exhibit 10.2 filed with the Companys Quarterly Report on Form
10-Q, filed November 7, 2008. |
||
10.3 | NewAlliance
Amended and Restated Employee Stock Ownership Plan Supplemental Executive Retirement
Plan. Incorporated herein by reference is Exhibit 10.3 filed with the Companys
Quarterly Report on Form 10-Q, filed November 7, 2008. |
||
10.4 | The NewAlliance
Bank Amended and Restated 401(k) Supplemental Executive Retirement Plan. Incorporated
herein by reference is Exhibit 10.4 filed with the Companys Quarterly Report
on Form 10-Q, filed November 7, 2008. |
||
10.5 | NewAlliance
Bank Executive Incentive Plan approved by shareholders on April 17, 2008, as amended.
Incorporated by reference is Exhibit 10.5 filed with the Companys Quarterly
Report on Form 10-Q, filed August 7, 2008. |
||
10.6 | Employee Change
of Control Severance Plan. Incorporated by reference is Exhibit 10.6 filed with
the Companys Quarterly Report on Form 10-Q, filed November 8, 2007. |
||
10.7.1 | Amended and
Restated Employment Agreement among NewAlliance Bancshares, Inc., NewAlliance Bank
and Peyton R. Patterson, effective September 25, 2007. Incorporated herein by reference
is Exhibit 10.7.1 filed with the Companys Current Report on Form 8-K, filed
October 1, 2007. |
||
10.7.2 | Amended and
Restated Employment Agreement among NewAlliance Bancshares, Inc., NewAlliance Bank
and Merrill B. Blanksteen, effective September 25, 2007. Incorporated herein by
reference is Exhibit 10.7.2 filed with the Companys Current Report on Form
8-K, filed October 1, 2007. |
||
10.7.3 | Amended and
Restated Employment Agreement among NewAlliance Bancshares, Inc., NewAlliance Bank
and Gail E.D. Brathwaite, effective September 25, 2007. Incorporated herein by reference
is Exhibit 10.7.3 filed with the Companys Current Report on Form 8-K, filed
October 1, 2007. |
||
10.7.4 | Intentionally omitted. | ||
10.7.5 | Amended and
Restated Employment Agreement between NewAlliance Bank and Diane L. Wishnafski,
effective September 25, 2007. Incorporated herein by reference is Exhibit 10.7.5
filed with the Companys Quarterly report on Form 10-Q, filed November 8, 2007. |
||
10.7.6 | (Intentionally omitted) | ||
10.7.7 | (Intentionally omitted) | ||
10.7.8 | Amended and
Restated Employment Agreement between NewAlliance Bank and Donald T. Chaffee, effective
September 25, 2007. Incorporated herein by reference is Exhibit 10.7.8 filed with
the Companys Current Report on Form 8-K, filed October 1, 2007. |
51
10.7.9 | Employment
Agreement between NewAlliance Bank and Paul A. McCraven, effective September 25,
2007. Incorporated herein by reference is Exhibit 10.7.9 filed with the Companys Current Report on Form 8-K, filed October 1, 2007. |
||
10.7.10 | Amended and
Restated Employment Agreement between NewAlliance Bank and Koon-Ping Chan, effective
September 25, 2007. Incorporated herein by reference is Exhibit 10.7.10 filed with
the Companys Current Report on Form 8-K, filed October 1, 2007. |
||
10.7.11 | Employment
Agreement between NewAlliance Bank and Mark Gibson, effective February 18, 2009.
Incorporated herein by reference is Exhibit 10.7.11 filed with the Companys
Annual Report on Form 10-K, filed February 27, 2009. |
||
10.7.12 | Employment
Agreement among NewAlliance Bank, NewAlliance Bancshares, Inc. and Cecil Eugene
Kirby, Jr., effective April 21, 2009. Incorporated herein by reference is Exhibit
10.7.12 filed with the Companys Current Report on Form 8-K, filed April 22,
2009. |
||
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. |
||
10.11 | (Intentionally omitted) | ||
10.12 | Form of Indemnification
Agreement for Directors and Certain Executive Officers. Incorporated herein by reference
is Exhibit 10.12 filed with the Companys Annual Report on Form 10-K, filed
March 1, 2007. |
||
10.13 | General Severance
Plan. Incorporated herein by reference is Exhibit 10.13 filed with the Companys
Annual Report on Form 10-K, filed February 27, 2009. |
||
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
1, 2007. |
||
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). |
||
31.2 | 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). |
52
SIGNATURES | ||
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: | May 06, 2009 |
53