Edgar Filing: NEWALLIANCE BANCSHARES INC

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 September 30, 2009.

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

Commission File Number: 001-32007

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

	DELAWARE	52-2407114

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

	195 Church Street, New Haven, Connecticut	06510

	(Address of principal executive offices)	(Zip Code)

(203) 789-2767

(Registrant’s telephone number, including area code)



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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

[ X ] Yes [ ] No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was requires to submit and post such files).

[ ] Yes [ ] No

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

	Large accelerated filer X		Accelerated filer

	Non-accelerated filer		Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

[ ] Yes [ X ] No

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

	Common Stock (par value $.01)			106,055,318

	Class			Outstanding at November 5, 2009

TABLE OF CONTENTS

Part I – FINANCIAL INFORMATION
		Page No.


Item 1.	Financial Statements (Unaudited)

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

	Consolidated Statements of Income for the three and nine months ended September 30, 2009 and 2008	4

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

	Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008	6

	Notes to Unaudited Consolidated Financial Statements	7

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

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	54

Item 4.	Controls and Procedures	55

Item 4T.	Controls and Procedures	55


Part II – OTHER INFORMATION


Item 1.	Legal Proceedings	55

Item 1A.	Risk Factors	55

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	59

Item 3.	Defaults Upon Senior Securities	60

Item 4.	Submission of Matters to a Vote of Security Holders	60

Item 5.	Other Information	60

Item 6.	Exhibits	60



SIGNATURES

NewAlliance Bancshares, Inc.
Consolidated Balance Sheets

	September 30,			December 31,
(In thousands, except per share data) (Unaudited)	2009			2008

Assets
Cash and due from banks	$	106,539		$	98,131
Short term investments		40,000			55,000

Cash and cash equivalents		146,539			153,131
Investment securities available for sale (note 5)		2,391,260			1,928,562
Investment securities held to maturity (note 5)		263,103			309,782
Loans held for sale (includes $14,241 measured at fair value at September 30, 2009)		14,749			5,361
Loans, net (note 6)		4,753,987			4,912,874
Federal Home Loan Bank of Boston stock		120,821			120,821
Premises and equipment, net		57,396			59,419
Cash surrender value of bank owned life insurance		139,257			136,868
Goodwill (note 7)		527,167			527,167
Identifiable intangible assets (note 7)		37,481			43,860
Other assets (note 8)		88,993			101,673

Total assets	$	8,540,753		$	8,299,518

Liabilities
Deposits (note 9)
Non-interest bearing	$	528,614		$	494,978
Savings, interest-bearing checking and money market		2,905,696			2,178,593
Time		1,540,025			1,774,259

Total deposits		4,974,335			4,447,830
Borrowings (note 10)		2,041,530			2,376,496
Other liabilities		97,401			93,976

Total liabilities		7,113,266			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 September 30, 2009 and December 31, 2008		1,215			1,215
Additional paid-in capital		1,245,504			1,245,679
Unallocated common stock held by ESOP		(89,636	)		(92,380	)
Unearned restricted stock compensation		(13,992	)		(18,474	)
Treasury stock, at cost (14,847 shares at September 30, 2009 and 14,427 shares at December 31, 2008)		(205,164	)		(200,428	)
Retained earnings		481,839			467,580
Accumulated other comprehensive income (loss) (note 16)		7,721			(21,976	)

Total stockholders’ equity		1,427,487			1,381,216

Total liabilities and stockholders’ equity	$	8,540,753		$	8,299,518

See accompanying notes to consolidated financial statements.

NewAlliance Bancshares, Inc.
Consolidated Statements of Income


	Three Months Ended					Nine Months Ended
	September 30,					September 30,

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

Interest and dividend income
Residential real estate loans	$	31,983	$	35,202		$	100,358		$	102,992
Commercial real estate loans		17,791		18,273			52,855			55,450
Commercial business loans		5,419		7,021			16,658			21,205
Consumer loans		8,517		9,718			25,821			29,551
Investment securities		28,495		27,423			85,070			86,503
Federal funds sold and other short-term investments		63		494			342			969
Federal Home Loan Bank of Boston stock		-		911			-			3,766

Total interest and dividend income		92,268		99,042			281,104			300,436

Interest expense
Deposits		18,930		24,610			63,048			79,413
Borrowings		21,576		26,373			68,374			78,710

Total interest expense		40,506		50,983			131,422			158,123

Net interest income before provision for loan losses		51,762		48,059			149,682			142,313

Provision for loan losses		5,433		4,200			14,533			9,600

Net interest income after provision for loan losses		46,329		43,859			135,149			132,713

Non-interest income
Depositor service charges		7,270		7,052			20,175			20,393
Loan and servicing income, net		322		325			498			971
Trust fees		1,569		1,635			4,219			4,984
Investment management, brokerage and insurance fees		1,700		1,872			5,514			6,248
Bank owned life insurance		882		1,164			2,652			3,984
Other-than-temporary impairment losses on securities		-		(2,610	)		(2,522	)		(2,610	)
Less: Portion of loss recognized in other comprehensive income (before taxes)		-		-			1,896			-

Net impairment losses on securities recognized in earnings		-		(2,610	)		(626	)		(2,610	)
Net gain on sale of securities		2,029		2,395			6,139			3,620

Net securities gain		2,029		(215	)		5,513			1,010
Mortgage origination activity and loan sale income		1,268		428			4,768			1,341
Other		1,409		1,144			2,664			4,660

Total non-interest income		16,449		13,405			46,003			43,591

Non-interest expense
Salaries and employee benefits (notes 11 & 12)		22,443		22,354			65,281			68,978
Occupancy		4,287		4,415			13,686			13,629
Furniture and fixtures		1,419		1,624			4,348			4,964
Outside services		4,779		5,047			14,584			13,791
Advertising, public relations, and sponsorships		1,932		1,667			4,202			5,412
Amortization of identifiable intangible assets		2,122		2,364			6,379			7,092
Merger related charges		4		99			27			177
FDIC insurance premiums		1,880		178			8,717			544
Other		3,376		3,623			9,805			10,339

Total non-interest expense		42,242		41,371			127,029			124,926

Income before income taxes		20,536		15,893			54,123			51,378
Income tax provision (note 13)		7,916		4,957			19,805			15,726

Net income	$	12,620	$	10,936		$	34,318		$	35,652

Basic earnings per share (note 17)	$	0.13	$	0.11		$	0.35		$	0.36
Diluted earnings per share (note 17)		0.13		0.11			0.35			0.36
Weighted-average shares outstanding (note 17)
Basic		99,507		98,989			99,292			99,803
Diluted		99,570		99,146			99,298			99,856
Dividends per share	$	0.07	$	0.07		$	0.21		$	0.205

See accompanying notes to consolidated financial statements.

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


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

Balance December 31, 2008	107,059		$	1,215	$	1,245,679		$	(92,380	)	$	(18,474	)	$	(200,428	)	$	467,580		$	(21,976	)	$	1,381,216
Dividends declared ($0.21 per share)																		(21,109	)					(21,109	)
Allocation of ESOP shares, net of tax						(334	)		2,744															2,410
Treasury shares acquired (note 15)	(420	)													(4,736	)								(4,736	)
Restricted stock expense												4,482												4,482
Stock option expense						243																		243
Book (over) tax benefit of stock-based compensation						(84	)																	(84	)
Cumulative effect of new OTTI accounting guidance, net of $0.6 million tax effect (note 5)																		1,050			(1,050	)		-
Comprehensive income:
Net income																		34,318						34,318
Other comprehensive income, net of tax (note 16)																					30,747			30,747

Total comprehensive income																								65,065

Balance September 30, 2009	106,639		$	1,215	$	1,245,504		$	(89,636	)	$	(13,992	)	$	(205,164	)	$	481,839		$	7,721		$	1,427,487

See accompanying notes to consolidated financial statements.

NewAlliance Bancshares, Inc.
Consolidated Statements of Cash Flows

	Nine Months Ended
	September 30,

(In thousands) (Unaudited)	2009			2008

Cash flows from operating activities
Net income	$	34,318		$	35,652
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses		14,533			9,600
Loss (gain) on Other real estate owned		160			(68	)
Restricted stock compensation expense		4,482			5,336
Stock option compensation expense		243			3,208
ESOP expense		2,410			2,535
Amortization of identifiable intangible assets		6,379			7,092
Net amortization/accretion of fair market adjustments from net assets acquired		(2,294	)		(3,369	)
Net amortization/accretion of investment securities		4,089			(1,583	)
Change in deferred income taxes		(1,912	)		166
Depreciation and amortization of premises and equipment		4,860			5,264
Net gain on sale of securities		(6,139	)		(3,620	)
Impairment losses on securities		626			2,610
Mortgage origination activity and loan sale income		(4,768	)		(1,341	)
Proceeds from sales of loans held for sale		408,122			77,049
Loans originated for sale		(412,742	)		(80,409	)
Loss on sale of premises and equipment		20			7
Net loss (gain) on limited partnerships		375			(668	)
Increase in cash surrender value of bank owned life insurance		(2,652	)		(3,984	)
Decrease in other assets		2,545			5,607
Increase (decrease) in other liabilities		3,425			(1,208	)

Net cash provided by operating activities		56,080			57,876

Cash flows from investing activities
Purchase of securities available for sale		(1,041,439	)		(557,600	)
Purchase of securities held to maturity		(22,431	)		(58,995	)
Proceeds from maturity, sales, calls and principal reductions of
securities available for sale		623,269			740,384
Proceeds from maturity, calls and principal reductions of
securities held to maturity		69,657			50,498
Proceeds from sales of fixed assets		32			659
Net decrease (increase) in loans held for investment		140,458			(227,992	)
Proceeds from sales of other real estate owned		2,468			806
Proceeds from bank owned life insurance		263			67
Purchase of premises and equipment		(2,827	)		(3,765	)

Net cash used by investing activities		(230,550	)		(55,938	)

Cash flows from financing activities
Net increase in customer deposit balances		526,606			33,214
Net decrease in short-term borrowings		(50,727	)		(6,680	)
Proceeds from long-term borrowings		142,000			410,000
Repayments of long-term borrowings		(424,072	)		(368,972	)
Book over tax benefit of stock-based compensation		(84	)		(408	)
Acquisition of treasury shares		(4,736	)		(22,027	)
Dividends paid		(21,109	)		(20,823	)

Net cash provided by financing activities		167,878			24,304

Net (decrease) increase in cash and cash equivalents		(6,592	)		26,242

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

Cash and equivalents, end of period	$	146,539		$	187,121

Supplemental information
Cash paid for
Interest on deposits and borrowings	$	133,458		$	160,505
Income taxes paid, net		18,592			15,596
Noncash transactions
Loans transferred to other real estate owned		3,860			1,248

See accompanying notes to consolidated financial statements.

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

1.		Summary of Significant Accounting Policies

		Financial Statement Presentation
		The consolidated financial statements of NewAlliance Bancshares, Inc. (the “Company”) have been prepared in conformity with accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. All significant intercompany transactions and balances have been eliminated in consolidation. Amounts in prior period financial statements are reclassified whenever necessary to conform to the current year presentation. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2008. The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant near-term change relate to the determination of the allowance for loan losses, the obligation and expense for pension and other postretirement benefits, and estimates used to evaluate asset impairment including investment securities, income tax contingencies and deferred tax assets and liabilities and the recoverability of goodwill and other intangible assets. As of November 9, 2009, the date in which the financial statements were issued, management has determined that no subsequent events have occurred following the balance sheet date of September 30, 2009 which require recognition or disclosure in the financial statements.

2.		Recent Accounting Pronouncements

		Accounting Standards Codification (Topic 105)

		In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards Codification^TM and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162” (“SFAS No. 168”). The objective of SFAS No. 168 is to replace SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” and to establish the FASB Accounting Standards Codification^TM (“Codification” or “FASB ASC”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”). The Codification supersedes all previous level (a) through (d) GAAP, aside from non-codified FASB statements and guidance issued by the Securities and Exchange Commission (“SEC”). The Codification did not change GAAP, but rather reorganized it into approximately 90 accounting topics within a consistent structure to simplify user access. Contents in each of these accounting topics are further organized by subtopic, section and paragraph. The Codification allows for the continued application of superseded accounting standards for transactions that have an ongoing effect in an entity’s financial statements. Although the Codification does not include the superseded guidance, it shall be considered grandfathered and remain authoritative for those transactions after the effective date of this statement. The Codification was effective for financial statements issued for reporting periods that end after September 15, 2009. SFAS No. 168 was the final standard issued by the FASB in that form. Changes to the Codification are in the form of Accounting Standards Updates issued by the FASB. An Accounting Standards Update is not authoritative; rather, it is a document that communicates the specific amendments that change the Codification and provides background information about the guidance, including the basis for conclusions on changes made to the Codification. The adoption of SFAS No. 168 and the Codification did not have a material impact on the Company’s consolidated financial statements but changed the referencing system for accounting standards from the legacy GAAP citations to codification topic numbers.

		In June 2009, the FASB issued FASB Accounting Standards Update (“ASU”) No. 2009-01, Topic 105, Generally Accepted Accounting Principles. This ASU amends the Codification for the issuance of SFAS No. 168 in its entirety, including the accounting standards update instructions contained in Appendix B of the statement. SFAS No. 168 is summarized above.

		Fair Value Measurement and Disclosure (Topic 820)

		In September 2009, the FASB issued ASU No. 2009-12, Topic 820, Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent), to provide guidance on measuring the fair value of certain alternative investments. This ASU amends FASB ASC 820, Fair Value Measurements and Disclosures, and offers investors a practical expedient for measuring the fair value of investments in certain entities that calculate net asset value per share. As there currently is diversity

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

		in practice, this guidance addresses the issue of how to estimate the fair value of various investments in entities, including hedge funds, private equity funds, venture capital funds, offshore fund vehicles, funds of funds and real estate funds. The ASU also requires enhanced disclosures about the nature and risks of investments within its scope that are measured at fair value on a recurring or nonrecurring basis. The guidance is effective for the first reporting period (including interim periods) ending after December 15, 2009, although early adoption is permitted. The Company has not elected to early adopt the guidance and management believes that this guidance will not have a material impact on the Company’s consolidated financial statements.

		In August 2009, the FASB issued ASU No. 2009-05, Fair Value Measurements and Disclosures – Measuring Liabilities at Fair Value. This update provides clarification on measuring liabilities at fair value when a quoted price in an active market is not available. In such circumstances, the ASU specifies that a valuation technique should be applied that uses either the quote for the liability when traded as an asset, the quoted prices for similar liabilities or similar liabilities when traded as assets, or another valuation technique consistent with existing fair value measurement guidance. The guidance also states that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustments to other inputs relating to the existence of a restriction that prevents the transfer of the liability. The guidance is effective for the first reporting period beginning after the date of issuance. Management anticipates the adoption of this guidance for the fourth quarter 2009 will not have a material impact on the Company’s consolidated financial statements.

		In April 2009, the FASB issued new guidance on 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 (FASB ASC 820-10). This guidance provides additional clarification for estimating fair value, in accordance with the fair value measurements and disclosures guidance, 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 guidance was effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company did not elect early application and the adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

		In February 2008, the FASB issued guidance related to Fair Value Measurements and Disclosures (FASB ASC 820-10), which delayed the January 1, 2008 effective date 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 this guidance did not have a material effect on the Company’s consolidated financial statements.

		Investments – Debt and Equity Securities (Topic 320)

		In April 2009, the FASB issued new guidance on the Recognition and Presentation of Other-Than-Temporary Impairments (FASB ASC 320-10), which amends FASB ASC 320, Investments – Debt and Equity Securities, to make the other-than-temporary impairment (“OTTI”) guidance more operational and to improve the presentation of other-than-temporary impairments in the financial statements. This guidance replaced the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired debt security until recovery with a requirement that management assert it does not have the intent to sell the security, and it is more likely than not it will not have to sell the security before recovery of its cost basis. When an other-than-temporary impairment exists under this stated assertion, the amount of impairment related to the credit loss component would be recognized in earnings while the remaining amount would be recognized in other comprehensive income. This guidance provides increased disclosure about the credit and noncredit components of impaired debt securities that are not expected to be sold and also requires increased and more frequent disclosures regarding expected cash flows, credit losses, and an aging of securities with unrealized losses. Although this amendment does not result in a change in the carrying amount of debt securities, it does require that the portion of an other-than-temporary impairment not related to a credit loss for a held-to-maturity security be recognized in a new category of other comprehensive income and be amortized over the remaining life of the debt security as an increase in the carrying value of the security. This new guidance does not amend existing recognition and measurement guidance for other-than-temporary impairments of equity securities. This guidance was effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company did not elect early application and the adoption resulted in a $1.0 million cumulative effect adjustment, net of taxes, to increase retained earnings and decrease to accumulated other comprehensive income as of April 1, 2009 for the non-credit component of debt securities for which an other-than-temporary impairment was previously recognized. Refer to Note 5 of the Notes to Unaudited Consolidated Financial Statements for further information on the Company’s adoption of this guidance.

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

		Financial Instruments (Topic 825)

		In April 2009, the FASB issued new guidance regarding Interim Disclosures about Fair Value of Financial Instruments (FASB ASC 825-10). FASB ASC 825-10-50 requires disclosures about fair value of financial instruments, whether or not measured on the balance sheet at fair value, in interim financial statements as well as in annual financial statements. Prior to this guidance, fair values for these assets and liabilities were only disclosed annually. This guidance applies to all financial instruments within the scope of FASB ASC 825, Financial Instruments, and requires all entities to disclose the method(s) and significant assumptions used to estimate the fair value. This guidance was effective for interim periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. Disclosures for earlier periods presented for comparative purposes at initial adoption are not required. In periods after initial adoption, comparative disclosures are only required for periods ending after initial adoption. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements. Refer to Note 3 of the Notes to Unaudited Consolidated Financial Statements for the required interim disclosures.

		Transfers of Financial Assets

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

		Consolidation

		In June 2009, the FASB issued SFAS No. 167 “Amendments to FASB Interpretation No. 46(R),” (“SFAS No. 167”). SFAS No. 167 has not yet been codified and, therefore, it will remain authoritative until integrated into the Codification. SFAS No. 167 amends Interpretation 46(R) to require an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity (which would result in the enterprise being deemed the primary beneficiary of that entity and, therefore, obligated to consolidate the variable interest entity in its financial statements); to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity; to revise guidance for determining whether an entity is a variable interest entity; and to require enhanced disclosures that will provide more transparent information about an enterprise’s involvement with a variable interest entity. SFAS No. 167 is effective for interim periods as of the beginning of the first annual reporting period beginning after November 15, 2009. The Company anticipates that the adoption of SFAS No. 167 will not have a material impact on the financial statements.

		Subsequent Events (Topic 855)

		In May 2009, the FASB issued new guidance on Subsequent Events, FASB ASC 855-10, which establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. In particular, the guidance sets forth (1) the period after the balance sheet date during which management of a reporting entity will evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (2) the circumstances under which an entity will recognize events or transactions occurring after the balance sheet date in its financial statements; and (3) the disclosures that an entity will make about events or transactions that occurred after the balance sheet date. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

		Compensation – Retirement Benefits (Topic 715)

		In December 2008, the FASB revised the disclosure guidance for Postretirement Benefit Plan Assets (FASB ASC 715-20). This guidance provides for additional disclosures about plan assets of a defined benefit pension or other postretirement plan. Pursuant to the guidance, 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, this requires an employer to disclose information about the valuation of plan assets similar to that required under FASB ASC 820, Fair Value Measurements and Disclosures. 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

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

		disclosures are required to be included in financial statements for fiscal years ending after December 15, 2009. Management believes that this guidance will not have a material impact on the Company’s consolidated financial statements.

		Derivatives and Hedging (Topic 815)

		In March 2008, the FASB issued disclosure guidance pertaining to Derivatives and Hedging (FASB ASC 815-10). This guidance 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 guidance was effective for financial statements issued for fiscal years beginning after November 15, 2008, with early application encouraged. The adoption did not have a material impact on the Company’s consolidated financial statements.

		Intangibles – Goodwill and Other (Topic 350)

		In April 2008, the FASB issued guidance about the Determination of the Useful Life of Intangible Assets (FASB ASC 350-30) which 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 FASB ASC 350, Intangibles – Goodwill and Other. The intent of this new guidance is to improve the consistency between the useful life of a recognized intangible asset under FASB ASC 350 and the period of expected cash flows used to measure the fair value of the asset under FASB ASC 805, Business Combinations. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption did not have a material impact on the Company’s consolidated financial statements.

		Business Combinations (Topic 805)

		In December 2007, the FASB issued revised guidance for Business Combinations. The revised Business Combination guidance (FASB ASC 805) retains the fundamental requirements that the acquisition method of accounting be used for all business combinations and for an acquirer to be identified for each business combination. The revised guidance 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. This guidance became effective on January 1, 2009 and the adoption of this guidance applies to any future business combinations. When a business combination occurs, it is expected to have a significant effect on NewAlliance’s 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 FASB ASC 820, the fair value estimates are measured within the fair value hierarchy. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are described below:

Basis of Fair Value Measurement

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

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

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

When available, quoted market prices are used. In other cases, fair values are based on estimates using present value or other valuation techniques. These techniques involve uncertainties and are significantly affected by the assumptions used and judgments made regarding risk characteristics of various financial instruments, discount rates, estimates of future cash flows, future expected loss experience and other factors. Changes in assumptions could significantly affect these estimates. Derived fair

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

		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.

		Fair Value Option
		FASB ASC 825-10 allows for the irrevocable option to elect fair value accounting for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis that may otherwise not be required to be measured at fair value under other accounting standards. The Company elected the fair value option as of January 1, 2009 for its portfolio of mortgage loans held for sale pursuant to forward loan sale commitments originated after January 1, 2009 in order to reduce certain timing differences and better match changes in fair values of the loans with changes in the value of the derivative forward loan sale contracts used to economically hedge them. As a result of the surge of refinances resulting from the drop in mortgage rates within the industry, the balance of loans held for sale and derivative contracts relating to those loans have increased significantly. The fair value option election relating to mortgage loans held for sale did not result in a transition adjustment to retained earnings and instead changes in the fair value have an impact on earnings as a component of noninterest income.

		As of September 30, 2009, mortgage loans held for sale pursuant to forward loan sale commitments had a fair value of $14.2 million, which includes a positive fair value adjustment of $103,000.

		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 September 30, 2009 and December 31, 2008 and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:

	September 30, 2009

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


Securities Available for Sale
Marketable equity securities	$	8,760		$	1,260	$	7,500		$	-
Bonds and obligations		220,035			192,405		27,630			-
Auction rate certificates		24,987			-		-			24,987
Trust preferred equity securities		32,087			-		29,353			2,734
Mortgage-backed securities		2,105,391			-		2,105,391			-

Total Securities Available for Sale	$	2,391,260		$	193,665	$	2,169,874		$	27,721
Mortgage Loans Held for Sale		14,241			-		14,241			-
Derivative Assets		345			-		345			-
Derivative Liabilities		(145	)		-		(145	)		-

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

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

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

The following table presents additional information about assets measured at fair value on a recurring basis for which the Company utilized Level 3 inputs to determine fair value.


	Securities Available for Sale

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,

(In thousands)		2009			2008			2009			2008

Balance at beginning of period	$	27,701		$	-		$	26,626		$	-
Transfer into Level 3		-			28,000			-			28,000
Total gains (losses) - (realized/unrealized):
Included in earnings		-			-			-			-
Included in other comprehensive income		197			(2,323	)		1,356			(2,323	)
Purchases, issuances, and settlements		-			-			-			-
Discount accretion		4			-			11			-
Principal payments		(181	)		-			(272	)		-

Balance at end of period	$	27,721		$	25,677		$	27,721		$	25,677

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

		Securities Available for Sale: Included in the available for sale category are both debt and equity securities. The Company utilizes Interactive Data Corp., a third-party, nationally-recognized pricing service (“IDC”) to estimate fair value measurements for 98.8% of its investment securities portfolio. The pricing service evaluates each asset class based on relevant market information considering observable data that may include dealer quotes, reported trades, market spreads, cash flows, the U.S. Treasury yield curve, the LIBOR swap yield curve, trade execution data, market prepayment speeds, credit information and the bond’s terms and conditions, among other things, but these prices are not binding quotes. The fair value prices on all investment securities are reviewed for reasonableness by management through an extensive process. This review process includes an analysis of changes in the LIBOR / swap curve, the treasury curve, mortgage rates and credit spreads as well as a review of the securities inventory list which details issuer name, coupon and maturity date for unusual market price fluctuations. The review resulted in no adjustments to the IDC pricing. Also, management assessed the valuation techniques used by IDC based on a review of their pricing methodology to ensure proper hierarchy classifications. The Company’s available for sale debt securities include auction rate certificates which were valued through means other than quoted market prices due to the Company’s conclusion that the market for the securities was not active. The fair value for the auction rate securities are based on Level 3 inputs in accordance with FASB ASC 820.

		The major categories of securities available for sale are:

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

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

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

	•	Trust preferred equity securities: Included in this category are two pooled trust preferred securities and “individual name” trust preferred securities of financial companies. One of the pooled trust preferred securities is not priced by IDC and is classified within Level 3 of the valuation hierarchy while the remaining securities are at Level 2 and are

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

		priced by IDC. The Company calculates the fair value of the Level 3 pooled trust preferred security based on a cash flow methodology that uses the Bloomberg AA rated bank yield curve to discount the cash flows. Additionally, the low level of the three month LIBOR rate, the general widening of credit spreads compared to when these securities were purchased and the reduced level of liquidity in the fixed income markets, were all factors in the determination of the current fair value market price. The fair value of the remaining trust preferred securities priced by IDC are based upon matrix pricing factoring in observable benchmark yields and issuer spreads and are, therefore, classified within Level 2 of the valuation hierarchy.

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

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

		Derivatives: Derivative instruments related to loans held for sale are carried at fair value. Fair value is determined through quotes obtained from actively traded mortgage markets. Any change in fair value for rate lock commitments to the borrower is based upon the change in market interest rates between making the rate lock commitment and the measurement date and, for forward loan sale commitments to the investor, is based upon the change in market interest rates from entering into the forward loan sales contract and the measurement date. Both the rate lock commitments to the borrowers and the forward loan sale commitments to investors are undesignated derivatives pursuant to the requirements of FASB ASC 815-10, however, the Company has not designated them as hedging instruments. Accordingly, they are marked to fair value through earnings.

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

	September 30, 2009

		Notional or
		Principal		Fair Value
(In thousands)		Amount		Adjustment


Rate Lock Commitments	$	25,330	$	345
Forward Sales Commitments		37,590		(145	)
Mortgage Loans Held for Sale		14,138		103

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

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

		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 September 30, 2009 and December 31, 2008 and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

	September 30, 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	$	2,200	$	-	$	-	$	2,200
Other Real Estate Owned		2,702		-		-		2,702
Impaired Loans		16,155		-		-		16,155

	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.

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

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

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

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

		Investment securities: Refer to the above discussion on securities

		Federal Home Loan Bank of Boston stock: FHLB Boston stock is a non-marketable equity security which is assumed to have a fair value equal to its carrying value due to the fact that it can only be redeemed back to the FHLB Boston at par value.

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

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

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

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

		Derivative Assets: Refer to the above discussion on derivatives.

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

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

		Derivative Liabilities: Refer to the above discussion on derivatives.


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

	September 30, 2009

		Carrying		Estimated
(In thousands)		Amounts		Fair Value

Financial Assets
Cash and due from banks	$	106,539	$	106,539
Short-term investments		40,000		40,000
Investment securities		2,654,363		2,667,460
Loans held for sale		14,749		14,749
Loans, net		4,753,987		4,838,704
Federal Home Loan Bank of Boston stock		120,821		120,821
Accrued income receivable		34,406		34,406
Derivative assets		345		345
Financial Liabilities
Interest and non-interest bearing checking, savings and money market accounts	$	3,434,310	$	3,434,310
Time deposits		1,540,025		1,564,432
Borrowed funds		2,041,530		2,091,071
Derivative liabilities		145		145

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 in accordance with FASB ASC 815, Derivatives and Hedging, 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 September 30, 2009.

		Loan Commitments and Forward Loan Sale Commitments: The Company enters into interest rate lock commitments with borrowers, to finance residential mortgage loans. Primarily to mitigate the interest rate risk on these commitments, the Company also enters into “mandatory” and “best effort” forward loan sale delivery commitments with investors. The interest rate lock commitments and the forward loan delivery commitments meet the definition of a derivative, however, the Company has not designated them as hedging instruments. Upon closing the loan, the loan commitment expires and the Company records

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

		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 accounting guidance for certain mortgage banking activities. Fluctuations in the fair value of loan commitments, loans held for sale, and forward loan sale commitments generally move in opposite directions, and the net impact of the changes in these valuations on net income is generally inconsequential to the financial statements.

		The decrease in mortgage rates at the end of 2008 through September 30, 2009 has resulted in a large increase in mortgage loan refinances and hence, the Company’s committed loans and forward loan sale commitments have significantly increased. The Company has elected the fair value option for loans held for sale originated after January 1, 2009 and therefore, those loans held for sale will be recorded in the statement of condition at fair value with any gains and losses recorded in earnings. See Footnote 3, Fair Value Measurements, for additional information.

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

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

Interest Rate Lock Commitments	25,330	345
Forward Sales Commitments	37,590	(145	)

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

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

Fair Values of Derivative Instruments

Asset Derivatives

Liability Derivatives

September 30, 2009

Balance Sheet

(In thousands)

Location

Fair Value

Location

Fair Value

Derivatives not designated as

hedging instruments

Interest rate contracts

Other Assets

345

Other Liabilities

145

Total derivatives not designated as

hedging instruments

345

145

Effect of Derivative Instruments on the Statement of Income

For the Three Months

For the Nine

Ended

Months Ended

September 30, 2009

Location of Gain or (Loss) Recognized in

Amount of Gain or (Loss) Recognized in Income

(In thousands)

Income on Derivatives

on Derivatives

Derivatives not designated as

hedging instruments

Interest rate contracts

Non-interest income

(907

)

200

Total derivatives not designated as

hedging instruments

(907

)

200

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 September 30, 2009 and December 31, 2008.

	September 30, 2009									December 31, 2008

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

Available for sale
U.S. Treasury obligations	$	596	$	1	$	-		$	597	$	596	$	1	$	-		$	597
U.S. Government sponsored enterprise obligations		193,515		2,722		(46	)		196,191		228,844		4,586		(81	)		233,349
Corporate obligations		8,149		300		-			8,449		8,178		-		(232	)		7,946
Other bonds and obligations		16,329		176		(1,707	)		14,798		17,654		128		(2,333	)		15,449
Auction rate certificates		27,800		-		(2,813	)		24,987		28,000		-		(4,521	)		23,479
Marketable equity securities		8,560		200		-			8,760		19,039		103		(8	)		19,134
Trust preferred equity securities		49,328		-		(17,241	)		32,087		47,708		-		(16,443	)		31,265
Private label mortgage-backed securities		25,871		-		(3,061	)		22,810		33,027		-		(7,891	)		25,136
Mortgage-backed securities		2,013,355		69,298		(72	)		2,082,581		1,543,403		30,019		(1,215	)		1,572,207

Total available for sale		2,343,503		72,697		(24,940	)		2,391,260		1,926,449		34,837		(32,724	)		1,928,562

Held to maturity
Mortgage-backed securities		252,118		12,803		-			264,921		299,222		8,832		(38	)		308,016
Other bonds		10,985		320		(26	)		11,279		10,560		186		-			10,746

Total held to maturity		263,103		13,123		(26	)		276,200		309,782		9,018		(38	)		318,762

Total securities	$	2,606,606	$	85,820	$	(24,966	)	$	2,667,460	$	2,236,231	$	43,855	$	(32,762	)	$	2,247,324

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

		A credit related OTTI loss in the amount of $626,000 was recorded against the Company’s position in an adjustable rate mortgage mutual fund that holds positions in non-agency mortgage-backed securities. During the second quarter of 2009, the fund experienced its first realized loss on a mortgage investment. Management determined that the dollar amount of securities carrying a rating of CCC or lower had increased since the March 31, 2009 quarter-end. This decrease in the credit quality of the securities coupled with the loss recognized by the fund, resulted in management’s determination that the fund was other-than-temporarily impaired. The non-credit related OTTI was $1.9 million and was recognized in OCI. During the third quarter, there were no further downgrades to underlying securities to a rating of CCC or below. The fund has a current book value of $8.3 million and is not expected to be sold and management has determined that there are no additional OTTI charges that need to be recognized in the quarter ended September 30, 2009.

		During 2008, one of the “individual name” trust preferred securities was deemed to be other-than-temporarily impaired and a charge of $1.6 million was recorded in the third quarter. Upon the adoption of the OTTI guidance discussed above, the Company recorded a cumulative effect adjustment that increased retained earnings and decreased AOCI by $1.6 million, or $1.0 million, net of tax. Additionally, the amortized cost for this security increased by $1.6 million as the entire impairment charge recorded in 2008 was non-credit related. At September 30, 2009 this security had an amortized cost of $4.7 million and an unrealized loss of $1.4 million.

		The following tables present the fair value of investments with continuous unrealized losses for less than one year and those that have been in a continuous loss position for more than one year as of September 30, 2009 and December 31, 2008. Of the securities summarized, 12 issues have unrealized losses for less than twelve months and 38 have unrealized losses for twelve months or more at September 30, 2009. This compares to a total of 145 issues that had an unrealized loss at December 31, 2008.

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

	September 30, 2009

	Less Than One Year				More Than One Year				Total

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

U. S. Government sponsored enterprise obligations	$	1,803	$	20	$	2,074	$	26	$	3,877	$	46
Corporate obligations		-		-		-		-		-		-
Other bonds and obligations		7,512		1,733		-		-		7,512		1,733
Auction rate certificates		-		-		24,987		2,813		24,987		2,813
Marketable equity securities		-		-		-		-		-		-
Trust preferred equity securities		3,584		3,097		28,504		14,144		32,088		17,241
Private label mortgage-backed securities		1,971		82		20,839		2,979		22,810		3,061
Mortgage-backed securities		17,433		72		-		-		17,433		72

Total securities with unrealized losses	$	32,303	$	5,004	$	76,404	$	19,962	$	108,707	$	24,966

	December 31, 2008

	Less Than One Year				More Than One Year				Total

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

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

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

		Management believes that no individual unrealized loss as of September 30, 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 issuer specific (present value of cash flows expected to be collected, issuer rating changes and trends, credit worthiness and review of underlying collateral), broad market details and the Company’s intent to sell the security or if it is more likely than not that the Company will be required to sell the debt security before recovering its cost. The Company also considers whether the depreciation is due to interest rates or credit risk. The following paragraphs outline the Company’s position related to unrealized losses in its investment securities portfolio at September 30, 2009.

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

		The unrealized losses on other bonds and obligations primarily relates to the non-credit related OTTI loss on a position in an adjustable rate mortgage mutual fund that holds positions in non-agency mortgage-backed securities that are facing negative mark to market pressures due to widening spreads in non-agency mortgage products. Although the fund has experienced declines in credit ratings since the beginning of the year, it was not due to customer redemptions or forced selling of the investments. The fund recorded its first loss which factored into management’s determination that the fund was other-than-temporarily impaired. As discussed above, a credit related OTTI loss of $626,000 was recorded through earnings in the second quarter of 2009. The fund carries a market value to book value ratio of 79.3% - a slight increase from June 30, 2009, a weighted average underlying investment credit rating of A+ and it continues to pay normal monthly dividends. There is no intent to sell nor is it more likely than not that the Company will be required to sell these securities and has therefore, concluded that there is no additional OTTI charges that need to be recognized in the quarter ended September 30, 2009.

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

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

		process for auction rate certificates began to freeze resulting from the problems in the credit markets. These securities are currently rated AAA and are still paying their contractual cash flows and are expected to continue to pay their contractual cash flows. Management has concluded that no other-than-temporary impairment exists as of September 30, 2009. 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.

		Trust preferred securities are comprised of two pooled trust preferreds with an amortized cost of $6.7 million, of which both are rated BB. The remaining $42.6 million are comprised of twelve “individual names” issues with the following ratings: $6.0 million rated A+ to A-, $14.5 million rated BBB+ to BBB and $22.1 million rated B to BB+. The unrealized losses reported for trust preferred equity securities relate to the financial and liquidity stresses in the fixed income market and not to any credit impairment of the issuers as the present value of cash flows expected to be collected is not less than the amortized cost basis of the securities. Although the ratings on some issues have been reduced since December 31, 2008, all are currently paying the contractual principal and interest payments. A detailed review of the two pooled trust preferreds and the “individual names” trust preferred equity securities was completed. This review included an analysis of collateral reports, stress default levels and financial ratios of the underlying issuers and management concluded that there was no other-than-temporary impairment at the end of the period.

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

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

	Three Months Ended		Nine Months Ended
	September 30,		September 30,

(In thousands)	2009		2009

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

Balance, end of period	$	626	$	626

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

	Available for Sale				Held to Maturity

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

September 30, 2009
Due in one year or less	$	95,243	$	93,255	$	1,775	$	1,784
Due after one year through five years		81,981		83,932		8,160		8,415
Due after five years through ten years		58,219		58,633		550		580
Due after ten years		60,274		41,289		500		500

Mortgage-backed securities		2,039,226		2,105,391		252,118		264,921

Total debt securities	$	2,334,943	$	2,382,500	$	263,103	$	276,200

Securities with a fair value of $776.4 million and $1.12 billion at September 30, 2009 and December 31, 2008, respectively, were pledged to secure public deposits, repurchase agreements and Federal Home Loan Bank of Boston (“FHLB”) borrowings.

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

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

	Debt Securities					Equity Securities

	Three Months Ended September 30,

(In thousands)		2009			2008		2009		2008

Realized gains	$	2,050		$	2,395	$	-	$	-
Realized losses		(21	)		-		-		-

	Debt Securities						Equity Securities

	Nine Months Ended September 30,

(In thousands)		2009			2008			2009		2008

Realized gains	$	6,192		$	4,911		$	-	$	27
Realized losses		(53	)		(21	)		-		(1,297	)

6.		Loans

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

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

Residential real estate	$	2,413,181		$	2,524,638
Commercial real estate		1,081,016			1,077,200
Construction
Residential		11,781			21,380
Commercial		141,964			143,610
Commercial business		422,814			458,952
Consumer
Home equity and equity lines of credit		717,632			714,444
Other		17,319			22,561

Total consumer		734,951			737,005

Total loans		4,805,707			4,962,785
Allowance for loan losses		(51,720	)		(49,911	)

Total loans, net	$	4,753,987		$	4,912,874

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

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

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


	At or For the Three Months				At or For the Nine Months
	Ended September 30,				Ended September 30,

(In thousands)	2009		2008		2009		2008

Balance at beginning of period	$	51,502	$	47,798	$	49,911	$	43,813
Provisions charged to operations		5,433		4,200		14,533		9,600
Charge-offs
Residential real estate loans		960		83		2,449		234
Commercial real estate loans		392		827		2,389		827
Commercial construction loans		1,010		1,431		3,055		2,431
Commercial business loans		3,166		468		5,317		1,143
Consumer loans		490		496		903		847

Total charge-offs		6,018		3,305		14,113		5,482

Recoveries
Residential real estate loans		3		255		140		262
Commercial real estate loans		538		-		538		23
Commercial construction loans		-		-		-		-
Commercial business loans		228		186		519		849
Consumer loans		34		41		192		110

Total recoveries		803		482		1,389		1,244

Net charge-offs		5,215		2,823		12,724		4,238

Balance at end of period	$	51,720	$	49,175	$	51,720	$	49,175

	Nonperforming Assets

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

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

Nonaccrual loans	$	49,091	$	38,331
Other real estate owned		2,702		2,023

Total nonperforming assets	$	51,793	$	40,354

Troubled debt restructured loans included in nonaccrual loans above	$	3,466	$	-

7.	Goodwill and Identifiable Intangible Assets

	The changes in the carrying amount of goodwill and identifiable intangible assets for the nine months ended September 30, 2009 are summarized as follows:

						Total
			Core Deposits			Identifiable
			and Customer			Intangible
(In thousands)	Goodwill		Relationship			Assets

Balance, December 31, 2008	$	527,167	$	43,860		$	43,860
Amortization expense		-		(6,379	)		(6,379	)

Balance, September 30, 2009	$	527,167	$	37,481		$	37,481


Estimated amortization expense for the year ending:
Remaining 2009				2,122			2,122
2010				7,811			7,811
2011				7,556			7,556
2012				7,556			7,556
2013				7,461			7,461
Thereafter				4,975			4,975

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

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

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

Core deposit and customer relationships	$	86,908	$	49,427	$	37,481

8.	Other Assets

	Selected components of other assets are as follows:

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

	Deferred tax asset, net	$	15,727	$	30,339
	Accrued interest receivable		34,406		35,285
	Investments in limited partnerships and other investments		8,182		9,171
	Receivables arising from securities transactions		13,348		9,892
	All other		17,330		16,986

	Total other assets	$	88,993	$	101,673


9.	Deposits

	A summary of deposits by account type is as follows:

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

	Savings	$	1,841,605	$	1,463,341
	Money market		696,464		346,522
	NOW		367,627		368,730
	Demand		528,614		494,978
	Time		1,540,025		1,774,259

	Total deposits	$	4,974,335	$	4,447,830


10.	Borrowings

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

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

	FHLB advances (1)	$	1,885,389	$	2,190,914
	Repurchase agreements		133,802		159,530
	Mortgage loans payable		1,204		1,317
	Junior subordinated debentures issued to affiliated trusts (2)		21,135		24,735

	Total borrowings	$	2,041,530	$	2,376,496

	(1)	Includes fair value adjustments on acquired borrowings, in accordance with purchase accounting standards of $3.7 million and $5.8 million at September 30, 2009 and December 31, 2008, respectively. The acquisition fair value adjustments (premiums) are being amortized as an adjustment to interest expense on borrowings over their remaining terms using the level yield method.

	(2)	Includes fair value adjustments on acquired borrowings, in accordance with purchase accounting standards of $0 and $100,000 at September 30, 2009 and December 31, 2008, respectively. The trusts were organized to facilitate the issuance of “trust preferred” securities. The Company acquired these subsidiaries when it acquired Alliance Bancorp of New England, Inc. and Westbank Corporation, Inc. The affiliated trusts are wholly-owned subsidiaries of the Company and the payments of these securities are irrevocably and unconditionally guaranteed by the Company.

Federal Home Loan Bank of Boston (“FHLB”) advances are secured by the Company’s investment in FHLB stock, a blanket security agreement and other eligible investment securities. This agreement requires the Bank to maintain as collateral certain qualifying assets, principally mortgage loans. Investment securities currently maintained as collateral are all U.S. Agency

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

	hybrid adjustable rate mortgage-backed securities. At September 30, 2009 and December 31, 2008, the Bank was in compliance with the FHLB collateral requirements. At September 30, 2009, the Company could immediately borrow an additional $298.9 million from the FHLB, inclusive of a line of credit of approximately $20.0 million. Additional borrowing capacity of approximately $1.39 billion would be available by pledging additional eligible securities as collateral. The Company also has borrowing capacity at the Federal Reserve Bank of Boston’s discount window, which was approximately $94.9 million as of September 30, 2009, all of which was available on that date. Repurchase agreement lines of credit with three large broker-dealers totaled $100.0 million at September 30, 2009, with availability of $75.0 million. At September 30, 2009, all of the Company’s $1.88 billion outstanding FHLB advances were at fixed rates ranging from 1.82% to 8.17%. The weighted average rate for all FHLB advances at September 30, 2009 was 4.27%.

11.	Pension and Other Postretirement Benefit Plans

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

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

							Supplemental
							Executive					Other Postretirement
	Qualified Pension						Retirement Plans					Benefits

(In thousands)	2009			2008			2009			2008		2009			2008

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

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


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

							Supplemental
							Executive					Other Postretirement
	Qualified Pension						Retirement Plans					Benefits

(In thousands)	2009			2008			2009			2008		2009			2008

Service cost - benefits earned during the period	$	2,426		$	2,362		$	338		$	403	$	164		$	147
Interest cost on projected benefit obligation		4,291			4,089			583			530		268			279
Expected return on plan assets		(5,224	)		(5,393	)		-			-		-			-
Amortization:
Transition		-			-			-			-		39			39
Prior service cost		40			38			5			5		-			-
Loss (gain)		612			-			(1	)		-		(129	)		(60	)

Net periodic benefit cost	$	2,145		$	1,096		$	925		$	938	$	342		$	405

	In connection with its conversion to a state-chartered stock bank, the Company established an employee stock ownership plan (“ESOP”) to provide substantially all employees of the Company the opportunity to become stockholders. The ESOP borrowed $109.7 million of a $112.0 million line of credit from the Company and used the funds to purchase 7,454,562 shares of common stock in the open market subsequent to the subscription offering. The loan will be repaid principally from the Bank’s discretionary contributions to the ESOP over a remaining period of 25 years. The unallocated ESOP shares are pledged as collateral on the loan.

	At September 30, 2009, the loan had an outstanding balance of $98.1 million and an interest rate of 4.0%. The Company accounts for its ESOP in accordance with FASB ASC 718-40, Compensation – Stock Compensation. Under this guidance,

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

	unearned ESOP shares are not considered outstanding and are shown as a reduction of stockholders’ equity as unearned compensation. The Company will recognize compensation cost equal to the fair value of the ESOP shares during the periods in which they are committed to be released. To the extent that the fair value of the Company’s ESOP shares differs from the cost of such shares, this difference will be credited or debited to equity. The Company will receive a tax deduction equal to the cost of the shares released to the extent of the principal paydown on the loan by the ESOP. As the loan is internally leveraged, the loan receivable from the ESOP to the Company is not reported as an asset nor is the debt of the ESOP shown as a liability in the Company’s financial statements. Dividends on unallocated shares are used to pay the ESOP debt. The ESOP compensation expense for the three and nine months ended September 30, 2009 was approximately $733,000 and $2.2 million respectively. For the three and nine months ended September 30, 2008, the ESOP compensation expense was approximately $848,000 and $2.4 million, respectively. The amount of loan repayments made by the ESOP is used to reduce the unallocated common stock held by the ESOP.

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


Shares released for allocation		1,349,549
Unreleased shares		6,105,013

Total ESOP shares		7,454,562

Market value of unreleased shares at September 30, 2009 (in thousands)	$	65,324

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 FASB ASC 718, Compensation - Stock Compensation. Pursuant to this guidance, the fair value of stock option and restricted stock awards, measured at grant date, is amortized to compensation expense on a straight-line basis over the vesting period or over the requisite service period for awards expected to vest.

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

	Option Awards
	Options awarded to date are for a term of ten years and total approximately 9.5 million shares. Substantially all of these options were awarded on the original award date of June 17, 2005 and these 2005 option awards had the following vesting schedule: 40% vested at year-end 2005 and 20% vested at year-end 2006, 2007 and 2008, respectively. Subsequent awards have vesting periods of either three or four years. The Company assumed a 4.1% average forfeiture rate on options granted subsequent to June 17, 2005 as the majority of the options were awarded to senior level management. Compensation expense recorded on options for the three and nine months ended September 30, 2009 was $111,000 and $243,000, respectively, or after tax expense of approximately $72,000 and $157,000, respectively. Compensation expense for the three and nine months ended September 30, 2008 was $1.0 million and $3.2 million, respectively, or after tax expense of approximately $671,000 and $2.1 million, respectively, was recorded. Under the terms of the LTCP, additional awards are likely to be granted, which will increase the amount of expense in future periods.

	Options to purchase 418,279 shares were granted to employees during the nine months ended September 30, 2009 and options to purchase 87,462 shares were granted during the nine months ended September 30, 2008. Using the Black-Scholes option pricing model, the weighted-average grant date fair value was $2.37 and $2.05 per share for the options which were granted in 2009 and 2008, respectively. The weighted-average related assumptions for the nine months ended September 30, 2009 and 2008 are presented in the following table.

	2009		2008

Risk-free interest rate	2.64	%	2.91	%
Expected dividend yield	2.15	%	2.13	%
Expected volatility	19.32	%	16.29	%
Expected life (years)	6.25 years		6.23 years

	•	The risk-free interest rate was determined using the U.S. Treasury yield curve in effect at the time of the grant.
	•	The dividend yield is calculated on the current dividend and strike price at the time of the grant.

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

	•	The expected volatility assumption is based on the Company’s stock price history, which for 2009 was 60 months and for 2008 was 48 months.
	•	The expected life for options granted during the nine months ended September 30, 2009 and 2008 was determined by applying the simplified method as allowed by current accounting guidance.

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

			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	418,279			13.00
Exercised	-			-
Forfeited/cancelled	(2,637	)		13.93
Expired	(1,003,038	)		14.39

Options outstanding at September 30, 2009	7,835,270		$	14.32	6.01	$	-

Options exercisable at September 30, 2009	7,226,756		$	14.40	5.74	$	-

The following table summarizes the nonvested options during the nine months ended September 30, 2009.

				Weighted-average
				Grant-Date
	Shares			Fair Value

Nonvested at January 1, 2009		247,494		$	2.60
Granted		418,279			2.37
Vested		(54,622	)		2.45
Forfeited / Cancelled		(2,637	)		2.25

Nonvested at September 30, 2009		608,514		$	2.46

	Restricted Stock and Performance-Based Restricted Stock Awards
	To date, approximately 3.7 million shares of restricted stock have been awarded under the LTCP. The majority of these shares were awarded in 2005 and these 2005 awards have a vesting schedule of 15% per year for six years and 10% in the seventh year. Subsequent awards have vesting schedules of three years, four years, or cliff vest after three years. During the nine months ended September 30, 2009, in addition to restricted stock awards, the Company also granted performance-based restricted awards. The vesting for these newly issued performance-based awards is conditional upon fulfillment of a market condition and on meeting a service period. Of the 191,491 shares of restricted stock awarded during the nine months ended September 30, 2009, 65,149 shares were performance-based.

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

	Total restricted stock compensation expense for the three months ended September 30, 2009 and 2008 was approximately $1.6 million and $1.7 million or after tax expense of approximately $1.2 million and $1.1 million, respectively. For the nine months ended September 30, 2009 and 2008, compensation expense was $4.5 million and $5.3 million or after tax expense of approximately $3.4 million and $3.5 million was recorded. The Company anticipates that it will record expense of approximately $6.1 million, $6.3 million, $4.5 million and $407,000 in calendar years 2009 through 2012, respectively. Under the terms of the LTCP, additional awards are likely to be granted, which will increase the amount of expense recognized in future periods.

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

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


			Weighted-average
			Grant-Date
	Shares		Fair Value

Nonvested at January 1, 2009	1,656,933		$	14.33
Granted	191,491			14.94
Vested	(487,208	)		14.35
Forfeited / Cancelled	(165,699	)		14.38

Nonvested at September 30, 2009	1,195,517		$	14.42

13.	Income Taxes

	The Company had transactions in which the related tax effect was recorded directly to stockholders’ equity or goodwill instead of operations. Transactions in which the tax effect was recorded directly to stockholders’ equity included the tax effects of unrealized gains and losses on available for sale securities and excess tax benefits related to stock awards. Deferred taxes charged to goodwill were in connection with prior acquisitions. The Company had a net deferred tax asset of $15.7 million and $30.3 million at September 30, 2009 and December 31, 2008, respectively. The decrease in the deferred tax asset was primarily due to changes in the unrealized gain on available for sale securities.

	As of September 30, 2009 and December 31, 2008, the Company has a valuation allowance of $9.3 million and $9.0 million, respectively, against charitable contribution carryforwards that are expected to expire in 2009 unused. The increase in the valuation allowance for the nine months ended September 30, 2009 was $300,000. Management estimates that a total $400,000 increase in the valuation allowance is needed in 2009. As the increase in the valuation allowance results from changes in judgment concerning current year’s estimated income, the $400,000 increase is treated as an adjustment to the annual effective tax rate. Therefore management expects that the valuation allowance will increase by $100,000 over the remainder of the year.

	As of September 30, 2009 and December 31, 2008, the Company has a valuation allowance of $1.1 million and $815,000, respectively, against capital loss carryforwards. Management estimates that a total $287,000 increase in the valuation allowance is needed in 2009. The increase in the valuation allowance that resulted from a current year loss item was $223,000. The increase is treated as an adjustment to the annual effective tax rate and therefore will be recognized ratably over the remainder of the year. The remainder of the increase, $64,000, relates to a change in estimate related to the prior year and is treated discretely in the third quarter.

	The components of income tax expense are summarized as follows:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,

(In thousands)	2009			2008			2009			2008

Current tax expense
Federal	$	9,877		$	5,039		$	21,202		$	15,473
State		191			29			515			87

Total current		10,068			5,068			21,717			15,560

Deferred tax expense, net of valuation reserve
Federal		(2,152	)		166			(1,912	)		443
State		-			(277	)		-			(277	)

Total deferred		(2,152	)		(111	)		(1,912	)		166

Total income tax expense	$	7,916		$	4,957		$	19,805		$	15,726

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

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						Nine Months Ended
	September 30,						September 30,

(In thousands)	2009			2008			2009			2008

Deferred tax asset allocated to:
Stockholders’ equity, tax effect of net unrealized gain on investment
securities available for sale, net of valuation allowance	$	7,425		$	(1,136	)	$	15,946		$	(4,243	)
Stockholders’ equity, tax impact of new split dollar life
insurance accounting pronouncement		-			(8	)		-			(580	)
Reclass as a result of adoption of new OTTI accounting pronouncement		-			-			578			-
Goodwill		-			(951	)		-			(1,207	)
Income		(2,152	)		(111	)		(1,912	)		166

Total change in deferred tax assets, net	$	5,273		$	(2,206	)	$	14,612		$	(5,864	)

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

	September 30,
(In thousands)	2009

Balance, beginning of period	$	421
Additions for tax positions of current year		-
Additions for tax positions of prior year		9
Reductions for tax positions of prior year		(30	)

Balance, end of period	$	400

	Included in the balance at September 30, 2009 are $400,000 of tax positions for which the ultimate deductibility is highly uncertain and for which the disallowance of the tax position would affect the annual effective tax rate. The Company anticipates that $140,000 of the unrecognized tax benefits will reverse in the next twelve months due to statute expirations. The Company recognizes interest and penalties accrued related to unrecognized tax benefits as a component of income tax expense. As of September 30, 2009, the Company has accrued approximately $71,000 in interest and penalties.

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

14.	Commitments and Contingencies

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

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

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


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

Loan origination commitments	$	174,246	$	108,948
Unadvanced portion of construction loans		94,584		82,525
Standby letters of credit		7,111		7,908
Unadvanced portion of lines of credit		601,208		608,043

Total commitments	$	877,149	$	807,424

	Other Commitments
	As of September 30, 2009 and December 31, 2008, the Company was contractually committed under limited partnership agreements to make additional partnership investments of approximately $1.5 million which constitutes the Company’s maximum potential obligation to these partnerships. The Company is obligated to make additional investments in response to formal written requests, rather than a funding schedule. Funding requests are submitted when the partnerships plan to make additional investments.

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

15.	Stockholders’ Equity

	At September 30, 2009 and December 31, 2008, stockholders’ equity amounted to $1.43 billion and $1.38 billion, respectively, representing 16.7% and 16.6% of total assets, respectively. The Company paid cash dividends totaling $0.21 per share on common stock during the nine months ended September 30, 2009.

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

	Treasury Shares
	Share Repurchase Plan
	On January 31, 2006, the Company’s Board of Directors authorized a repurchase plan of up to an additional 10.0 million shares or approximately 10% of the then outstanding Company common stock. Under this plan the Company has repurchased 7.1 million shares of common stock at a weighted average price of $13.11 per share as of September 30, 2009. During 2009, approximately 313,200 shares were repurchased. There is no set expiration date for this repurchase plan.

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

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

NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

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
September 30, 2009
Tier 1 Capital (to Average Assets)	$	718,219		9.0	%	$	318,554		4.0	%	$	398,193		5.0	%
Tier 1 Capital (to Risk Weighted Assets)		718,219		16.4			175,478		4.0			263,217		6.0
Total Capital (to Risk Weighted Assets)		770,029		17.6			350,956		8.0			438,694		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.
September 30, 2009
Tier 1 Capital (to Average Assets)	$	875,114		11.0	%	$	318,958		4.0	%	$	398,697		5.0	%
Tier 1 Capital (to Risk Weighted Assets)		875,114		19.9			175,863		4.0			263,794		6.0
Total Capital (to Risk Weighted Assets)		926,834		21.1			351,726		8.0			439,657		10.0
December 31, 2008
Tier 1 Capital (to Average Assets)	$	853,628		11.1	%	$	308,873		4.0	%	$	386,091		5.0	%
Tier 1 Capital (to Risk Weighted Assets)		853,628		18.7			182,537		4.0			273,806		6.0
Total Capital (to Risk Weighted Assets)		903,539		19.8			365,075		8.0			456,343		10.0

16.	Other Comprehensive Income

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,

(In thousands)	2009			2008			2009			2008

Net income	$	12,620		$	10,936		$	34,318		$	35,652
Other comprehensive income, before tax
Unrealized gains on securities
Unrealized holding gains (losses), arising during the period		23,233			(4,054	)		54,680			(12,345	)
Reclassification adjustment for (gains) losses, included in net income		(2,029	)		215			(5,513	)		(1,010	)
Non-credit unrealized loss on other-than-temporarily impaired debt securities		-			-			(1,896	)		-

Other comprehensive income (loss), before tax		21,204			(3,839	)		47,271			(13,355	)
Income tax (expense) benefit, net of valuation allowance		(7,425	)		1,136			(16,524	)		4,243

Other comprehensive income (loss), net of tax		13,779			(2,703	)		30,747			(9,112	)

Comprehensive income	$	26,399		$	8,233		$	65,065		$	26,540

17.	Earnings Per Share

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,

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

Net income	$	12,620	$	10,936	$	34,318	$	35,652
Average common shares outstanding for basic EPS		99,507		98,989		99,292		99,803
Effect of dilutive stock options and unvested stock awards		63		157		6		53

Average common and common-equivalent shares for dilutive EPS		99,570		99,146		99,298		99,856
Net income per common share:
Basic	$	0.13	$	0.11	$	0.35	$	0.36
Diluted		0.13		0.11		0.35		0.36

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. Management’s 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 NewAlliance’s 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, changes in accounting standards and FDIC initiatives, 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 Company’s 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. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s 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 to—and should be read in conjunction with—our 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 Company’s consolidated results of operations for the periods presented in our Consolidated Financial Statements.

30

•

Financial Condition and Management of Market and Interest Rate Risk — an overview of financial condition and market and interest rate risk.

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 $8.54 billion and stockholders’ equity of $1.43 billion at September 30, 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 87 banking offices, 104 ATMs and internet website (www.newalliancebank.com). NewAlliance common stock is traded on the New York Stock Exchange under the symbol “NAL”.

The Company’s 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 Company’s 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 and new business lines;
	•		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 Company’s 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 NewAlliance’s Annual Report on Form 10-K for the year ended December 31, 2008 for additional disclosures with respect to laws and regulations affecting the Company’s businesses.

Critical Accounting Estimates

Our Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States of America. 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 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 Company’s critical accounting estimates have changed during the quarter. A brief description of our current policies involving significant management judgment 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 Company’s 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 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 tax 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 assumptions—estimated return on plan assets and the discount rate—are 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 be impaired. 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 management’s 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. For equity securities, 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. For debt securities, if such decline is deemed other-than-temporary, the investment is written down for the portion of the impairment related to the estimated credit loss within non-interest income and the non-credit related impairment is recognized in other comprehensive income unless required to sell or there is intent to sell, in which case the entire loss would be recorded within non-interest income. Factors considered by management include, but are not limited to: not having the intent or need to sell 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, credit deterioration of the investment such as the 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 management’s assessment of the factors used to determine that a security was not other-than-temporarily impaired could lead to additional impairment charges.

A complete discussion of critical accounting estimates can be found in the Company’s most recent Annual Report on Form 10-K (fiscal year ended December 31, 2008).

Recent Accounting Changes

We have adopted the following new accounting pronouncements and authoritative guidance during 2009. Except as indicated, the adoption of the following pronouncements did not have a material impact on the Company’s consolidated financial statements.

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards Codification^TM and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162” (“SFAS No. 168”). The objective of SFAS No. 168 is to replace SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” and to establish the FASB Accounting Standards Codification^TM (“Codification” or “FASB ASC”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”). The Codification supersedes all previous level (a) through (d) GAAP, aside from non-codified FASB statements and guidance issued by the Securities and Exchange Commission (“SEC”). The Codification did not change GAAP, but rather reorganized it into approximately 90 accounting topics within a consistent structure to simplify user access. Contents in each of these accounting topics are further organized by subtopic, section and paragraph. Changes to the Codification are in the form of Accounting Standards Updates issued by the FASB. An Accounting Standards Update is not authoritative; rather, it is a document that communicates the specific amendments that change the Codification and provides background information about the guidance, including the basis for conclusions on changes made to the Codification. The adoption of SFAS No. 168 and the Codification did not have a material impact on the Company’s consolidated financial statements but changed the referencing system for accounting standards from the legacy GAAP citations to codification topic numbers.

In June 2009, the FASB issued FASB Accounting Standards Update (“ASU”) No. 2009-01, Topic 105, Generally Accepted Accounting Principles. This ASU amends the Codification for the issuance of SFAS No. 168 in its entirety, including the accounting standards update instructions contained in Appendix B of the statement. SFAS No. 168 is summarized above.

The following pronouncements provide citations to the applicable Codification, as appropriate.

FASB ASC 820-10, Effective date of Fair Value Measurements and Disclosures. This guidance requires disclosure of nonfinancial assets and liabilities in accordance with FASB ASC 820, Fair Value Measurements and Disclosures.

FASB ASC 815-10, Disclosures about Derivative Instruments and Hedging Activities. This guidance changes the disclosure requirements regarding derivative instruments and hedging activities in accordance with FASB ASC 815-10-65.

FASB ASC 350-30, Determination of the Useful Life of Intangible Assets. This guidance 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 FASB ASC 350, Intangibles – Goodwill and Other.

FASB ASC 805, Business Combinations. This guidance became effective on January 1, 2009 and applies prospectively to any future business combinations. It is expected to have a significant effect on the Company’s consolidated financial statements, when a business combination occurs.

FASB ASC 820-10, 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. This guidance provides additional clarification for estimating fair value 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.

FASB ASC 320-10, Recognition and Presentation of Other-Than-Temporary Impairments. This guidance makes the accounting for other-than-temporary impairments more operational and improves the presentation of other-than-temporary impairments in the financial statements. The adoption of this pronouncement resulted in a $1.0 million, net of tax, cumulative effect adjustment increasing retained earnings and decreasing accumulated other comprehensive income.

FASB ASC 825-10, Interim Disclosures about Fair Value of Financial Instruments. This guidance requires disclosures about the 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.

FASB ASC 855-10, Subsequent Events. This guidance establishes general standards of accounting for and the disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued.

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 18 to 24 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”), the Financial Stability Plan and the American Recovery and Reinvestment Act. While these initiatives have objectives related to restoring confidence in the banking system and overall market place and stimulating the economy, to date they have had mixed results. Although the economy has been stabilized from its free fall, it is still operating in a recessionary environment as stress on consumers remains high due to elevated and rising unemployment rates, rising mortgage delinquencies and home foreclosures and credit remaining tight. In the second quarter, the Federal Deposit Insurance Company (“FDIC”) imposed an emergency special assessment on all FDIC insured banks that would assist the FDIC in their efforts to increase the Deposit Insurance Fund. As a result of this special assessment, the Company recorded approximately $4.0 million in additional deposit insurance expense for the three months ended June 30, 2009. Total FDIC assessment expense for the nine months ended September 30, 2009, including the special assessment, was $8.7 million. The FDIC has further proposed to require insured banks to prepay their quarterly assessments through December 31, 2012 on December 30, 2009 based on its current liquidity needs projections. Also, a proposal was released by the Obama Administration which includes sweeping financial regulatory reforms designed to ensure stability in the financial markets which will likely impact our regulatory burden if passed into law. Consequently, the operating environment remains very challenging.

The Company reported earnings of $12.6 million, or $0.13 per diluted share, for the third quarter of 2009 compared to $10.9 million or $0.11 per diluted share for the third quarter of 2008. For the nine months ended September 30, 2009 and 2008 reported earnings were $34.3 million, or $0.35 per diluted share, and $35.7 million, or $0.36 per diluted share, respectively. The quarter and year-to-date results were both positively impacted by the improvement in net interest income and non-interest income offset by higher loan loss provisions, FDIC insurance expense and income taxes.

In the third quarter, we experienced further growth in core deposits bolstered by continued customer confidence and new product offerings. Core deposits increased $87.1 million since June 30, 2009 and $760.7 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 to reduce our borrowings.

We expect deposit competition in our market area to remain high as a key focus for the banking industry continues to be the generation of deposits to enhance liquidity and asset growth in what continues to be a tight credit market for lower credit rated institutions. This has manifested itself in deposit pricing still running slightly high relative to reference indexes such as the LIBOR or Treasury curves than we experienced in more stable periods. We plan to continue our pricing strategy to retain maturing time deposit balances, within reason, and to grow core deposits.

Residential mortgage loan originations have also remained very strong thus far in 2009. The decrease in conforming mortgage interest rates caused by government purchases of mortgage securities, a reduced number of competitors who have the ability and liquidity to retain or sell mortgage loans and enhanced sales efforts by the Bank were catalysts for the surge of mortgage originations we experienced through September 30, 2009. In the third quarter, mortgage rates increased slightly causing a dip in originations, however, they were still strong. With ample liquidity, capital and access to the secondary mortgage market, we

were able to increase our market share and post mortgage originations of approximately $807.0 million in the first three quarters of 2009. Of these originations, approximately $403.0 million were fixed rate mortgages with terms of 15 years or more and were originated for sale. Total mortgage origination activity and loan sale income was $1.3 million and $428,000 for the three months ended September 30, 2009 and 2008, respectively and for the 2009 and 2008 year-to-date periods, income was $4.8 million and $1.3 million, respectively. The current year income of $4.8 million includes approximately $300,000 in unrealized fair value gains related to loan commitments and mortgage loans held for sale. We anticipate originations will trend downward throughout the year, but still be running higher than prior year activity.

Net interest income has increased from 2008, both on a quarter and year-to-date basis, primarily due to significant reductions in our cost of funds. For the three months ended September 30, 2009, interest expense decreased $10.5 million, or 20.5%, from the comparative quarter and the average rate paid on interest-bearing liabilities decreased 76 basis points. The nine month period experienced similar year-over-year declines in interest expense and the average rate paid on interest-bearing liabilities of 16.9% and 68 basis points, respectively. We expect the cost of our interest-bearing liabilities to continue to decline throughout the year.

For the three and nine months ended September 30, 2009, the net interest margin expanded to 2.71% and 2.63%, respectively, from 2.63% and 2.62% for the three and nine months ended September 30, 2008, respectively. The reduction in the cost of funds outpaced the decline in the average yield on interest-earning assets resulting in positive growth in the margin.

Asset quality and prudent lending practices are major strengths of our institution, however like many financial institutions, we have experienced higher levels of delinquencies, net charge-offs and nonperforming loans compared to historical levels. In the third quarter, however, delinquencies and nonperforming loans stabilized slightly and were down from the second quarter. In response to risks inherent in its loan portfolio, the Company recorded a loan loss provision of $5.4 million for the quarter ended September 30, 2009 and $14.5 million for the nine months ended September 30, 2009.

Throughout the economic downturn, the Company’s asset quality has remained solid and a cornerstone of our success. For the three months ended September 30, 2009, net charge-offs were $5.2 million, or on an annualized basis, 0.43% of average loans compared to net charge-offs of $2.8 million recorded during the third quarter of 2008. For the nine months ended September 30, 2009 and 2008, net charge-offs were $12.7 million and $4.2 million, respectively. Nonperforming loans at September 30, 2009 increased 28.1% to $49.1 million since December 31, 2008 and as a percentage of total loans are 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 increase in nonperforming loans is attributable to residential real estate resulting from 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 10.97%, 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 did not apply 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 18 - 24 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, de-novo branching, acquiring banks that provide earnings accretion, including FDIC assisted acquisitions of troubled banks and seizing opportunities to purchase regional bank branch divestitures.

Through prudent risk management practices, sound credit polices, no direct exposure to subprime mortgage lending and sufficient capital and liquidity, we are confident that we are positioned well in these difficult economic times. Therefore, in looking forward our key business priorities for 2009 remain: 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.

Selected financial data, ratios and per share data are provided in Table 1.

Table 1: Selected Data
	Three Months Ended						Nine Months Ended
	September 30,						September 30,

(Dollars in thousands, except share data)	2009			2008			2009			2008

Condensed Income Statement
Interest and dividend income	$	92,268		$	99,042		$	281,104		$	300,436
Interest expense		40,506			50,983			131,422			158,123

Net interest income before provision for loan losses		51,762			48,059			149,682			142,313
Provision for loan losses		5,433			4,200			14,533			9,600

Net interest income after provision for loan losses		46,329			43,859			135,149			132,713
Non-interest income		16,449			13,405			46,003			43,591
Operating expenses		42,238			41,272			127,002			124,749
Merger related charges		4			99			27			177

Income before income taxes		20,536			15,893			54,123			51,378
Income tax provision		7,916			4,957			19,805			15,726

Net income	$	12,620		$	10,936		$	34,318		$	35,652

Weighted average shares outstanding
Basic		99,506,517			98,988,777			99,292,067			99,802,810
Diluted		99,569,908			99,145,940			99,298,399			99,855,692
Earnings per share
Basic	$	0.13		$	0.11		$	0.35		$	0.36
Diluted		0.13			0.11			0.35			0.36


Financial Ratios
Return on average assets (1)		0.59	%		0.53	%		0.54	%		0.58	%
Return on average equity (1)		3.57			3.13			3.27			3.37
Net interest margin (1)		2.71			2.63			2.63			2.62
Dividend payout ratio		53.85			63.64			60.00			56.94
Average equity to average assets ratio		16.57			16.96			16.51			17.22

Non-GAAP Ratios
Efficiency ratio (2)		63.61			66.90			66.30			67.58
Tangible common equity ratio (3)		10.82			10.75			10.82			10.75

Per share data
Book value per share	$	13.39		$	13.08		$	13.39		$	13.08
Tangible book value per share		8.09			7.72			8.09			7.72

(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 and identifiable intangible assets. 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
Tables 2 & 3 below set forth certain information concerning average interest-earning assets and interest-bearing liabilities and their associated yields or rates for the periods indicated. The average yields and costs are derived by dividing annualized 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 4 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 Company’s 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.

Table 2: Average Balance Sheets for the Three Months Ended September 30, 2009 and 2008

	Three Months Ended September 30,

	2009							2008

					Average							Average
	Average				Yield/			Average				Yield/
(Dollars in thousands)	Balance		Interest		Rate			Balance		Interest		Rate

Interest-earning assets
Loans
Residential real estate	$	2,462,668	$	31,983		5.19	%	$	2,562,448	$	35,202	5.50	%
Commercial real estate		1,212,759		17,791		5.87			1,194,106		18,273	6.12
Commercial business		437,842		5,419		4.95			471,555		7,021	5.96
Consumer		737,405		8,517		4.62			719,016		9,718	5.41

Total loans		4,850,674		63,710		5.25			4,947,125		70,214	5.68
Fed funds sold and other short-term investments		87,864		63		0.29			79,171		494	2.50
Federal Home Loan Bank of Boston stock		120,821		-		-			120,821		911	3.02
Securities		2,579,856		28,495		4.42			2,176,072		27,423	5.04

Total securities, short-term investments
and federal home loan bank stock		2,788,541		28,558		4.10			2,376,064		28,828	4.85

Total interest-earning assets		7,639,215	$	92,268		4.83	%		7,323,189	$	99,042	5.41	%
Non-interest earning assets		899,599							921,916

Total assets	$	8,538,814						$	8,245,105



Interest-bearing liabilities
Deposits
Money Markets	$	621,017	$	2,419		1.56	%	$	383,234	$	1,913	2.00	%
NOW		366,770		280		0.31			359,033		288	0.32
Savings		1,878,458		5,701		1.21			1,348,578		7,742	2.30
Time		1,512,703		10,530		2.78			1,769,126		14,667	3.32

Total interest-bearing deposits		4,378,948		18,930		1.73			3,859,971		24,610	2.55
Repurchase agreements		127,307		375		1.18			179,350		1,045	2.33
FHLB advances and other borrowings		1,988,712		21,201		4.26			2,243,820		25,328	4.52

Total interest-bearing liabilities		6,494,967		40,506		2.49	%		6,283,141		50,983	3.25	%
Non-interest-bearing demand deposits		532,792							494,104
Other non-interest-bearing liabilities		96,367							69,233

Total liabilities		7,124,126							6,846,478
Equity		1,414,688							1,398,627

Total liabilities and equity	$	8,538,814						$	8,245,105

Net interest-earning assets	$	1,144,248						$	1,040,048

Net interest income			$	51,762						$	48,059

Interest rate spread						2.34	%					2.16	%
Net interest margin (net interest income
as a percentage of total interest-earning assets						2.71	%					2.63	%
Ratio of total interest-earning assets
to total interest-bearing liabilitites						117.62	%					116.55	%



37

Table 3: Average Balance Sheets for the Nine Months Ended September 30, 2009 and 2008

	Nine Months Ended

	September 30, 2009							September 30, 2008

					Average							Average
	Average				Yield/			Average				Yield/
(Dollars in thousands)	Balance		Interest		Rate			Balance		Interest		Rate

Interest-earning assets
Loans
Residential real estate	$	2,522,403	$	100,358		5.30	%	$	2,485,609	$	102,992		5.52	%
Commercial real estate		1,213,877		52,855		5.81			1,198,238		55,450		6.17
Commercial business		443,564		16,658		5.01			462,889		21,205		6.11
Consumer		739,600		25,821		4.65			702,436		29,551		5.61

Total loans		4,919,444		195,692		5.30			4,849,172		209,198		5.75
Fed funds sold and other short-term investments		93,336		342		0.49			45,740		969		2.82
Federal Home Loan Bank of Boston stock		120,821		-		-			118,369		3,766		4.24
Investment securities		2,456,203		85,070		4.62			2,232,525		86,503		5.17

Total securities, short-term investments
and federal home loan bank stock		2,670,360		85,412		4.26			2,396,634		91,238		5.08

Total interest-earning assets		7,589,804	$	281,104		4.94	%		7,245,806	$	300,436		5.53	%
Non-interest earning assets		889,869							936,922

Total assets	$	8,479,673						$	8,182,728



Interest-bearing liabilities
Deposits
Money Markets	$	515,048	$	6,500		1.68	%	$	444,882	$	7,442		2.23	%
NOW		360,717		777		0.29			375,545		1,083		0.38
Savings		1,729,690		19,125		1.47			1,195,774		20,946		2.34
Time		1,617,893		36,646		3.02			1,792,976		49,942		3.71

Total interest-bearing deposits		4,223,348		63,048		1.99			3,809,177		79,413		2.78
Repurchase agreements		142,383		1,302		1.22			182,670		3,113		2.27
FHLB advances and other borrowings		2,109,595		67,072		4.24			2,229,373		75,597		4.52

Total interest-bearing liabilities		6,475,326		131,422		2.71	%		6,221,220		158,123		3.39	%
Non-interest-bearing demand deposits		510,864							478,817
Other non-interest-bearing liabilities		93,788							73,398

Total liabilities		7,079,978							6,773,435
Equity		1,399,695							1,409,293

Total liabilities and equity	$	8,479,673						$	8,182,728

Net interest-earning assets	$	1,114,478						$	1,024,586

Net interest income			$	149,682						$	142,313

Interest rate spread						2.24	%						2.14	%
Net interest margin (net interest income
as a percentage of total interest-earning assets						2.63	%						2.62	%
Ratio of total interest-earning assets
to total interest-bearing liabilitites						117.21	%						116.47	%



38

Table 4: Rate/Volume Analysis


	Three Months Ended									Nine Months Ended
	September 30, 2009									September 30, 2009
	Compared to									Compared to
	Three Months Ended									Nine Months Ended
	September 30, 2008									September 30, 2008

	Increase (Decrease)									Increase (Decrease)
	Due to									Due to

(In thousands)	Rate			Volume			Net			Rate			Volume			Net

Interest-earning assets
Loans
Residential real estate	$	(1,879	)	$	(1,340	)	$	(3,219	)	$	(4,142	)	$	1,508		$	(2,634	)
Commercial real estate		(764	)		282			(482	)		(3,311	)		716			(2,595	)
Commercial business		(1,125	)		(477	)		(1,602	)		(3,692	)		(855	)		(4,547	)
Consumer		(1,445	)		244			(1,201	)		(5,230	)		1,500			(3,730	)

Total loans		(5,213	)		(1,291	)		(6,504	)		(16,375	)		2,869			(13,506	)
Fed funds sold and other short-term investments		(480	)		49			(431	)		(1,170	)		543			(627	)
Federal Home Loan Bank of Boston stock		(911	)		-			(911	)		(3,842	)		76			(3,766	)
Securities		(3,639	)		4,711			1,072			(9,653	)		8,220			(1,433	)

Total securities, short-term investments
and federal home loan bank stock		(5,030	)		4,760			(270	)		(14,665	)		8,839			(5,826	)

Total interest-earning assets	$	(10,243	)	$	3,469		$	(6,774	)	$	(31,040	)	$	11,708		$	(19,332	)

Interest-bearing liabilities
Deposits
Money market	$	(488	)	$	994		$	506		$	(2,003	)	$	1,061		$	(942	)
NOW		(14	)		6			(8	)		(264	)		(42	)		(306	)
Savings		(4,432	)		2,391			(2,041	)		(9,286	)		7,465			(1,821	)
Time		(2,173	)		(1,964	)		(4,137	)		(8,732	)		(4,564	)		(13,296	)

Total interest bearing deposits		(7,107	)		1,427			(5,680	)		(20,285	)		3,920			(16,365	)
Repurchase agreements		(422	)		(248	)		(670	)		(1,227	)		(584	)		(1,811	)
FHLB advances and other borrowings		(1,354	)		(2,773	)		(4,127	)		(4,581	)		(3,944	)		(8,525	)

Total interest-bearing liabilities	$	(8,883	)	$	(1,594	)	$	(10,477	)	$	(26,093	)	$	(608	)	$	(26,701	)

Increase in net interest income	$	(1,360	)	$	5,063		$	3,703		$	(4,947	)	$	12,316		$	7,369

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 Company’s 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 September 30, 2009 was $51.8 million, an increase of $3.7 million from September 30, 2008. The increase was due to a 76 basis point reduction on the average rate paid on interest-bearing liabilities. The product mix shift from maturing higher cost time deposits and borrowings to lower cost core deposits resulted in a favorable funding mix. The earning assets that repriced or originated at reduced rates from a year ago, were counterbalanced by the reduction in our funding costs which resulted in an increase in the net interest margin of 8 basis points to 2.71% compared to 2.63% for the three months ended September 30, 2008.

Net interest income for the nine months ended September 30, 2009 was $149.7 million, as shown in Table 3, an increase of $7.4 million, compared to the same period in 2008. These increases were due to: a) average balances of interest-earning assets outpacing the growth in interest-bearing liabilities by approximately $89.9 million; b) the repricing or maturing of interest-bearing liabilities outpacing interest-earning assets, thereby allowing us to reduce our cost of funds at a faster pace and c) the shift in the mix of interest-bearing liabilities from higher cost time deposits and borrowings to core deposits which reduced the cost of funds by 68 basis points. As discussed more fully below, given the loss of the Federal Home Loan Bank of Boston (“FHLB”) dividend and the reduction in the yields of interest-earning assets, the net interest margin increased one basis point to 2.63% for the current year-to-date period ended September 30, 2009 as compared to 2008.

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. No dividends have been received for the three and nine month periods ended September 30, 2009 compared to dividends of $911,000 and $3.8 million for the three and nine months ended September 30, 2008.

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 extended the moratorium on excess stock purchases, primarily due to other-than-temporary impairment charges on its private-label mortgage-backed securities investments. The FHLB has stated that it expects and intends to hold its private-label mortgage-backed securities to maturity. In a letter to member banks on August 12, 2009, the FHLB announced the filing of its quarterly report to the SEC and disclosed that they were able to recapture approximately $350.0 million of capital upon the adoption of the new OTTI guidance in the second quarter, however, certain investments in their portfolio remain vulnerable to the potential volatility in the housing and capital markets, which could result in additional losses. They also stated that, to protect their capital base and to build retained earnings, their moratorium on excess stock repurchases and the quarterly dividend payout suspension remains in place at this time. Therefore, dividends from the FHLB for the remainder of 2009 are unlikely.

Comparison of Quarter-to-Date September 2009 and September 2008
Interest and dividend income decreased $6.7 million to $92.3 million at September 30, 2009 compared to $99.0 million at September 30, 2008 comprising of a decrease of $10.2 million due to rate, 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 to a lesser extent by the increase in nonperforming loans. Investment growth helped to mitigate the effect of the rate decline on interest income as the average balance increase of $403.8 million accounted for approximately $4.8 million of the increase to interest income. Due to the growth in core deposits the Company has expanded the securities portfolio primarily with purchases of adjustable rate mortgage-backed securities. The average balance of the loan portfolio fell $96.5 million for the period. Given the economic and market conditions that have beset the industry over the last year, there have been fewer commercial originations that meet our underwriting criteria and although residential mortgage originations have been relatively strong, approximately half were originated at fixed rates and sold in the secondary market.

The cost of funds for the quarter ended September 30, 2009 decreased $10.5 million, or 20.5% to $40.5 million, compared to $51.0 million for the same period a year ago. The Company’s continued strategy during this period was to bring down deposit costs and focus on the growth of core interest and non-interest-bearing deposits. The result has been a decrease of $5.7 million in deposit interest expense due to changes in the mix of deposits with net average balance growth of $557.7 million and a decrease of 82 basis points on the average rate paid. This decrease in deposit interest expense was primarily in time deposits, which decreased $4.1 million due to the declines in the average balances and average rate paid of $256.4 million and 54 basis points, respectively. Through targeted marketing campaigns and migration from maturing time deposits as they repriced at reduced rates, the Company has been able to grow core deposit average balances by a total of $814.1 million. The main driver of core deposit growth has been savings accounts with an average balance increase of $529.9 million and, additionally, when combined with the decline in the average rate paid of 109 basis points, interest expense actually decreased by $2.0 million.

A further benefit of the core deposit growth has been a substantial reduction in and reliance on borrowings from the FHLB. FHLB advances and other borrowing costs decreased $4.1 million due to the decline in the average balance and the average rate paid on FHLB advances of $255.1 million and 26 basis points, respectively. The Company was able to replace maturing advances with new advances at substantially lower rates or to payoff maturing advances.

Comparison of Year-to-Date September 2009 and September 2008
Interest and dividend income decreased $19.3 million to $281.1 million for the nine months ended September 30, 2009 compared to $300.4 million at September 30, 2008 and comprised of a decrease of $31.0 million due to rate, partially offset by a $11.7 million increase due to volume. The decline in rate was primarily due to the decline in loan and investment yields due to lower market interest rates and the loss of three quarterly dividends from the FHLB. Loan and investment growth helped to relieve some of the interest rate pressure as the Company, with ready liquidity, increased the average balance of earning assets by $344.0 million.

The cost of funds for the nine months ended September 30, 2009 decreased $26.7 million to $131.4 million, compared to $158.1 million for the same period a year ago primarily resulting from the Company’s diligence in bringing deposit costs down while continuing to increase core deposits. As shown in table 4, deposit costs were reduced by $20.3 million due to a decrease in the average rate paid of 79 basis points, partially offset by an increase of $3.9 million due to the increase in the average balances of $414.2 million. This $16.4 million net decrease in deposit interest costs has been achieved concurrently with growth in all core deposits of $621.3 million. Supported by the growth in deposits, the Company has been able to pay down higher cost borrowings as they mature or replace them with new advances at substantially lower rates and reduce its overall reliance on borrowings.

Provision for Loan Losses
The provision for loan losses (“provision”) is based on management’s periodic assessment of the adequacy of the allowance for loan losses (“allowance”) which, in turn, is based on such interrelated factors as the composition of the loan portfolio and its inherent risk characteristics, the level of nonperforming loans and charge-offs, both current and historic, local economic conditions, the direction of real estate values, and regulatory guidelines.

Management performs a monthly review of the loan portfolio, and based on this review determines the level of the provision necessary to maintain an adequate allowance for loan losses. Management recorded a provision for loan losses of $5.4 million for the three months ended September 30, 2009. The primary factors that influenced management’s decision to record this provision were continuing trends in delinquencies, net charge-offs of $5.2 million for the quarter and to support estimated credit losses embedded in the portfolio. A provision for loan losses of $4.2 million was recorded for the three months ended September 30, 2008, based on growth in the portfolio, the level of net charge-offs, and nonperforming loans at that time.

For the nine months ended September 30, 2009, the provision for loan losses was $14.5 million as compared to $9.6 million for the same period a year ago. The year-to-date provision relates to net charge-offs of $12.7 million and increases in nonperforming loans of $10.8 million, primarily in the residential and commercial business portfolios due to the current economic conditions. Partially offsetting the year-to-date increase in the nonperforming loans was a decrease in nonperforming construction loans to commercial developers of residential condominiums which have declined due to negotiated sales, borrower paydowns and charge-offs. Future provisions for loan losses may be deemed necessary if economic conditions do not improve or continue to deteriorate. Further details about nonperforming loans can be found in the “Asset Quality” and “Allowance for Loan Losses” sections beginning on page 48.

At September 30, 2009, the allowance for loan losses was $51.7 million, which represented 1.08% of total loans and 105.36% of nonperforming loans. This compared to the allowance for loan losses of $49.9 million at December 31, 2008 which represented 1.01% of total loans and 130.21% of nonperforming loans.

Table 5: Non-Interest Income
	Three Months Ended											Nine Months Ended
	September 30,					Change						September 30,				Change

(Dollars in thousands)	2009		2008			Amount			Percent			2009		2008		Amount			Percent

Depositor service charges	$	7,270	$	7,052		$	218			3	%	$	20,175	$	20,393	$	(218	)		(1	) %
Loan and servicing income, net		322		325			(3	)		(1	)		498		971		(473	)		(49	)
Trust fees		1,569		1,635			(66	)		(4	)		4,219		4,984		(765	)		(15	)
Investment management, brokerage & insurance fees		1,700		1,872			(172	)		(9	)		5,514		6,248		(734	)		(12	)
Bank owned life insurance		882		1,164			(282	)		(24	)		2,652		3,984		(1,332	)		(33	)
Net gain on securities		2,029		(215	)		2,244			(1,044	)		5,513		1,010		4,503			446
Mortgage origination activity & loan sale income		1,268		428			840			196			4,768		1,341		3,427			256
Other		1,409		1,144			265			23			2,664		4,660		(1,996	)		(43	)

Total non-interest income	$	16,449	$	13,405		$	3,044			23	%	$	46,003	$	43,591	$	2,412			6	%

Non-Interest Income

Comparison of Quarter-to-Date September 2009 and September 2008
As displayed in Table 5, non-interest income increased $3.0 million to $16.4 million for the three months ended September 30, 2009 from the prior year period. The main drivers of the increase were depositor service charges, net gain on securities, mortgage origination activity and loan sale income and other income. These increases were partially offset by a decrease in BOLI income.

	•	Depositor service charges increased due to overdraft fee income and checking account service charges. Growth in this type of fee related income has resulted from profit improvement initiatives to expand core banking fee income and are also due in part to the growth in core deposits.

	•	Net gain on securities increased due to the prior year impairment charges related to an investment in a trust preferred equity security in a regional bank and two preferred equity securities issued by Freddie Mac and Lehman Brothers. Net gains recorded in the current year period primarily relate to gains on the sale of mortgage-backed securities. These securities were sold at a premium and were sold in order to reduce prepayment risk.

	•	Mortgage origination activity and loan sale income increased $840,000 due to a greater number of mortgage loans originated for sale and sold in the secondary market during the quarter and the effect of originations that were in the pipeline at September 30, 2009 under commitments 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.

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	•		Other income increased due to a larger net gain on investments in limited partnerships recorded during the current year quarter as compared to the net gain recorded in the prior year period.

	•		BOLI income decreased due to a decline in the average yield earned as a result of current market interest rates.

Comparison of Year-to-Date September 2009 and September 2008
As displayed in Table 5, non-interest income increased $2.4 million to $46.0 million for the nine months ended September 30, 2009 from the prior year period. The increase was attributable to net gain on securities and increased mortgage origination activity and loan sale income. These increases were partially offset by declines in loan and servicing income, trust fees, investment management, brokerage and insurance fees, BOLI and other income.

	•		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 reduce high price premium risk and to fund the pay-off of maturing FHLB advances. The increase in the net gain on securities is also due to the prior year impairment charges as outlined in the quarterly discussion above. Partially offsetting the net gain on the sale of investments was an other-than-temporary impairment recorded against the Company’s investment in an adjustable rate mortgage mutual fund in the second quarter.

	•		Trust fees declined primarily due to a decrease in the year-to-date average 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. Assets under management have begun to rebound in the most recent quarter evidenced by the recent market improvement.

	•		Investment management, brokerage and insurance fees declined due to prevailing depressed market conditions and the ongoing lack of consumer confidence in longer-term investment choices.

	•		Loan and servicing income declined due primarily to a write-down of $475,000 in the first quarter of 2009 of the Bank’s mortgage servicing asset and fewer commercial real estate prepayment fees. The decline in interest rates caused prepayment speeds to accelerate, thereby reducing the value of the servicing asset.

	•		Other income decreased due to: a) net loss of $375,000 recorded on limited partnerships during 2009 due to the decline in the fair-value of the underlying investments compared to a net gain in the prior year of $625,000, 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 Company’s stake in Visa Inc., following Visa’s initial public offering.

	•		The reasons for the decreases in BOLI income and the increase in mortgage origination and loan sale income from a year ago were due to the same reasons as outlined in the quarterly discussion above.

Table 6: Non-Interest Expense
	Three Months Ended										Nine Months Ended
	September 30,				Change						September 30,				Change

(Dollars in thousands)	2009		2008		Amount			Percent			2009		2008		Amount			Percent

Salaries and employee benefits	$	22,443	$	22,354	$	89			0	%	$	65,281	$	68,978	$	(3,697	)		(5	) %
Occupancy		4,287		4,415		(128	)		(3	)		13,686		13,629		57			0
Furniture and fixtures		1,419		1,624		(205	)		(13	)		4,348		4,964		(616	)		(12	)
Outside services		4,779		5,047		(268	)		(5	)		14,584		13,791		793			6
Advertising, public relations, and sponsorships		1,932		1,667		265			16			4,202		5,412		(1,210	)		(22	)
Amortization of identifiable intangible assets		2,122		2,364		(242	)		(10	)		6,379		7,092		(713	)		(10	)
Merger related charges		4		99		(95	)		(96	)		27		177		(150	)		(85	)
FDIC insurance premiums		1,880		178		1,702			956			8,717		544		8,173			1,502
Other		3,376		3,623		(247	)		(7	)		9,805		10,339		(534	)		(5	)

Total non-interest expense	$	42,242	$	41,371	$	871			2	%	$	127,029	$	124,926	$	2,103			2	%


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Non-Interest Expense

Comparison of Quarter-to-Date September 2009 and September 2008
As displayed in Table 6, non-interest expense increased $871,000 to $42.2 million for the three months ended September 30, 2009 from $41.4 million for the same period a year ago. The main driver of the increase was FDIC insurance premiums expense and advertising, public relations, and sponsorships. This increase was partially offset by decreases in outside services, amortization of identifiable intangible assets and other expense.

	•		FDIC insurance premium expense increased $1.7 million from the third quarter of last year due to: a) a nine basis point increase in the assessment rate bringing the rate to fourteen basis points and b) the exhaustion of the Company’s one-time credit established by the Federal Deposit Insurance Reform Act of 2005 in the first quarter of 2009. FDIC insurance expense may continue to be volatile as the FDIC is in the process of determining how to best handle its liquidity needs. Instead of imposing any additional special assessments, the FDIC has issued a proposed rulemaking that would require institutions to prepay their regular risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011, and 2012 by December 30, 2009.

	•		Advertising, public relations and sponsorships increased primarily due to additional expenses related to various media advertising and bonus campaigns to promote an array of business and consumer products.

	•		Amortization of identifiable intangible assets decreased due to less amortization on core deposit intangibles from using the accelerated method of accounting whereas there was more amortization expense in 2008 compared to 2009.

	•		Outside services and other expenses decreased due to declines in operational expenditures such as data processing, audit fees, telephone, and outside printing costs. These decreases are mainly due to timing as we expect these expenses to increase in the fourth quarter.

Comparison of Year-to-Date September 2009 and September 2008
As displayed in Table 6, non-interest expense increased $2.1 million to $127.0 million for the nine months ended September 30, 2009 from $124.9 million for the same period a year ago. The main drivers of the increase were FDIC insurance premiums and outside services. These increases were partially offset by decreased salaries and employee benefits, furniture and fixtures, amortization of identifiable intangible assets and advertising, public relations and sponsorships. In the second quarter of 2009 the FDIC imposed a special assessment on all FDIC insured banks that would assist them in their efforts to increase the Deposit Insurance Fund. The Bank recorded expense of approximately $4.0 million related to the special assessment. Without the special assessment total non-interest expense would have been $123.1 million, a decrease of $1.9 million from the prior year.

	•	Outside services increased primarily due to consulting costs associated with a performance optimization project undertaken in the second half of 2008 and continuing into 2009 to improve the overall effectiveness and revenue performance of the Company, consulting costs for strategic planning initiatives and mortgage consulting costs.

	•	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 a decrease in restricted stock expense due to the retirement of executive officers in 2009 and 2008. Additionally, salary expense decreased due to a prior year severance payment for an executive who is no longer with the Company. These decreases were partially offset by increased bonus accruals, current year severance payments and an increase in pension plan expense due to the decline in the value of the pension assets and changes in assumptions for 2009. Resulting from the retirement of an executive officer, the Company expects to record additional benefit expense for the Supplemental Executive Retirement Plan (“SERP”) of approximately $1.2 million in the fourth quarter of 2009.

	•	Furniture and fixture expense decreased primarily due to a decline in depreciation expenses for various hardware and software that have been fully depreciated, i.e. branch and corporate telephone and computer systems.

	•	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. As exemplified in the quarter, advertising has picked up and we expect this trend to continue through the end of the year due to planned media campaigns.

	•	The increase in FDIC insurance premiums of $8.2 million is due to the special one-time assessment of $4.0 in the second quarter of 2009 as well as the reasons outlined in the quarterly discussion.

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	•		The decrease in amortization of intangible assets is due to the same reason as described in the quarterly discussion.

Income Tax Provision
For the three months ended September 30, 2009 and 2008, income tax expense was $7.9 million and $5.0 million and the effective tax rate for these periods was 38.5% and 31.2%, respectively. The increase in the effective tax rate for the three months ended September 30, 2009 as compared to the 2008 period was primarily due to an increase, in 2009, of estimated nondeductible excess remuneration pursuant to Internal Revenue Code 162(m) and the reduction, in 2009, of favorable permanent differences, including bank owned life insurance income and the dividends received deduction.

For the nine months ended September 30, 2009 and 2008, income tax expense was $19.8 million and $15.7 million and the effective tax rate for these periods was 36.6% and 30.6%, respectively. The increase in the effective tax rate for the nine months ended September 30, 2009 as compared to the 2008 period was primarily due to the reduction of $924,000 of unrecognized tax benefits for tax positions of prior years in the first quarter of 2008 upon settlement of an IRS audit, an increase, in 2009, of estimated non-deductible excess remuneration pursuant to Internal Revenue Code 162(m) and the reduction, in 2009, of favorable permanent differences, including bank owned life insurance income and the dividends received deduction. The effective tax rate for the year ended December 31, 2009 is expected to be 36.59%

Financial Condition

Financial Condition Summary
From December 31, 2008 to September 30, 2009, total assets and total liabilities increased $241.2 million and $195.0 million, respectively, due mainly to increases in investments and deposits, partially offset by decreases in loans and borrowings. Stockholders’ equity increased $46.3 million.

Investment Securities
The following table presents the amortized cost and fair value of investment securities at September 30, 2009 and December 31, 2008.

Table 7: Investment Securities
	September 30, 2009				December 31, 2008

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


Available for sale
U.S. Treasury obligations	$	596	$	597	$	596	$	597
U.S. Government sponsored enterprise obligations		193,515		196,191		228,844		233,349
Corporate obligations		8,149		8,449		8,178		7,946
Other bonds and obligations		16,329		14,798		17,654		15,449
Auction rate certificates		27,800		24,987		28,000		23,479
Marketable equity securities		8,560		8,760		19,039		19,134
Trust preferred equity securities		49,328		32,087		47,708		31,265
Private label mortgage-backed securities		25,871		22,810		33,027		25,136
Mortgage-backed securities		2,013,355		2,082,581		1,543,403		1,572,207

Total available for sale		2,343,503		2,391,260		1,926,449		1,928,562

Held to maturity
Mortgage-backed securities		252,118		264,921		299,222		308,016
Other bonds		10,985		11,279		10,560		10,746

Total held to maturity		263,103		276,200		309,782		318,762

Total securities	$	2,606,606	$	2,667,460	$	2,236,231	$	2,247,324

At September 30, 2009, the Company had total investments of $2.65 billion, or 31.1%, of total assets. The increase of $416.0 million, from $2.24 billion at December 31, 2008 was primarily the result of purchasing mortgage-backed securities. The Company’s 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. At September 30, 2009, mortgage-backed securities comprised 87.1% and 95.8% of the total available for sale and held to maturity securities portfolios, respectively, the majority of which are issued by Federal National Mortgage Association (“FNMA”) or (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“FHLMC”) or (“Freddie Mac”). The duration of the mortgage-backed securities portfolio was 1.38 years at September 30, 2009 compared to 1.55 years at December 31, 2008.

The Company’s 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.

FASB guidance for the accounting of Investments - Debt and Equity Securities, requires the Company to designate its securities as held to maturity, available for sale or trading depending on the Company’s intent regarding its investments at the time of purchase. The Company does not currently maintain a portfolio of trading securities. As of September 30, 2009, $2.39 billion, or 90.1% of the portfolio, was classified as available for sale and $263.1 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.

During the second quarter new other-than-temporary impairment (“OTTI”) guidance, FASB ASC 320-10, was adopted and, for debt securities, requires that credit related OTTI be recognized in earnings while non-credit related OTTI be recognized in other comprehensive income (“OCI”) unless there is intent to sell or are required to sell. The new guidance also requires that previously recorded impairment charges that do not relate to a credit loss be reclassified from retained earnings to accumulated other comprehensive income (“AOCI”). During the quarter ended June 30, 2009, the Company reclassified the non-credit related portion of a previously recorded OTTI loss and recorded a current OTTI loss in accordance with this new guidance, both of which are described below.

A credit related OTTI loss in the amount of $626,000 was recorded against the Company’s position in an adjustable rate mortgage mutual fund that holds positions in non-agency mortgage-backed securities. During the second quarter, the fund experienced its first realized loss on a mortgage investment and management determined that the dollar amount of securities carrying a rating of CCC or lower had increased since the prior quarter end. This decrease in the credit quality of the securities coupled with the loss recognized by the fund, resulted in management’s determination that the fund was other-than-temporarily impaired. The non-credit related OTTI was $1.9 million and was recognized in OCI. During the third quarter, the fund’s market to book ratio improved and the fund continues to pay a monthly dividend. As of September 30, 2009, the fund has a current book value of $8.3 million and is not expected to be sold and management has determined that there are no additional OTTI charges that need to be recognized in the quarter ended September 30, 2009.

During 2008, one of the “individual name” trust preferred securities was deemed to be other-than-temporarily impaired and a charge of $1.6 million was recorded in the third quarter. Upon the adoption of the OTTI guidance discussed above, the Company recorded a cumulative effect adjustment that increased retained earnings and decreased AOCI by $1.6 million, or $1.0 million, net of tax. Additionally, the amortized cost for this security increased by $1.6 million as the entire impairment charge recorded in 2008 was non-credit related. At September 30, 2009, this security had an amortized cost of $4.7 million and an unrealized loss of $1.4 million.

The net unrealized gain on securities classified as available for sale as of September 30, 2009 was $47.8 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 and the unrealized gains on the mortgage backed securities purchased during the year, partially offset by gains on securities sold. The net unrealized gain on the available for sale investment portfolio that is primarily within the mortgage-backed securities is partially offset by unrealized losses on trust 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. During the quarter, the negative mark to market pressure improved slightly due to a tightening of credit spreads. In addition to the changes in market interest rates, the unrealized gain on agency mortgage-backed securities are also due in part to programs initiated by the Federal Reserve to purchase the direct obligations of housing-related GSE’s, Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, and mortgage-backed securities issued by Fannie Mae, Freddie Mac, and Ginnie Mae. The goal of these purchases has been 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 compared to benchmark treasury and London Interbank Offered Rate (“LIBOR”) rates that have declined. In September, the Federal Open Market Committee announced that the FRB will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt, to support mortgage lending and the housing markets and to improve the overall conditions in private credit

markets. Mortgage spreads tightened dramatically to the LIBOR curve over the quarter ended September 30, 2009 and mortgage spreads also tightened to the treasury curve.

The unrealized loss on mortgage-backed securities issued by private institutions is primarily concentrated in one BBB rated private-label mortgage-backed security which is substantially paid down, well seasoned and of an earlier vintage that has not been significantly affected by high delinquency levels or vulnerable to lower collateral coverage as seen in later issued pools. None of the securities are backed by subprime mortgage loans and none have suffered losses. One security was downgraded to BBB during the quarter and the remaining securities are rated AAA. All are still paying principal and interest and are expected to continue to pay their contractual cash flows. Management’s review of the above factors and issuer specific data concluded that these private-label mortgage-backed securities are not other-than-temporarily impaired.

The unrealized losses on other bonds and obligations primarily relates to the noncredit-related OTTI loss on a position in an adjustable rate mortgage mutual fund that holds positions in non-agency mortgage-backed securities that are facing negative mark to market pressures due to widening spreads in non-agency mortgage products. Although the fund has experienced declines in credit ratings it was not due to customer redemptions or forced selling of the investments. The fund recorded its first loss which factored into management’s determination that the fund was other-than-temporarily impaired. As discussed above, a credit related OTTI loss of $626,000 was recorded through earnings in the second quarter of 2009. The fund carries a market value to book value ratio of 79.35% - a slight increase from June 30, 2009, has a weighted average underlying investment credit rating of A+ and it continues to pay normal monthly dividends. There is no intent to sell nor is it more likely than not that the Company will be required to sell these securities and has therefore concluded that the fund experienced no further OTTI in the quarter ended September 30, 2009.

The unrealized losses on auction rate certificates relate to certificates issued by an investment banking 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. Management has therefore concluded that no other-than-temporary impairment exists as of September 30, 2009. 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.

Trust preferred securities are comprised of two pooled trust preferreds with an amortized cost of $6.7 million which are both rated BB. The remaining $42.6 million are comprised of twelve “individual names” issues with the following ratings: $6.0 million rated A+ to A-, $14.5 million rated BBB+ to BBB and $22.1 million rated B to BB+. The unrealized losses reported for trust preferred equity securities relate to the financial and liquidity stresses in the fixed income market and not to any credit impairment of the issuers as the present value of cash flows expected to be collected is not less than the securities amortized cost basis. Although the ratings on some issues have been reduced since December 31, 2008, all are currently paying the contractual principal and interest payments. A detailed review of the two pooled trust preferreds and the “individual names” trust preferred equity securities is completed quarterly. This review included an analysis of collateral reports, stress default levels and financial ratios of the underlying issuers and management concluded that there was no other-than-temporary impairment at the end of the period.

Management has performed a review of all investments with unrealized losses and determined that no other investments had credit related other-than-temporary impairment. The Company has no intent to sell nor is it more likely than not that the Company will be required to sell any of these securities within 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 subprime mortgage collateral.

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 8 displays the balances of the Company’s loan portfolio as of September 30, 2009 and December 31, 2008.

Table 8: Loan Portfolio

	September 30, 2009					December 31, 2008

			Percent of					Percent of
(Dollars in thousands)	Amount		Total					Total

Residential real estate	$	2,413,181		50.2	%	$	2,524,638		50.9	%
Residential real estate construction		11,781		0.3			21,380		0.4

Total residential real estate		2,424,962		50.5			2,546,018		51.3

Commercial real estate		1,081,016		22.4			1,077,200		21.7
Commercial real estate construction		141,964		3.0			143,610		2.9

Total commercial real estate		1,222,980		25.4			1,220,810		24.6
Commercial business		422,814		8.8			458,952		9.2
Home equity and equity lines of credit		717,632		14.9			714,444		14.4
Other consumer		17,319		0.4			22,561		0.5

Total loans	$	4,805,707		100.0	%	$	4,962,785		100.0	%

		As shown in Table 8, gross loans were $4.81 billion, down $157.1 million, at September 30, 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 reduced business loan demand.

		Residential real estate loans continue to represent the largest segment of the Company’s loan portfolio as of September 30, 2009, comprising 50.5% of total loans. The decrease of $121.1 million from December 31, 2008 was primarily due to prepayments outweighing new originations for portfolio during the year 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 $806.6 million during the year, approximately $403.8 million was originated for portfolio and the remainder was sold in the secondary market. The Company currently sells the majority of all originated fixed rate residential real estate loans with terms of 15 years or more. During the third quarter of 2009, the Company began to retain in its portfolio 30 year jumbo fixed rate residential mortgage originations. The Company anticipates that mortgage activity will continue to be robust while interest rates remain low, but not at the levels experienced in the first half of the year. The residential real estate loan portfolio has a weighted average FICO score of 749 and a current estimated weighted loan to value ratio of 60%. Included in residential real estate is a purchased portfolio, which is made up of prime loans individually re-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 September 30, 2009 the Company’s purchased portfolio had an outstanding balance of approximately $546.0 million with the largest concentration in our footprint of Connecticut and Massachusetts at 17.6%, followed by California and New York, which each make up approximately 13.5%.

		Commercial real estate loans and commercial business loans decreased $34.0 million, primarily in commercial 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 $142.0 million includes approximately $34.2 million of loans to commercial borrowers for residential housing development, $12.9 million of which are for condominium projects. The decrease in commercial construction is due to a decrease in residential housing development loans through a negotiated settlement, paydowns and further charge-offs on nonperforming condominium projects, partly offset by originations of commercial to permanent construction loans. The 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 Company’s commercial portfolios have declined, our long term strategy continues to be that of building a larger percentage of the Company’s assets in commercial loans including real estate and other business loans, such as asset-based lending. 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 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 $3.2 million from December 31, 2008 to September 30, 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 current estimated weighted combined loan to value ratio for home equity loans and lines of credit is 748 and 65%, respectively. Loan growth has been from organic originations in the Company’s market area, none of which is subprime.

		Higher-Risk Loans

		The 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 loans. The Company has a carrying value of $34.2 million of commercial construction loans for residential development. All of these loans are collateralized and carry a reserve allocation of approximately $5.3 million. This segment has total delinquencies of $2.7 million, all of which are in the over 90 day category.

		Within the residential portfolio, management uses two main early warning techniques to more closely monitor credit deterioration. The Company uses a matrix to identify where the concentration of outstanding loans fall in the risk continuum. This matrix is constructed using estimated current loan-to-value ranges (current balance LTV adjusted for estimated appreciation or depreciation in the appraised value) and the latest available FICO score ranges (rescored quarterly). The Company considers loans with an estimated current loan-to-value ratio above 80% and a FICO score less than 620 to be higher-risk. Once identified, the higher-risk loans are then reviewed by the Special Assets department to determine what, if any, action should be taken to mitigate possible loss exposure. At September 30, 2009, higher-risk loans comprised approximately $39.0 million, or 1.7% of the residential real estate portfolio. The Company also tracks loans that have a FICO score that has declined 20 points or more and are below 660. As of September 30, 2009 loans meeting this criteria represent approximately $47.0 million, or 2% of the residential portfolio.

		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 9, nonperforming assets at September 30, 2009 increased to $51.8 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 and commercial business loans, partially offset by a decline in construction loans.

		The increase in nonperforming residential loans of $14.0 million was due to current economic conditions including factors such as the rise in unemployment rates reaching a twenty-six year high and the declines in the median sales price of residential homes. There are 132 loans in the residential nonperforming category totaling $26.7 million, representing 1.10% 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 has been its practice historically, the Company does not originate subprime loans. Included in nonperforming residential loans are approximately $3.5 million in restructured loans which have been modified from their original contractual terms.

		In the course of resolving nonperforming loans, the Bank may choose to restructure the contractual terms of certain real estate loans. Terms may be modified to fit the ability of the borrower to repay in line with their current financial status. It is the Bank’s policy to have any restructured loans which are on nonaccrual status prior to being modified, remain on nonaccrual status for approximately six months before management considers its return to accrual status.

		The increase in nonperforming commercial business loans was primarily due to the general deterioration of economic conditions that have led to the inability of some businesses to properly service their debt.

		The decline in nonperforming commercial construction loans relates to condominium projects within the residential housing development segment primarily due to charge-offs recorded against a number of relationships of $3.1 million, note sales and paydowns. As of September 30, 2009, the construction to permanent segment of commercial construction loans had no delinquencies, nonaccruals, impairment or adversely classified loans.

		If current economic and real estate market 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 weighted average 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 September 30, 2009 were 1.02%, compared to 0.77% at December 31, 2008.

Table 9: Nonperforming Assets

	September 30,			December 31,
(Dollars in thousands)	2009			2008

Nonaccruing loans (1)
Real estate loans
Residential (one- to four- family)	$	26,654		$	12,634
Commercial real estate loans		6,993			8,201
Commercial construction		2,721			10,234

Total real estate loans		36,368			31,069
Commercial business		10,693			5,863
Consumer loans
Home equity and equity lines of credit		2,008			1,304
Other consumer		22			95

Total consumer loans		2,030			1,399

Total nonaccruing loans		49,091			38,331
Other real estate owned		2,702			2,023

Total nonperforming assets	$	51,793		$	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
Troubled debt restructured loans included in nonaccruing loans above	$	3,466		$	-

(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 10 below, the Company recorded net charge-offs of $5.2 million, during the three months ended September 30, 2009, compared to net charge-offs of $2.8 million for the three months ended September 30, 2008. Net charge-offs of $957,000, $1.0 million, $2.9 million and $456,000 were recorded against the residential, commercial construction, commercial business and consumer portfolios, respectively. The majority of the charge-offs in the residential category were adjustments based on current appraisals which continue to show the depression in home values while persisting adverse economic and housing pressures are affecting charge-off levels in the commercial construction and commercial business portfolios. As a result of the net charge-offs, nonaccrual and delinquent loans and adversely classified loan indicators, a provision for loan losses of $5.4 million was recorded for the three months ended September 30, 2009 compared to $4.2 million for the three months ended September 30, 2008. For the nine months ended September 30, 2009 and 2008, net charge-offs were $12.7 million and $4.2 million and the provision for loan losses was $14.5 million and $9.6 million, respectively.

		The Company has a loan loss allowance of $51.7 million, or 1.08% of total loans as compared to a loan loss allowance of $49.9 million, or 1.01% of total loans at December 31, 2008. Management believes that the allowance for loan losses is adequate and directionally consistent with asset quality and delinquency indicators and that it represents the best estimate of probable losses inherent in the loan portfolio. To achieve this best estimate, numerous factors are evaluated and applied to the allowance for loan loss calculation. Management continues to assess loss factors based on recent economic events and incorporates that into the calculation, including the appropriate timeframe to consider for loss history.

		The allowance for loan losses to nonperforming loans ratio at September 30, 2009 was 105.36% compared to 130.21% at December 31, 2008 and 140.52% at September 30, 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 Company’s 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 year 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 FASB ASC 450,Contingencies, for performing loans. Performing loans have not grown at the same rate as nonperforming loans. The Company employs a formal quarterly process to assess the adequacy of the Company’s allowance for loan losses. The process is designed to adequately capture inherent losses in the loan portfolio.

Table 10: Schedule of Allowance for Loan Losses

	As or For the Three Months								As or For the Nine Months
	Ended September 30,							Ended September 30,

(Dollars in thousands)	2009			2008						2009		2008

Balance at beginning of period	$	51,502			$	47,798			$	49,911			$	43,813
Provision for loan losses		5,433				4,200				14,533				9,600
Charge-offs
Residential real estate loans		960				83				2,449				234
Commercial real estate loans		392				827				2,389				827
Commercial construction loans		1,010				1,431				3,055				2,431
Commercial business loans		3,166				468				5,317				1,143
Consumer loans		490				496				903				847

Total charge-offs		6,018				3,305				14,113				5,482

Recoveries
Residential real estate loans		3				255				140				262
Commercial real estate loans		538				-				538				23
Commercial construction loans		-				-				-				-
Commercial business loans		228				186				519				849
Consumer loans		34				41				192				110

Total recoveries		803				482				1,389				1,244

Net charge-offs		5,215				2,823				12,724				4,238

Balance at end of period	$	51,720			$	49,175			$	51,720			$	49,175

Net charge-offs to average loans (annualized)		0.43	%			0.23	%			0.34	%			0.12	%
Allowance for loan losses to total loans		1.08				0.99				1.08				0.99
Allowance for loan losses to nonperforming loans		105.36				140.52				105.36				140.52
Net charge-offs to allowance for loan losses		10.08				5.74				24.60				8.62
Total recoveries to total charge-offs		13.34				14.58				9.84				22.69

		Loans held for Sale
		Loans held for sale were $14.7 million at September 30, 2009, an increase of $9.3 million from December 31, 2008. The Company currently sells the majority of its originated fixed rate residential real estate loans with terms of 15 years or more. During the third quarter of 2009, the Company allocated an initial pool of $50.0 million for the retention of 30 year jumbo fixed rate residential mortgage originations in its portfolio. 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 Company’s adequate liquidity and capital allowed us to increase our market share. During the year, the Company funded approximately $402.9 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 September 30, 2009, the Company had intangible assets of $564.6 million, a decrease of $6.4 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 assist with the 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. Given the economic climate and the Company’s market capitalization, management reviewed a number of events that could potentially trigger the requirement to perform an interim goodwill impairment analysis. The review consisted of an analysis of potential triggering events, including, but not limited to: a) a significant adverse change in legal factors or in the business climate, b) an adverse action or assessment by a regulator, c) unanticipated competition, d) cash flow or operating losses, e) long-term outlooks for specific industries and f) market capitalization of the company below its book value. The fact that the market capitalization of the Company was below its book value at September 30, 2009 was outweighed by the lack of other triggering events and management concluded that no events or circumstances have occurred through September 30, 2009 which indicate that the carrying value of the Company’s goodwill may be impaired.

		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 Company’s 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. See Note 10 of Notes to Unaudited Consolidated Financial Statements contained elsewhere within this Report for 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 86 other banking offices throughout Connecticut (75 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 11: Deposits
		September 30,		December 31,
(In thousands)		2009		2008

Savings	$	1,841,605	$	1,463,341
Money market		696,464		346,522
NOW		367,627		368,730
Demand		528,614		494,978
Time		1,540,025		1,774,259

Total deposits	$	4,974,335	$	4,447,830

		As displayed in Table 11, deposits increased $526.5 million compared to December 31, 2008. The Company’s 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 $760.7 million, particularly through the Company’s free savings product. The Bank has also been focused on growing core deposits by launching the products, “Essential Checking and Essential Savings” in the beginning of the year, which encompasses an interest-bearing checking, a competitively priced savings account and a cash rewards debit card. Money market deposits have shown significant increases and have grown approximately $350.0 million from year end due to the premium money market product which offers competitive pricing with a tiered rate structure. The Company has executed several programs, including telephone and direct mail campaigns to retain valued, higher-balance deposit accounts through the cross-sell strategy of offering our “best” banking product – Premium Alliance Checking and its companion accounts – Premium Savings and Premium Money Market. Also positively impacting money market deposit balances was the transfer of approximately $45.0 million of the Bank’s Trust 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 $234.2 million, as the Company repriced maturing CD’s 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, premium money market 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 of Boston 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 Company’s recorded borrowings at September 30, 2009.

Table 12: Borrowings
		September 30,		December 31,
(In thousands)		2009		2008

FHLB advances (1)	$	1,885,389	$	2,190,914
Repurchase agreements		133,802		159,530
Mortgage loans payable		1,204		1,317
Junior subordinated debentures issued to affiliated trusts (2)		21,135		24,735

Total borrowings	$	2,041,530	$	2,376,496

		(1)		Includes fair value adjustments on acquired borrowings, in accordance with purchase accounting standards of $3.7 million and $5.8 million at September 30, 2009 and December 31, 2008, respectively. The acquisition fair value adjustments (premiums) are being amortized as an adjustment to interest expense on borrowings over their remaining terms using the level yield method.

		(2)		Includes fair value adjustments on acquired borrowings, in accordance with purchase accounting standards of $0 and $100,000 at September 30, 2009 and December 31, 2008, respectively. The trusts were organized to facilitate the issuance of "trust preferred" securities. The Company acquired these subsidiaries when it acquired Alliance Bancorp of New England, Inc. and Westbank Corporation, Inc. The affiliated trusts are wholly-owned subsidiaries of the Company and the payments of these securities are irrevocably and unconditionally guaranteed by the Company.

		Borrowings were $2.04 billion at September 30, 2009, a decrease of $335.0 million from the balance recorded at December 31, 2008, and were 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. Due to the growth in core deposits, the Company has not initiated any advances with the FHLB since the first quarter of 2009. As a result, the Company was able to 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 September 30, 2009, all of the Company’s outstanding FHLB advances were at fixed rates ranging from 1.82% to 8.17%.

		Stockholders’ Equity
		Total stockholders’ equity equaled $1.43 billion at September 30, 2009, an increase of $46.3 million compared to $1.38 billion at December 31, 2008. The increase was primarily due to year to date earnings of $34.3 million and an increase in the fair market value of available for sale investment securities of $30.7 million, net of tax. The increase in equity was partially offset by $21.1 million for the payment of cash dividends declared on our common stock during the nine months ended September 30, 2009. For information regarding our compliance with applicable capital requirements, see “Liquidity and Capital Position” below.

		Dividends declared for the year to date period ended September 30, 2009 were $0.21 per share compared to $0.205 per share for the same period last year. On October 27, 2009, we declared a $0.07 per share cash dividend payable on November 17, 2009 to shareholders of record on November 6, 2009. This will be the Company’s 22nd consecutive quarterly dividend payment. Book value per share amounted to $13.39 and $12.90 at September 30, 2009 and December 31, 2008, respectively, and tangible book value amounted to $8.09 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 has implied government guarantees. There is no direct subprime 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 Company’s 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 Company’s gap position and interest rate sensitivity exposure described below and Asset/Liability Committee minutes detailing the Company’s activities and strategies, the effect of those strategies on the

		Company’s operating results, interest rate risk position and the effect changes in interest rates would have on the Company’s 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 Bank’s 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 bank’s 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 September 30, 2009, the Company’s 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 positive $149.1 million, or positive 1.75% of total assets. The Bank’s 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 Company’s 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 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 September 30, 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 September 30, 2009, the Company’s 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		2.73	%

25 basis point downward shock in interest rates		-0.97	%

		As of September 30, 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 first half of next year due to the reductions in the federal funds rate, the government stimulus package and the expansion of the Federal Reserve Bank’s balance sheet.

		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 Company’s primary sources of funds consist of deposit inflows, loan repayments and sales, maturities, paydowns and sales of investment and mortgage-backed securities, borrowings from the Federal Home Loan Bank and repurchase agreements.

		The Company has used borrowings from the Federal Home Loan Bank of Boston to fund loan growth while managing interest rate risk and liquidity; however during 2009 the Company was able to reduce its reliance on the FHLB due to the growth in core deposits and thus have not initiated borrowings since March 2009. At September 30, 2009, total borrowings from the Federal Home Loan Bank amounted to $1.88 billion, exclusive of $3.7 million in purchase accounting adjustments, and the Company had the immediate capacity to increase that total to $2.20 billion. Additional borrowing capacity of approximately $1.39 billion would be readily available by pledging eligible investment securities as collateral. Depending on market conditions and the Company’s 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 September 30, 2009 the Company’s repurchase agreement lines of credit with three large broker dealers totaled $100.0 million, $75.0 million of which was available on that date. Agreement terms vary based on the collateral submitted.

		The Company’s most liquid assets are cash and due from banks, short-term investments and debt securities. The levels of these assets are dependent on the Company’s operating, financing, lending and investment activities during any given period. At September 30, 2009, cash and due from banks, short-term investments and debt securities maturing within one year amounted to $340.0 million, or 4.0% of total assets.

		NewAlliance’s 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 NewAlliance’s 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.

		At September 30, 2009, the Company had commitments to originate loans, unused outstanding lines of credit and standby letters of credit totaling $877.1 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 September 30, 2009 amount to $1.15 billion.

		At September 30, 2009, the Company’s Tier 1 leverage ratio, a primary measure of regulatory capital was $875.1 million, or 11.0%, which is above the threshold level of $398.7 million, or 5.0% to be considered “well-capitalized.” The Tier 1 risk-based capital ratio stood at 19.9% and the Total risk-based capital ratio stood at 21.1%. The Bank also exceeded all of its regulatory capital requirements with leverage capital of $718.2 million, or 9.0% of average assets, which is above the required level of $319.0 million or 4.0%. The Tier 1 risk-based capital ratio was 16.4% and the Total risk-based capital ratio was 17.6%. 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 Company’s market risk appears under Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, under the caption “Management of Market and Interest Rate Risk” on pages 52 through 54.

		Item 4. Controls and Procedures

		The Company’s management, including our Chief Executive Officer and Interim Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13(a)-15(e) or Rule 15(d)-15(e) under the Exchange Act) as of September 30, 2009. Based upon that evaluation, the Chief Executive Officer and Interim 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 Commission’s 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 third quarter 2009.

		In addition, based on that evaluation, no change in the Company’s internal control over financial reporting occurred during the quarter ended September 30, 2009 that has materially affected, or is reasonably likely to materially affect, the Company’s 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 Company’s financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of the Company’s 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. NewAlliance’s 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 NewAlliance’s 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 NewAlliance’s 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 Bank’s net interest margin will decline.

		Credit market conditions may impact NewAlliance’s investments.
		Significant credit market anomalies may impact the valuation and liquidity of the Company’s 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 Company’s investments, even those with no apparent credit exposure. The valuation of the Company’s 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 NewAlliance’s 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. NewAlliance’s 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 Company’s 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 NewAlliance’s 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 NewAlliance’s allowance for loan losses. In that event, NewAlliance’s earnings could be adversely affected.

		Additionally, 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 NewAlliance’s 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, NewAlliance’s 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 NewAlliance’s financial condition and results of operations. See the sections titled “Allowance for Loan Losses” and “Classification of Assets and Loan Review” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operation, located in the Company’s 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 would have a negative impact on the Company’s profitability.
		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 company’s net assets, the excess is carried on the acquirer’s balance sheet as goodwill. At September 30, 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 NewAlliance’s financial condition and results of operations.

		NewAlliance’s 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 five 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 Treasury’s 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 Treasury’s consent to buy back their own stock;
		-		Treasury receives warrants entitling Treasury to buy participating bank’s common stock equal to 15% of Treasury’s 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 either the TARP or 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 NewAlliance’s 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.

		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 Company’s 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. For example, currently pending in Congress are separate bills that would (1) create a Consumer Financial Protection Agency; and (2) impose stringent rules on banks charging overdraft fees. Other initiatives would dramatically alter the current structure for the regulation of banks. 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 Company’s 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 Company’s 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 Bank’s ability to pay us dividends is subject to its ability to earn net income and to meet certain regulatory requirements.

		NewAlliance’s stock price can be volatile.
		NewAlliance’s 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 Company’s 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 NewAlliance’s stock price to decrease regardless of the Company’s operating results.

		NewAlliance may not be able to attract and retain skilled people.
		NewAlliance’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s business and, in turn, its financial condition and results of operations.

		NewAlliance’s controls and procedures may fail or be circumvented.
		Management regularly reviews and updates the Company’s 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 Company’s 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 customer’s 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 NewAlliance’s financial statements.
		NewAlliance’s 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 NewAlliance’s 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 NewAlliance’s performance.

		Unpredictable catastrophic events could have a material adverse effect on NewAlliance Bank.
		The occurrence of catastrophic events such as hurricanes, pandemic disease (including the H1N1 virus), windstorms, floods, severe winter weather or other catastrophes could adversely affect NewAlliance’s business and, in turn, its financial condition or results of operations. This may result in a significant number of employees that are unavailable to perform critical operating functions at either their regular worksite or the disaster recovery worksite. Unpredictable natural and other disasters could have an adverse effect on the Company in that such events could materially disrupt its operations or the ability or willingness of its customers to access the financial services offered by NewAlliance Bank.

		Unprecedented disruption and significantly increased risk in the financial markets.
		The banking industry experienced unprecedented turmoil in 2008 as some of the world’s 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 world’s 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 FDIC’s special one-time assessment of 5 basis points of total assets less Tier 1 capital payable in the third quarter of 2009, which has had a substantial effect on NewAlliance’s 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.

		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 Company’s stock repurchases for the three months ended September 30, 2009.

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
July 1-31, 2009	(1)	202	$ 11.73	0	3,036,747 shares
August 1-31, 2009		0	$ -	0	3,036,747 shares
September 1-30, 2009		149,475	$ 10.89	149,475	2,887,272 shares
Total		149,677	$ 10.89	149,475

On January 31, 2006, the Company’s 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)		Shares represent common stock withheld by the Company to satisfy tax withholding requirements on the vesting of shares under the Company’s benefit plans.

Item 3. Defaults Upon Senior Securities

None.

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

None.

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 Company’s Quarterly Report on Form 10-Q, filed August 13, 2004.
3.2			Amended and Restated Bylaws of NewAlliance Bancshares, Inc. Incorporated herein by reference is Exhibit 3.2 filed with the Company’s Current Report on Form 8-K, filed November 2, 2007.
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 Company’s 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 Company’s 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 Company’s 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 herein by reference is Exhibit 10.5 filed with the Company’s Quarterly Report on Form 10-Q, filed August 7, 2009.
10.6			Employee Change of Control Severance Plan. Incorporated by reference is Exhibit 10.6 filed with the Company’s 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 Company’s Current Report on Form 8-K, filed October 1, 2007.
10.7.2			Intentionally omitted.
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 Company’s Current Report on Form 8-K, filed October 1, 2007.
10.7.4			Intentionally omitted.
10.7.5			June 2009 Amendment to Amended and Restated Employment Agreement between NewAlliance Bank and Diane L. Wishnafski, effective June 23, 2009. Incorporated herein by reference is Exhibit 10.7.5.1 filed with the Company’s Current Report on Form 8-K, filed June 23, 2009.
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 Company’s Current Report on Form 8-K, filed October 1, 2007.
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 Company’s 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 Company’s 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 Company’s 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 Company’s Current Report on Form 8-K, filed April 22, 2009.
10.7.13			Employment Agreement among NewAlliance Bank, NewAlliance Bancshares, Inc. and Glenn I. MacInnes, dated as of October 12, 2009. Incorporated herein by reference is Exhibit 10.7.13 filed with the Company’s Current Report on Form 8-K, filed October 14, 2009.
10.8.1			Form of Stock Option Agreement (for outside directors). Incorporated herein by reference is Exhibit 10.8.1 filed with the Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s Annual Report on Form 10-K, filed February 27, 2009.
10.14			Form of Performance Share Award Agreement (for senior officers) (2009 awards). Incorporated herein by reference is Exhibit 10.14 filed with the Company Current Report on Form 8-K, filed June 1, 2009.
10.15			Form of Restricted Stock Award Agreement (for senior officers) (2009 awards). Incorporated herein by reference is Exhibit 10.15 filed with the Company Current Report on Form 8-K, filed June 1, 2009.
10.16			Form of Stock Option Award Agreement (for senior officers) (2009 awards). Incorporated herein by reference is Exhibit 10.16 filed with the Company Current Report on Form 8-K, filed June 1, 2009.
14			Code of Ethics for Senior Financial Officers. Incorporated herein by reference is Exhibit 14 filed with the Company’s 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 Company’s 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 Mark F. Doyle 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 Mark F. Doyle pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

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/ Mark F. Doyle

		Mark F. Doyle
		Senior Vice President and Chief Accounting Officer
		(principal financial officer)

	Date:	November 5, 2009