UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
[ X ] | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2010. |
OR
[ ] | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ____to ____. |
Commission File Number: 001-32007
NEWALLIANCE BANCSHARES, INC.
(Exact name
of registrant as specified in its charter)
DELAWARE | 52-2407114 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
195 Church Street, New Haven, Connecticut | 06510 | |
(Address of principal executive offices) | (Zip Code) |
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.
Indicate by check mark whether the registrant has submitted electronically and posted
on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | X | Accelerated filer | |||||
Non-accelerated filer | Smaller reporting company | ||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | [ ] | Yes | [ X] | No |
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
Common Stock (par value $.01) | 105,079,540 | ||
Class | Outstanding at August 4, 2010 |
TABLE OF CONTENTS
Part I FINANCIAL
INFORMATION
Page No. | ||||
Item 1. | Financial Statements (Unaudited) | |||
Consolidated Balance Sheets at June 30, 2010 and December 31, 2009 | 3 | |||
Consolidated Statements of Income for the three and six months ended June 30, 2010 and 2009 | 4 | |||
Consolidated Statement of Changes in Stockholders Equity for the six months ended June 30, 2010 | 5 | |||
Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009 | 6 | |||
Notes to Unaudited Consolidated Financial Statements | 7 | |||
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations | 33 | ||
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 56 | ||
Item 4. | Controls and Procedures | 56 | ||
Item 4T. | Controls and Procedures | 56 | ||
Part II OTHER INFORMATION | ||||
Item 1. | Legal Proceedings | 56 | ||
Item 1A. | Risk Factors | 56 | ||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 56 | ||
Item 3. | Defaults Upon Senior Securities | 57 | ||
Item 4. | (Removed and Reserved) | 57 | ||
Item 5. | Other Information | 57 | ||
Item 6. | Exhibits | 57 | ||
SIGNATURES |
2
NewAlliance Bancshares, Inc.
Consolidated
Balance Sheets
December 31, | ||||||||
(In thousands, except per share data) (Unaudited) | June 30, 2010 | 2009 | ||||||
Assets | ||||||||
Cash and due from banks |
$ | 97,693 | $ | 96,927 | ||||
Short term investments |
20,000 | 50,000 | ||||||
Cash and cash equivalents |
117,693 | 146,927 | ||||||
Investment securities available for sale, at fair value (note 3) |
2,403,317 | 2,327,855 | ||||||
Investment securities held to maturity (note 3) |
323,255 | 240,766 | ||||||
Loans held for sale (includes $11,744 at June 30, 2010 and |
||||||||
$12,908 at December 31, 2009 measured at fair value) |
13,362 | 14,659 | ||||||
Loans, net (note 4) |
4,873,426 | 4,709,582 | ||||||
Federal Home Loan Bank of Boston stock |
120,821 | 120,821 | ||||||
Premises and equipment, net |
58,651 | 57,083 | ||||||
Cash surrender value of bank owned life insurance |
135,054 | 140,153 | ||||||
Goodwill (note 5) |
527,167 | 527,167 | ||||||
Identifiable intangible assets (note 5) |
31,454 | 35,359 | ||||||
Other assets (note 6) |
107,897 | 113,941 | ||||||
Total assets |
$ | 8,712,097 | $ | 8,434,313 | ||||
Liabilities | ||||||||
Deposits (note 7) |
||||||||
Non-interest bearing |
$ | 568,414 | $ | 534,180 | ||||
Savings, interest-bearing checking and money market |
3,120,460 | 3,008,416 | ||||||
Time |
1,447,872 | 1,481,446 | ||||||
Total deposits |
5,136,746 | 5,024,042 | ||||||
Borrowings (note 8) |
2,023,732 | 1,889,928 | ||||||
Other liabilities |
87,448 | 85,390 | ||||||
Total liabilities |
7,247,926 | 6,999,360 | ||||||
Commitments and contingencies (note 12) |
||||||||
Stockholders Equity | ||||||||
Preferred stock, $0.01 par value; authorized 38,000 shares; |
- | - | ||||||
none issued |
||||||||
Common stock, $0.01 par value; authorized 190,000 shares; |
||||||||
issued 121,486 shares at June 30, 2010 and December 31, 2009 |
1,215 | 1,215 | ||||||
Additional paid-in capital |
1,245,532 | 1,245,489 | ||||||
Unallocated common stock held by ESOP |
(86,892 | ) | (88,721 | ) | ||||
Unearned restricted stock compensation |
(9,210 | ) | (12,389 | ) | ||||
Treasury stock, at cost (16,406 shares at June 30, 2010 and |
||||||||
15,435 shares at December 31, 2009) |
(222,835 | ) | (211,582 | ) | ||||
Retained earnings |
505,694 | 486,974 | ||||||
Accumulated other comprehensive income (note 16) |
30,667 | 13,967 | ||||||
Total stockholders equity |
1,464,171 | 1,434,953 | ||||||
Total liabilities and stockholders equity |
$ | 8,712,097 | $ | 8,434,313 | ||||
See accompanying notes to consolidated financial statements.
3
NewAlliance
Bancshares, Inc.
Consolidated Statements of Income
Three Months Ended | Six Months Ended | |||||||||||||||||
June 30, | June 30, | |||||||||||||||||
(In thousands, except per share data) (Unaudited) | 2010 | 2009 | 2010 | 2009 | ||||||||||||||
Interest and dividend income | ||||||||||||||||||
Residential real estate loans |
$ | 29,589 | $ | 33,782 | $ | 59,273 | $ | 68,376 | ||||||||||
Commercial real estate loans |
18,662 | 17,448 | 36,915 | 35,065 | ||||||||||||||
Commercial business loans |
5,591 | 5,527 | 10,785 | 11,239 | ||||||||||||||
Consumer loans |
7,946 | 8,596 | 16,083 | 17,304 | ||||||||||||||
Investment securities |
25,239 | 28,613 | 51,338 | 56,575 | ||||||||||||||
Federal funds sold and other short-term investments |
34 | 116 | 67 | 278 | ||||||||||||||
Total interest and dividend income |
87,061 | 94,082 | 174,461 | 188,837 | ||||||||||||||
Interest expense | ||||||||||||||||||
Deposits |
12,464 | 21,277 | 26,346 | 44,118 | ||||||||||||||
Borrowings |
16,856 | 22,878 | 34,732 | 46,799 | ||||||||||||||
Total interest expense |
29,320 | 44,155 | 61,078 | 90,917 | ||||||||||||||
Net interest income before provision for loan losses |
57,741 | 49,927 | 113,383 | 97,920 | ||||||||||||||
Provision for loan losses | 5,500 | 5,000 | 10,300 | 9,100 | ||||||||||||||
Net interest income after provision for loan losses |
52,241 | 44,927 | 103,083 | 88,820 | ||||||||||||||
Non-interest income | ||||||||||||||||||
Depositor service charges |
7,457 | 6,953 | 14,165 | 12,906 | ||||||||||||||
Loan and servicing income, net |
351 | 357 | 668 | 176 | ||||||||||||||
Trust fees |
1,573 | 1,392 | 3,174 | 2,651 | ||||||||||||||
Investment management, brokerage and insurance fees |
1,302 | 1,564 | 2,816 | 3,814 | ||||||||||||||
Bank owned life insurance |
847 | 899 | 4,309 | 1,770 | ||||||||||||||
|
(30 | ) | (2,522 | ) | (30 | ) | (2,522 | ) | ||||||||||
Less: Portion of loss recognized in other comprehensive income (before taxes) |
(522 | ) | 1,896 | (522 | ) | 1,896 | ||||||||||||
Net impairment losses on securities recognized in earnings |
(552 | ) | (626 | ) | (552 | ) | (626 | ) | ||||||||||
Net gain on sale of securities |
750 | 2,243 | 750 | 4,109 | ||||||||||||||
Net securities gain |
198 | 1,617 | 198 | 3,483 | ||||||||||||||
Mortgage origination activity and loan sale income |
571 | 1,481 | 1,299 | 3,500 | ||||||||||||||
Net gain (loss) on limited partnerships |
2,372 | 89 | 2,703 | (659 | ) | |||||||||||||
Other |
1,215 | 939 | 1,953 | 1,913 | ||||||||||||||
Total non-interest income |
15,886 | 15,291 | 31,285 | 29,554 | ||||||||||||||
Non-interest expense | ||||||||||||||||||
Salaries and employee benefits (notes 9 & 10) |
23,982 | 21,607 | 46,203 | 42,838 | ||||||||||||||
Occupancy |
4,094 | 4,644 | 8,715 | 9,399 | ||||||||||||||
Furniture and fixtures |
1,426 | 1,453 | 2,771 | 2,929 | ||||||||||||||
Outside services |
4,718 | 4,455 | 9,867 | 9,805 | ||||||||||||||
Advertising, public relations, and sponsorships |
1,486 | 981 | 3,017 | 2,115 | ||||||||||||||
Amortization of identifiable intangible assets |
1,953 | 2,129 | 3,905 | 4,257 | ||||||||||||||
FDIC insurance premiums |
1,898 | 5,893 | 3,755 | 6,838 | ||||||||||||||
Other |
4,071 | 3,243 | 7,595 | 6,605 | ||||||||||||||
Total non-interest expense |
43,628 | 44,405 | 85,828 | 84,786 | ||||||||||||||
Income before income taxes |
24,499 | 15,813 | 48,540 | 33,588 | ||||||||||||||
Income tax provision (note 11) |
8,226 | 5,705 | 15,834 | 11,890 | ||||||||||||||
Net income |
$ | 16,273 | $ | 10,108 | $ | 32,706 | $ | 21,698 | ||||||||||
Basic earnings per share (note 17) |
$ | 0.16 | $ | 0.10 | $ | 0.33 | $ | 0.22 | ||||||||||
Diluted earnings per share (note 17) |
0.16 | 0.10 | 0.33 | 0.22 | ||||||||||||||
Weighted-average shares outstanding (note 17) |
||||||||||||||||||
Basic |
98,781 | 99,278 | 98,900 | 99,266 | ||||||||||||||
Diluted |
98,860 | 99,311 | 98,937 | 99,310 | ||||||||||||||
Dividends per share |
$ | 0.07 | $ | 0.07 | $ | 0.14 | $ | 0.14 |
See accompanying notes to consolidated financial statements.
4
NewAlliance Bancshares, Inc.
Consolidated
Statement of Changes in Stockholders Equity
Unallocated | Accumulated | ||||||||||||||||||||||||||||||||||
Common | Par Value | Additional | Common | Other | Total | ||||||||||||||||||||||||||||||
For the Six Months Ended June 30, 2010 | Shares | Common | Paid-in | Stock Held | Unearned | Treasury | Retained | Comprehensive | Stockholders | ||||||||||||||||||||||||||
(In thousands, except per share data) (Unaudited) | Outstanding | Stock | Capital | by ESOP | Compensation | Stock | Earnings | Income | Equity | ||||||||||||||||||||||||||
Balance December 31, 2009 | 106,051 | $ | 1,215 | $ | 1,245,489 | $ | (88,721 | ) | $ | (12,389 | ) | $ | (211,582 | ) | $ | 486,974 | $ | 13,967 | $ | 1,434,953 | |||||||||||||||
Dividends declared ($0.14 per share) | (13,986 | ) | (13,986 | ) | |||||||||||||||||||||||||||||||
Allocation of ESOP shares, net of tax | (205 | ) | 1,829 | 1,624 | |||||||||||||||||||||||||||||||
Treasury shares acquired (note 15) | (971 | ) | (11,253 | ) | (11,253 | ) | |||||||||||||||||||||||||||||
Restricted stock expense | 3,179 | 3,179 | |||||||||||||||||||||||||||||||||
Stock option expense | 248 | 248 | |||||||||||||||||||||||||||||||||
Comprehensive income: | |||||||||||||||||||||||||||||||||||
Net income |
32,706 | 32,706 | |||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax (note 16) |
16,700 | 16,700 | |||||||||||||||||||||||||||||||||
Total comprehensive income | 49,406 | ||||||||||||||||||||||||||||||||||
Balance June 30, 2010 | 105,080 | $ | 1,215 | $ | 1,245,532 | $ | (86,892 | ) | $ | (9,210 | ) | $ | (222,835 | ) | $ | 505,694 | $ | 30,667 | $ | 1,464,171 | |||||||||||||||
See accompanying notes to consolidated financial statements.
5
NewAlliance
Bancshares, Inc.
Consolidated Statements of Cash Flows
Six Months Ended | ||||||||
June 30, | ||||||||
(In thousands) (Unaudited) | 2010 | 2009 | ||||||
Cash flows from operating activities | ||||||||
Net income | $ | 32,706 | $ | 21,698 | ||||
Adjustments to reconcile net income to net cash provided by operating activities | ||||||||
Provision for loan losses |
10,300 | 9,100 | ||||||
Loss on OREO |
18 | 193 | ||||||
Restricted stock compensation expense |
3,179 | 2,900 | ||||||
Stock option compensation expense |
248 | 131 | ||||||
ESOP expense |
1,624 | 1,613 | ||||||
Amortization of identifiable intangible assets |
3,905 | 4,257 | ||||||
Net amortization/accretion of fair market adjustments from net assets acquired |
(941 | ) | (1,673 | ) | ||||
Net amortization/accretion of investment securities |
4,929 | 1,892 | ||||||
Deferred income taxes |
(504 | ) | 240 | |||||
Depreciation and amortization of premises and equipment |
3,101 | 3,253 | ||||||
Net gain on securities |
(198 | ) | (3,483 | ) | ||||
Mortgage origination activity and loan sale income |
(1,299 | ) | (3,500 | ) | ||||
Proceeds from sales of loans held for sale |
114,875 | 280,195 | ||||||
Loans originated for sale |
(112,279 | ) | (325,813 | ) | ||||
(Gain) loss on sale of fixed assets |
(5 | ) | 19 | |||||
Net (gain) loss on limited partnerships |
(2,703 | ) | 659 | |||||
Increase in cash surrender value of bank owned life insurance |
(1,677 | ) | (1,770 | ) | ||||
Increase in other assets |
(1,757 | ) | (181 | ) | ||||
Increase in other liabilities |
2,058 | 5,101 | ||||||
Net cash provided by (used in) operating activities |
55,580 | (5,169 | ) | |||||
Cash flows from investing activities | ||||||||
Purchase of securities available for sale |
(535,189 | ) | (747,883 | ) | ||||
Purchase of securities held to maturity |
(140,638 | ) | (21,451 | ) | ||||
Proceeds from maturity, sales, calls and principal reductions of |
||||||||
securities available for sale |
482,235 | 386,276 | ||||||
Proceeds from maturity, calls and principal reductions of |
||||||||
securities held to maturity |
58,059 | 43,503 | ||||||
Proceeds from sales of fixed assets |
6 | 32 | ||||||
Net (increase) decrease in loans held for investment |
(176,031 | ) | 102,268 | |||||
Proceeds from sales of other real estate owned |
2,616 | 2,310 | ||||||
Proceeds from bank owned life insurance |
6,776 | 263 | ||||||
Purchase of premises and equipment |
(4,629 | ) | (1,342 | ) | ||||
Net cash used in investing activities |
(306,795 | ) | (236,024 | ) | ||||
Cash flows from financing activities | ||||||||
Net increase in customer deposit balances |
112,678 | 414,752 | ||||||
Net increase (decrease) in short-term borrowings |
76,856 | (52,018 | ) | |||||
Proceeds from long-term borrowings |
491,100 | 142,000 | ||||||
Repayments of long-term borrowings |
(433,414 | ) | (252,324 | ) | ||||
Book under/(over) tax benefit of stock-based compensation |
- | (98 | ) | |||||
Acquisition of treasury shares |
(11,253 | ) | (3,105 | ) | ||||
Dividends paid |
(13,986 | ) | (14,075 | ) | ||||
Net cash provided by financing activities |
221,981 | 235,132 | ||||||
Net decrease in cash and cash equivalents |
(29,234 | ) | (6,061 | ) | ||||
Cash and equivalents, beginning of period |
146,927 | 153,131 | ||||||
Cash and equivalents, end of period |
$ | 117,693 | $ | 147,070 | ||||
Supplemental information | ||||||||
Cash paid for |
||||||||
Interest on deposits and borrowings |
$ | 62,101 | $ | 92,142 | ||||
Income taxes paid, net |
15,945 | 11,447 | ||||||
Noncash transactions |
||||||||
Loans transferred to other real estate owned |
2,075 | 1,560 |
See accompanying notes to consolidated financial statements.
6
NewAlliance
Bancshares, Inc.
Notes to Unaudited Consolidated Financial
Statements
1. | Summary of Significant Accounting Policies | |
Financial
Statement Presentation The consolidated financial statements of NewAlliance Bancshares, Inc. (the Company) have been prepared in conformity with accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. All significant intercompany transactions and balances have been eliminated in consolidation. Amounts in prior period financial statements are reclassified whenever necessary to conform to the current year presentation. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K as of and for the year ended December 31, 2009. |
||
The preparation
of the consolidated financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues and
expenses and the disclosure of contingent assets and liabilities. Actual results
could differ from those estimates. |
||
Material estimates
that are particularly susceptible to significant near-term change relate to the
determination of the allowance for loan losses, the obligation and expense for pension
and other postretirement benefits, and estimates used to evaluate asset impairment
including investment securities, income tax contingencies and deferred tax assets
and liabilities and the recoverability of goodwill and other intangible assets. |
||
Management
has determined that no subsequent events have occurred following the balance sheet
date of June 30, 2010 which require recognition or disclosure in the financial statements. |
||
Cash and Cash Equivalents | ||
For purposes
of reporting cash flows, cash and cash equivalents include cash on hand and due
from banks and short-term investments with original maturities of three months or
less. At June 30, 2010, included in the balance of cash and due from banks were
cash on hand of $97.7 million, which includes required reserves in the form of deposits
with the Federal Reserve Bank (FRB) of approximately $33.6 million. Short-term
investments included money market funds of $20.0 million at June 30, 2010. |
||
Investment Securities | ||
Marketable
equity and debt securities are classified as either trading, available for sale,
or held to maturity (applies only to debt securities). Management determines the
appropriate classifications of securities at the time of purchase. At June 30, 2010
and December 31, 2009, the Company had no debt or equity securities classified as
trading. Held to maturity securities are debt securities for which the Company has
the ability and intent to hold until maturity. All other securities not included
in held to maturity are classified as available for sale. Held to maturity securities
are recorded at amortized cost, adjusted for the amortization or accretion of premiums
or discounts. Available for sale securities are recorded at fair value. Unrealized
gains and losses, net of the related tax effect, on available for sale securities
are excluded from earnings and are reported in accumulated other comprehensive income,
a separate component of equity, until realized. Further information relating to
the fair value of securities can be found within Note 13 of the Notes to Consolidated
Financial Statements. |
||
Premiums and
discounts on debt securities are amortized or accreted into interest income over
the term of the securities using the level yield method. In accordance with Financial
Accounting Standards Board (FASB) Accounting Standards Codification
(FASB ASC) 320 Debt and Equity Securities, a decline in
market value of a debt security below amortized cost that is deemed other than temporary
is charged to earnings for the credit related other than temporary impairment (OTTI) resulting in the establishment of a new cost basis for the security,
while the non-credit related OTTI is recognized in other comprehensive income (OCI) if there is no intent to sell or will not be required to sell the
security. If an equity security is deemed other-than-temporarily impaired, the
full impairment is recorded as a charge to earnings. Gains and losses on sales of
securities are recognized at the time of sale on a specific identification basis. |
||
Federal Home Loan Bank of Boston stock | ||
As a member
of the Federal Home Loan Bank of Boston, (FHLB Boston), the Bank is
required to hold a certain amount of FHLB Boston stock. This stock is considered
to be a non-marketable equity security reported at cost. The level of stock purchases
is determined by the Banks advances outstanding and the amount of residential
mortgage assets on the Banks balance sheet. The shares can only be purchased
and sold between the FHLB Boston and the Company at a par value of $100 per share. |
7
NewAlliance
Bancshares, Inc.
Notes to Unaudited Consolidated Financial
Statements
Loans Held for Sale | ||
The Company
currently sells the majority of originated fixed rate residential real estate loans
with terms of 15 years and over. Mortgage loans held for sale are carried at fair
value. Fair value is estimated using quoted loan market prices provided by government-sponsored
entities of Federal National Mortgage Association (FNMA) and Federal
Home Loan Mortgage Corporation (FHLMC). Further information regarding
the fair value measurement of mortgage loans held for sale can be found in Note
13 of the Notes to Consolidated Financial Statements. Residential loans are sold
by the Company without recourse. The Company currently sells these loans servicing
released. |
||
The Company
is also involved in the Small Business Administration (SBA) loan secondary
market. The Company currently sells the guaranteed portion of SBA loans that meet
certain criteria and retains the unguaranteed portion and the right to service the
sold portion of the loan in its portfolio. Such loans are included in loans held
for sale on the balance sheet upon origination. SBA loans held for sale are valued
at the lower of cost (less principal payments received and net of deferred fees
and costs) or estimated fair value. Fair value is estimated using quoted market
prices from a secondary market broker. All other loan originations are classified
as loans held for investment. |
||
Loans Receivable | ||
Loans are
stated at their principal amounts outstanding, net of deferred loan fees and costs
and fair value adjustments for loans acquired. |
||
Interest on
loans is credited to income as earned based on the rate applied to principal amounts
outstanding. Loans are placed on nonaccrual status when timely collection of principal
or interest in accordance with contractual terms is in question. The Companys
policy is to discontinue the accrual of interest when principal or interest payments
become 90 days delinquent or sooner if management concludes that circumstances indicate
borrowers may be unable to meet contractual principal or interest payments. If ultimately
collected, such interest is credited to income when received. Loans are removed
from nonaccrual status when they become current as to principal and interest and
when, in the opinion of management concern no longer exists as to the collectability
of principal and interest. |
||
Certain direct
loan origination fees and costs and fair value adjustments to acquired loans are
recognized over the lives of the related loans as an adjustment of interest using
the level yield method. When loans are prepaid, sold or participated out, the unamortized
portion is recognized as income or expense at that time. |
||
Allowance for Loan Losses | ||
The adequacy
of the allowance for loan losses is regularly evaluated by management. Factors considered
in evaluating the adequacy of the allowance include previous loss experience, current
economic conditions and their effect on borrowers, the performance of individual
loans in relation to contract terms, and other pertinent factors. The provision
for loan losses charged to expense is based upon managements judgment of the
amount necessary to maintain the allowance at a level adequate to absorb probable
losses inherent in the loan portfolio. Loan losses are charged against the allowance
when management believes the collectability of the principal balance outstanding
is unlikely. |
||
In determining
the adequacy of the allowance for loan losses, management reviews overall portfolio
quality through an evaluation of individual performing and impaired loans, the risk
characteristics of the loan portfolios, an analysis of current levels and trends
in charge offs, delinquency and nonperforming loan data, and the credit risk profile
of each component of the portfolio, among other factors. While management uses the
best available information to recognize losses on loans, future additions to the
allowance for loan losses may be necessary based on changes in economic conditions.
In addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Banks allowance for loan losses. Such agencies
may require the Bank to recognize additions to the allowance based on their judgments
about information available to them at the time of their examinations. |
||
The allowance
for loan losses consists of a formula allowance following FASB ASC 450
Contingencies and FASB ASC 310 - Receivables, based on a variety of factors
including historical loss experience for various loan portfolio classifications,
and a specific valuation allowance for loans identified as impaired. The allowance
is an estimate, and ultimate losses may vary from managements estimate. Changes
in the estimate are recorded in the results of operations in the period in which
they become known, along with provisions for estimated losses incurred during that
period. |
||
A loan is
considered to be impaired when it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan agreement.
Impaired loans, as defined, may be measured based on the present value of expected
future cash flows discounted at the loans original effective interest rate,
at the loans observable market price or the fair value of the collateral if
the loan is collateral dependent. When the measurement of the impaired loan is less
than the recorded investment in the loan, the impairment is recorded through a valuation
allowance. |
8
NewAlliance
Bancshares, Inc.
Notes to Unaudited Consolidated Financial
Statements
Loan Servicing Rights | ||
The Company
capitalizes servicing rights for loans sold based on the relative fair value which
is allocated between the servicing rights and the loans (without servicing rights). |
||
The cost basis
of loan servicing rights is amortized on a level yield basis over the period of
estimated net servicing revenue and such amortization is included in the consolidated
statement of income as a reduction of loan servicing fee income. Servicing rights
are evaluated for impairment by comparing their aggregate carrying amount to their
fair value. The fair value of loan servicing rights is estimated using a present
value cash flow model. The most important assumptions used in the valuation model
are the anticipated rate of loan prepayments and discount rates. All assumptions
are based on standards used by market participants. An independent appraisal of
the fair value of the Companys loan servicing rights is obtained as necessary,
but at least annually and is used by management to evaluate the reasonableness of
the fair value estimates. For interim quarters, management analyzes the current
variables and assesses the need for an independent appraisal. Impairment is recognized
as an adjustment to loan and servicing income. |
||
Premises and Equipment | ||
Premises and
equipment are carried at cost less accumulated depreciation and amortization. Depreciation
and amortization are computed on the straight-line method using the estimated lives
of the assets. Estimated lives are 5 to 40 years for building and improvements and
3 to 10 years for furniture, fixtures and equipment. Amortization of leasehold improvements
is calculated on a straight-line basis over the terms of the related leases or the
life of the asset, whichever is shorter. The cost of maintenance and repairs is
charged to expense as incurred, whereas significant renovations are capitalized. |
||
Bank Owned Life Insurance | ||
Bank owned
life insurance (BOLI) represents life insurance on certain employees
who have consented to allow the Bank to be the beneficiary of those policies. BOLI
is recorded as an asset at cash surrender value. Increases in the cash value of
the policies, as well as insurance proceeds received in excess of cash values, are
recorded in other non-interest income and are not subject to income tax. Management
reviews the financial strength of the insurance carriers on a quarterly basis and
BOLI with any individual carrier is limited to 15% of capital plus reserves. |
||
Goodwill and Identifiable Intangible Assets | ||
The assets
(including identifiable intangible assets) and liabilities acquired in a business
combination are recorded at fair value at the date of acquisition. Goodwill is recognized
for the excess of the acquisition cost over the fair values of the net assets acquired
and is not subsequently amortized. Identifiable intangible assets are subsequently
amortized on a straight-line or accelerated basis, over their estimated lives. Management
assesses the recoverability of goodwill at least on an annual basis and all intangible
assets whenever events or changes in circumstances indicate that their carrying
value may not be recoverable. If carrying amount exceeds fair value an impairment
charge is recorded to income. |
||
Income Taxes | ||
The Company
files a consolidated federal tax return and various combined and separate Company
state tax returns. The Company uses the asset and liability method of accounting
for income taxes. Under this method, deferred tax assets and liabilities are established
for the temporary differences between the financial reporting basis and the tax
basis of the Companys assets and liabilities. Deferred tax assets are also
recognized for available tax carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to be in effect when temporary differences
and carryforwards are realized or settled. |
||
The deferred
tax asset is subject to reduction by a valuation allowance in certain circumstances.
This valuation allowance is recognized if, based on an analysis of available evidence,
management determines that it is more likely than not that some portion or all of
the deferred tax asset will not be realized. The valuation allowance is subject
to ongoing adjustment based on changes in circumstances that affect managements
judgment about the realization of the deferred tax asset. Adjustments to increase
or decrease the valuation allowance are charged or credited, respectively, to income
tax expense or in certain limited circumstances to equity. |
||
Income tax
expense includes the amount of taxes payable for the current year, and the deferred
tax benefit or expense for the period. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income tax expense in the period that
includes the enactment date. |
||
The Company
is required to make a determination of an inventory of tax positions (federal and
state) for which the sustainability of the position, based upon the technical merits,
is uncertain. The Company regularly evaluates all tax positions taken and the likelihood
of those positions being sustained. If management is highly confident that the position
will be allowed and there is a |
9
NewAlliance
Bancshares, Inc.
Notes to Unaudited Consolidated Financial
Statements
greater than
50% likelihood that the full amount of the tax position will be ultimately realized,
the company recognizes the full benefit associated with the tax position. Additionally,
interest and penalties related to uncertain tax positions are included as a component
of income tax expense. |
||
Trust Assets | ||
The Bank had
approximately $1.01 billion and $1.03 billion of assets under management at June 30,
2010 and December 31, 2009, respectively, in a fiduciary or agency capacity for
customers. These assets are not included in the accompanying consolidated financial
statements since they are not owned by the Bank. Trust income primarily consists
of management fees based on the assets under management. |
||
Pension and Other Postretirement Benefit Plans | ||
The Company
has a noncontributory pension plan covering substantially all employees who meet
certain age and length of service requirements and who were employed by the Company
prior to January 1, 2008. Pension costs related to this plan are based upon actuarial
computations of current and future benefits for employees based on years of service
and the employees highest career earnings over a five-year consecutive period.
Costs are charged to non-interest expense and are funded in accordance with requirements
of the Employee Retirement Income Security Act and the Pension Protection Act of
2006. Contributions are intended to provide not only for benefits attributed to
service to date, but also for those expected to be earned in the future. |
||
In addition
to the qualified plan, the Company has supplemental retirement plans for certain
key officers. These plans, which are nonqualified, were designed to offset the impact
of changes in the pension plan that limit benefits for highly compensated employees
under qualified pension plans. |
||
The Company
also accrues costs related to postretirement healthcare and life insurance benefits,
which recognizes costs over the employees period of active employment. |
||
The discount
rate is set for the retirement plans by reference to high quality long-term fixed
income instrument yields. The discount rates were determined by applying the estimated
cash flows of the Companys retirement plans to the Citigroup Pension Liability
Yield Curve. The Moodys Aa long-term corporate bond index was also reviewed
as a benchmark. The expected long-term rate of return on the assets held in our
defined pension plan is based on market and economic conditions, the Plans
asset allocation and other factors. |
||
Based on our
review of rates at December 31, 2009, separate discount rates were chosen for each
type of benefit plan for the measurement of benefit obligations to better represent
the actual plans. Discount rates as of December 31, 2009 were 5.85% for the defined
benefit plan, 5.50% for the postretirement plan and 5.75% for the supplemental executive
retirement benefit plan. The expected long-term rate of return on the pension plan
assets was 7.75% for December 31, 2009. |
||
Stock-Based Compensation | ||
The Company
accounts for stock option and restricted stock awards in accordance with FASB ASC
718 Compensation Stock Compensation. Pursuant to this
guidance, the fair value of stock option and restricted stock awards, measured at
grant date, is amortized to compensation expense on a straight-line basis over the
vesting period. |
||
Repurchase Agreements | ||
Repurchase
agreements are accounted for as secured borrowings since the Company maintains effective
control over the transferred securities and the transfer meets the other criteria
for such accounting. Securities are sold to a counterparty with an agreement to
repurchase the same or substantially the same security at a specified price and
date. The Company has repurchase agreements with commercial or municipal customers
that are offered as a business banking service. Customer repurchase agreements are
for a term of one day and are backed by the purchasers interest in certain
U.S. Treasury Notes or other U.S. Government securities. The Company also has a
single dealer repurchase agreement that was initiated as a means to manage the Companys interest rate risk. The dealer repurchase agreement was issued for a term
of five years and matures in 2012. The dealer repurchase agreement is collateralized
by U.S. Government mortgage-backed securities. Obligations to repurchase securities
sold are reflected as a liability in the Consolidated Balance Sheets. The Company
does not record transactions of repurchase agreements as sales. The securities underlying
the repurchase agreements remain in the available-for-sale investment securities
portfolio. |
||
Merger Related Charges | ||
The Company
accounts for acquisitions in accordance with FASB ASC 805, Business Combinations.
Costs that do not meet the conditions for inclusion in the allocation of acquisition
cost, costs for contemplated acquisitions and recurring costs related to prior acquisitions
are expensed as incurred and are reported in other non-interest expense. These charges
consist primarily of |
10
NewAlliance
Bancshares, Inc.
Notes to Unaudited Consolidated Financial
Statements
consulting,
legal, system conversion, printing and advertising costs associated with acquired
companies, acquisition targets and potential acquisition targets. For acquisitions
completed after January 1, 2009, pursuant to new business combination accounting
guidance, merger-related charges will also include acquisition related transaction
and restructuring costs which were previously capitalized as part of the cost of
the acquisition. |
||
Related Party Transactions | ||
Directors
and executive officers of the Company and its subsidiaries and their associates
have been customers of and have had transactions with the Company, and management
expects that such persons will continue to have such transactions in the future. |
||
Comprehensive Income | ||
The purpose
of reporting comprehensive income is to report a measure of all changes in an entity
that result from recognized transactions and other economic events of the period
other than transactions with owners in their capacity as owners. Comprehensive income
includes net income and certain changes in capital that are not recognized in the
statement of income (such as changes in net unrealized gains and losses on securities
available for sale). The Company has reported comprehensive income for the three
and six months ended June 30, 2010 and 2009 in the Consolidated Statement of Changes
in Stockholders Equity. The components of comprehensive income are presented
in Note 16 of the Notes to Consolidated Financial Statements. |
||
Segment Reporting | ||
The Companys only business segment is Community Banking. During the six months ended June
30, 2010 and the years ended 2009 and 2008, this segment represented all the revenues
and income of the consolidated group and therefore, is the only reported segment
as defined by FASB ASC 820, Segment Reporting. |
||
Earnings Per Share | ||
Basic earnings
per share (EPS) excludes dilution and is calculated by dividing net
income available to common stockholders by the weighted-average number of shares
of common stock outstanding during the period. Diluted EPS is computed in a manner
similar to that of basic EPS except that the weighted-average number of common shares
outstanding is increased to include the number of incremental common shares (computed
using the treasury stock method) that would have been outstanding if all potentially
dilutive common shares (such as stock options and unvested restricted stock) were
issued during the period. Unallocated common shares held by the Employee Stock Ownership
Plan (ESOP) are not included in the weighted-average number of common
shares outstanding for either basic or diluted earnings per share calculations. |
||
Earnings per
share for the three and six months ended June 30, 2010 and 2009 can be found in
Note 17 of the Notes to Consolidated Financial Statements. |
||
2. | Recent Accounting Pronouncements | |
Receivables (Topic 310) | ||
In July 2010,
the FASB issued Accounting Standards Update (ASU) No. 2010-20, Disclosures
about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The statement is intended to improve the transparency of financial reporting
by requiring enhanced disclosures about a banks allowance for loan losses and the credit quality of its financing receivables (generally defined as loans
and leases). The primary goal of the disclosure requirements is to provide more
information about the credit risk in a banks portfolio of loans and how that
risk is analyzed and assessed in arriving at the allowance for loan loss. The guidance
is effective for public entities for annual and interim reporting periods ending
on or after December 15, 2010. The adoption of ASU No. 2010-06 on December 31, 2010
will not have a material impact on the financial statements as it impacts disclosures
only. |
||
Fair Value Measurements and Disclosures (Topic 820) | ||
In February
2010, the FASB issued ASU No. 2010-06, Improving Disclosures about Fair Value
Measurements. The amendment to Topic 820, Fair Value Measurements and Disclosures,
requires additional disclosures about fair value measurements including transfer
in and out of Levels 1 and 2 and higher levels of disaggregation for the different
types of financial instruments. For the reconciliation of Level 3 fair values measurements,
information about purchases, sales, issuances and settlements should be presented
separately. The guidance was effective for annual and interim reporting periods
beginning after December 15, 2009, except for the disclosure of information about
sales, issuances and settlements on a gross basis for assets and liabilities classified
as level 3, which is effective for reporting periods beginning after December 15,
2010. The adoption of ASU No. 2010-06 on January 1, 2010 did not have a material
impact on the financial statements as it impacts disclosures only. |
11
NewAlliance
Bancshares, Inc.
Notes to Unaudited Consolidated Financial
Statements
Investments Debt and Equity Securities (Topic 320) | ||
In April 2009,
the FASB issued new guidance on the Recognition and Presentation of Other-Than-Temporary
Impairments (FASB ASC 320-10), which amends FASB ASC 320, Investments Debt and Equity Securities,
to make the other-than-temporary impairment (OTTI) guidance more
operational and to improve the presentation of other-than-temporary impairments
in the financial statements. This guidance replaced the existing requirement that
the entitys management assert it has both the intent and ability to hold an
impaired debt security until recovery with a requirement that management assert
it does not have the intent to sell the security, and it is more likely than not
it will not have to sell the security before recovery of its cost basis. When an
other-than-temporary impairment exists under this stated assertion, the amount of
impairment related to the credit loss component would be recognized in earnings
while the remaining amount would be recognized in other comprehensive income. This
guidance provides increased disclosure about the credit and noncredit components
of impaired debt securities that are not expected to be sold and also requires increased
and more frequent disclosures regarding expected cash flows, credit losses, and
an aging of securities with unrealized losses. Although this amendment does not
result in a change in the carrying amount of debt securities, it does require that
the portion of an other-than-temporary impairment not related to a credit loss for
a held-to-maturity security be recognized in a new category of other comprehensive
income and be amortized over the remaining life of the debt security as an increase
in the carrying value of the security. This new guidance does not amend existing
recognition and measurement guidance for other-than-temporary impairments of equity
securities. This guidance was effective for interim and annual periods ending after
June 15, 2009, with early adoption permitted for periods ending after March 15,
2009. The Company did not elect early application and the adoption resulted in a $1.0
million cumulative effect adjustment, net of taxes, to increase retained earnings
and decrease accumulated other comprehensive income as of April 1, 2009 for the
non-credit component of debt securities for which an other-than-temporary impairment
was previously recognized. Refer to Note 3 of the Notes to Consolidated Financial
Statements for further information on the Companys adoption of this guidance. |
||
Transfers of Financial Assets (Topic 860) | ||
In December
2009, the FASB issued ASU No. 2009-16 codifying the new guidance issued in June
2009 regarding the Transfer of Financial Assets. This guidance requires entities
to provide more information about sales of securitized financial assets and similar
transactions, particularly if the seller retains some risk in the assets. The guidance
eliminates the concept of a qualifying special-purpose entity, changes the requirements
for the derecognition of financial assets, and enhances the disclosure requirements
for sellers of the assets. This guidance was effective for the fiscal year beginning
after November 15, 2009. The adoption of ASU No. 2009-16 on January 1, 2010 did
not have a material impact on the financial statements. |
||
Consolidation (Topic 810) | ||
In December
2009, the FASB issued ASU No. 2009-17 codifying the new guidance issued in June
2009 regarding Consolidations. The guidance requires an enterprise to perform
an analysis to determine whether the enterprises 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 enterprises involvement
with a variable interest entity. The guidance was effective for interim periods
as of the beginning of the first annual reporting period beginning after November
15, 2009. The adoption of ASU No. 2009-17 on January 1, 2010 did not have a material
impact on the financial statements. |
||
Subsequent Events (Topic 855) | ||
In February
2010, the FASB issued ASU 2010-09 for amendments to certain recognition and disclosure
requirements. Among other things, this guidance retracts, for public entities, the
requirement to disclose the date through which subsequent events have been evaluated
and whether that date is the date the financial statements were issued or were available
to be issued. The portion of the ASU that addresses the disclosure of the date through
which subsequent events have been evaluated, and that impacts the Company, was effective
upon issuance. |
12
NewAlliance
Bancshares, Inc.
Notes to Unaudited Consolidated Financial
Statements
3. | Investment Securities | |
The following
table presents the amortized cost, gross unrealized gains, gross unrealized losses
and estimated fair values of investment securities for the periods presented: |
June 30, 2010 | December 31, 2009 | |||||||||||||||||||||||||||||||||
Gross | Gross | Gross | Gross | |||||||||||||||||||||||||||||||
Amortized | unrealized | unrealized | Fair | Amortized | unrealized | unrealized | Fair | |||||||||||||||||||||||||||
(In thousands) | cost | gains | losses | value | cost | gains | losses | value | ||||||||||||||||||||||||||
Available for sale | ||||||||||||||||||||||||||||||||||
U.S. Treasury obligations |
$ | - | $ | - | $ | - | $ | - | $ | 597 | $ | - | $ | - | $ | 597 | ||||||||||||||||||
U.S. Government sponsored |
||||||||||||||||||||||||||||||||||
enterprise obligations |
399,327 | 5,874 | (22 | ) | 405,179 | 198,692 | 1,621 | (583 | ) | 199,730 | ||||||||||||||||||||||||
Corporate obligations |
8,118 | 612 | - | 8,730 | 8,139 | 378 | - | 8,517 | ||||||||||||||||||||||||||
Other bonds and obligations |
13,496 | 184 | (1,419 | ) | 12,261 | 14,625 | 127 | (1,518 | ) | 13,234 | ||||||||||||||||||||||||
Auction rate certificates |
12,050 | - | - | 12,050 | 27,550 | - | (2,755 | ) | 24,795 | |||||||||||||||||||||||||
Marketable equity securities |
8,582 | 197 | - | 8,779 | 8,567 | 216 | - | 8,783 | ||||||||||||||||||||||||||
Trust preferred equity securities |
48,223 | 3 | (13,444 | ) | 34,782 | 48,754 | - | (15,458 | ) | 33,296 | ||||||||||||||||||||||||
Private label residential mortgage-backed securities |
21,428 | 27 | (1,229 | ) | 20,226 | 23,871 | - | (3,015 | ) | 20,856 | ||||||||||||||||||||||||
Residential mortgage-backed securities |
1,820,482 | 80,828 | - | 1,901,310 | 1,951,297 | 68,393 | (1,643 | ) | 2,018,047 | |||||||||||||||||||||||||
Total available for sale |
2,331,706 | 87,725 | (16,114 | ) | 2,403,317 | 2,282,092 | 70,735 | (24,972 | ) | 2,327,855 | ||||||||||||||||||||||||
Held to maturity | ||||||||||||||||||||||||||||||||||
Residential mortgage-backed securities |
313,520 | 12,172 | - | 325,692 | 230,596 | 11,360 | - | 241,956 | ||||||||||||||||||||||||||
Other bonds |
9,735 | 311 | (2 | ) | 10,044 | 10,170 | 243 | (38 | ) | 10,375 | ||||||||||||||||||||||||
Total held to maturity |
323,255 | 12,483 | (2 | ) | 335,736 | 240,766 | 11,603 | (38 | ) | 252,331 | ||||||||||||||||||||||||
Total securities |
$ | 2,654,961 | $ | 100,208 | $ | (16,116 | ) | $ | 2,739,053 | $ | 2,522,858 | $ | 82,338 | $ | (25,010 | ) | $ | 2,580,186 | ||||||||||||||||
The securities
portfolio is reviewed on a monthly basis for the presence of other-than-temporary
impairment (OTTI). In accordance with OTTI guidance issued by the FASB
in 2009, credit related OTTI for debt securities is recognized in earnings while
non-credit related OTTI is recognized in other comprehensive income (OCI)
if there is no intent to sell or will not be required to sell the security. If an
equity security is deemed other-than-temporarily impaired, the full impairment is
considered to be credit-related and a charge to earnings would be recorded. During
the second quarter of 2010, the Company recorded an OTTI loss on a debt security
in accordance with this FASB guidance, as described below. |
||
During the
three months ended June 30, 2010, a pooled trust preferred security, which had a
previous credit related impairment charge during 2009, was deemed to have an additional
credit related OTTI loss in the amount of $552,000 based on a further decline in
expected cash flows. The credit related impairment, which was reclassified from
other comprehensive income as it was previously recognized as non-credit related
was due to a cash flow analysis that indicated further credit related impairment.
The Company received nine cash flow scenarios from the underwriter which were utilized
by management to analyze this security for potential OTTI. The nine scenarios covered
various default rates, recovery rates and prepayment options over different time
periods. Two of the nine cash flow analyses indicated impairment over the life of
the security. The driver of the indicated impairment was the recovery rate, which
was modeled at 0% in these two cash flow scenarios. As the severity of the estimated
loss in these two cash flow scenarios increased by a factor of five since the prior
OTTI analysis in the first quarter of 2010 and the past history of the security
indicates that there have not been any recoveries to date from securities that have
defaulted, the Company recorded a credit related impairment charge. The credit impairment
represents the average loss of the two negative cash flow analyses. After the write-down,
the pooled trust preferred security had an amortized cost and fair value of approximately $869,000
and $220,000, respectively. There is no intent to sell nor is it more likely than
not that the Company will be required to sell this security. |
||
The following
tables present the fair value of investments with continuous unrealized losses for
less than one year and those that have been in a continuous unrealized loss position
for more than one year as of June 30, 2010 and December 31, 2009. Of the securities
summarized, one issue has an unrealized loss for less than twelve months and 33
have unrealized losses for twelve months or more at June 30, 2010. This compares
to a total of 72 issues that had an unrealized loss at December 31, 2009. |
13
NewAlliance
Bancshares, Inc.
Notes to Unaudited Consolidated Financial
Statements
June 30, 2010 | |||||||||||||||||||||||||||
Less Than One Year | More Than One Year | Total | |||||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | ||||||||||||||||||||||
(In thousands) | value | losses | value | losses | value | losses | |||||||||||||||||||||
U. S. Government sponsored enterprise obligations |
$ | - | $ | - | $ | 3,536 | $ | 22 | $ | 3,536 | $ | 22 | |||||||||||||||
Corporate obligations |
- | - | - | - | - | - | |||||||||||||||||||||
Other bonds and obligations |
978 | 2 | 6,657 | 1,419 | 7,635 | 1,421 | |||||||||||||||||||||
Auction rate certificates |
- | - | - | - | - | - | |||||||||||||||||||||
Marketable equity securities |
- | - | - | - | - | - | |||||||||||||||||||||
Trust preferred equity securities |
- | - | 33,779 | 13,444 | 33,779 | 13,444 | |||||||||||||||||||||
Private label residential mortgage-backed securities |
- | - | 17,801 | 1,229 | 17,801 | 1,229 | |||||||||||||||||||||
Residential mortgage-backed securities |
- | - | - | - | - | - | |||||||||||||||||||||
Total securities with unrealized losses |
$ | 978 | $ | 2 | $ | 61,773 | $ | 16,114 | $ | 62,751 | $ | 16,116 | |||||||||||||||
December 31, 2009 | |||||||||||||||||||||||||||
Less Than One Year | More Than One Year | Total | |||||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | ||||||||||||||||||||||
(In thousands) | value | losses | value | losses | value | losses | |||||||||||||||||||||
U. S. Government sponsored enterprise obligations | $ | 83,108 | $ | 542 | $ | 3,774 | $ | 41 | $ | 86,882 | $ | 583 | |||||||||||||||
Corporate obligations | - | - | - | - | - | - | |||||||||||||||||||||
Other bonds and obligations | 942 | 38 | 6,558 | 1,518 | 7,500 | 1,556 | |||||||||||||||||||||
Auction rate certificates | - | - | 24,795 | 2,755 | 24,795 | 2,755 | |||||||||||||||||||||
Marketable equity securities | - | - | - | - | - | - | |||||||||||||||||||||
Trust preferred equity securities | - | - | 33,296 | 15,458 | 33,296 | 15,458 | |||||||||||||||||||||
Private label residential mortgage-backed securities | - | - | 20,856 | 3,015 | 20,856 | 3,015 | |||||||||||||||||||||
Residential mortgage-backed securities | 246,600 | 1,643 | - | - | 246,600 | 1,643 | |||||||||||||||||||||
Total securities with unrealized losses |
$ | 330,650 | $ | 2,223 | $ | 89,279 | $ | 22,787 | $ | 419,929 | $ | 25,010 | |||||||||||||||
Management
believes that no individual unrealized loss as of June 30, 2010 represents an other-than-temporary
impairment, based on its detailed monthly review of the securities portfolio. Among
other things, the other-than-temporary impairment review of the investment securities
portfolio focuses on the combined factors of percentage and length of time by which
an issue is below book value as well as consideration of issuer specific (present
value of cash flows expected to be collected, issuer rating changes and trends,
credit worthiness and review of underlying collateral), broad market details and
the Companys 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 Companys position related
to unrealized losses in its investment securities portfolio at June 30, 2010. |
||
The unrealized
loss on private label residential mortgage-backed securities is primarily concentrated
in one BBB rated private-label mortgage-backed security which is substantially
paid down, well seasoned and of an earlier vintage that has not been significantly
affected by high delinquency levels or vulnerable to lower collateral coverage as
seen in later issued pools. Widening in non-agency mortgage spreads since the date
purchased is the primary factor for the unrealized losses reported on private label
residential mortgage-backed securities. None of the securities are backed by subprime
mortgage loans and none have suffered losses. One of the private issue securities
is rated BBB and the remaining securities are AA through AAA rated. Management reviewed
the above factors and issuer specific data and concluded that these private-label
mortgage-backed securities are not other-than-temporarily impaired. |
||
The unrealized
losses on other bonds and obligations primarily relates to a position in an adjustable
rate mortgage mutual fund that holds positions in non-agency mortgage-backed securities
that are facing negative mark to market pressures due to widening spreads in non-agency
mortgage products. Although the fund has experienced declines in credit ratings
during 2009, it was not due to customer redemptions or forced selling of the investments.
During 2009, the Company recorded an OTTI loss of $816,000 on this adjustable rate
mortgage mutual fund due to a decrease in the credit quality of the security coupled
with a loss recognized by the fund. As of June 30, 2010, the investment carries
a market value to book value ratio of 82.43%, a weighted average underlying investment
credit rating of A+ and it continues to pay normal monthly dividends. There is no
intent to sell nor is it more likely than not that the Company will be required
to sell these securities and management has therefore concluded that the fund experienced
no further OTTI in the six months ended June 30, 2010. |
||
Trust preferred
securities are comprised of two pooled trust preferreds with an amortized cost of $5.6
million, one of which is rated A and the other is rated CC at June 30, 2010, a downgrade
from BB at December 31, 2009. During 2009, the Company recorded a credit related
impairment of $581,000 on the CC rated pooled trust preferred security based on a
cash flow analysis and a subsequent credit related impairment of $552,000 during
the second quarter ending June 30, 2010 as discussed above. The remaining $42.6 million
of trust preferred securities are comprised of twelve individual names
issues with the following |
14
NewAlliance Bancshares, Inc.
Notes to Unaudited Consolidated Financial
Statements
ratings: $15.6
million rated A to A-, $14.6 million rated BBB- to BBB+ and $12.4 million rated BB.
The unrealized losses reported for trust preferred securities relate to the financial
and liquidity stresses in the fixed income markets and in the banking sector and
are not reflective of individual stresses in the individual company names. The ratings
on all of the issues with the exception of the CC rated pooled security have improved
or remained the same since December 31, 2009. Additionally, there have not been
any disruptions in the cash flows of these securities and all are currently paying
the contractual principal and interest payments. A detailed review of the two pooled
trust preferreds and the individual names trust preferred equity securities
was completed by management. This review included an analysis of collateral reports,
cash flows, stress default levels and financial ratios of the underlying issuers.
Management reviewed the above factors and issuer specific data and concluded that
after the OTTI loss recorded on the CC rated pooled trust preferred security, these
securities are not other-than-temporarily impaired. |
||
The Company
has no intent to sell nor is it more likely than not that the Company will be required
to sell any of the securities contained in the table during the period of time necessary
to recover the unrealized losses, which may be until maturity. |
||
The following
table presents the changes in the credit loss component of the amortized cost of
debt securities available for sale that have been written down for other-than-temporary
impairment loss and recognized in earnings. The credit loss component represents
the difference between the present value of expected future cash flows and the amortized
cost basis of the security prior to considering credit losses. |
Three Months Ended | Six Months Ended | |||||||||||||||||
June 30, | June 30, | |||||||||||||||||
(In thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||||
Balance, beginning of period | $ | 1,397 | $ | - | $ | 1,397 | $ | - | ||||||||||
Additions: | ||||||||||||||||||
Initital credit impairments which were not previously recognized |
||||||||||||||||||
as a component of earnings |
- | 626 | - | 626 | ||||||||||||||
Subsequent credit impairments |
552 | - | 552 | - | ||||||||||||||
Reductions: | ||||||||||||||||||
Securities sold |
- | - | - | - | ||||||||||||||
Balance, end of period | $ | 1,949 | $ | 626 | $ | 1,949 | $ | 626 | ||||||||||
As of June
30, 2010, the amortized cost and fair values of debt securities and short-term obligations,
by contractual maturity, are shown below. Expected maturities may differ from contracted
maturities because issuers may have the right to call or prepay obligations with
or without call or prepayment penalties. |
Available for Sale | Held to Maturity | |||||||||||||||||
(In thousands) | Amortized cost | Fair value | Amortized cost | Fair value | ||||||||||||||
June 30, 2010 | ||||||||||||||||||
Due in one year or less |
$ | 119,165 | $ | 118,380 | $ | 2,565 | $ | 2,606 | ||||||||||
Due after one year through five years |
98,465 | 101,345 | 6,170 | 6,438 | ||||||||||||||
Due after five years through ten years |
212,813 | 215,966 | - | - | ||||||||||||||
Due after ten years |
50,771 | 37,311 | 1,000 | 1,000 | ||||||||||||||
Residential mortgage-backed securities |
1,841,910 | 1,921,536 | 313,520 | 325,692 | ||||||||||||||
Total debt securities |
$ | 2,323,124 | $ | 2,394,538 | $ | 323,255 | $ | 335,736 | ||||||||||
Securities
with a fair value of $772.8 million and $673.8 million at June 30, 2010 and December
31, 2009, respectively, were pledged to secure public deposits, repurchase agreements
and Federal Home Loan Bank of Boston (FHLB) borrowings. |
15
NewAlliance
Bancshares, Inc.
Notes to Unaudited Consolidated Financial
Statements
The following table presents information related to realized gains and losses on sales of securities available for sale during the three and six months ended June 30, 2010 and 2009. |
Debt Securities | Equity Securities | |||||||||||||
Three Months Ended June 30, | ||||||||||||||
(In thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||
Realized gains | $ | 750 | $ | 2,243 | $ | - | $ | - | ||||||
Realized losses | - | - | - | - | ||||||||||
Debt Securities | Equity Securities | |||||||||||||
Six Months Ended June 30, | ||||||||||||||
(In thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||
Realized gains | $ | 750 | $ | 4,142 | $ | - | $ | - | ||||||
Realized losses | - | 33 | - | - | ||||||||||
4. | Loans | ||||||||
The composition of the Companys loan portfolio is as follows: | |||||||||
June 30, | December 31, | ||||||||
(In thousands) | 2010 | 2009 | |||||||
Residential real estate | $ | 2,472,730 | $ | 2,382,514 | |||||
Commercial real estate | 1,192,934 | 1,100,880 | |||||||
Construction | |||||||||
Residential |
18,431 | 13,789 | |||||||
Commercial |
68,884 | 132,370 | |||||||
Commercial business | 473,329 | 411,211 | |||||||
Consumer | |||||||||
Home equity and equity lines of credit |
687,635 | 705,673 | |||||||
Other |
14,428 | 15,608 | |||||||
Total consumer |
702,063 | 721,281 | |||||||
Total loans |
4,928,371 | 4,762,045 | |||||||
Allowance for loan losses |
(54,945 | ) | (52,463 | ) | |||||
Total loans, net |
$ | 4,873,426 | $ | 4,709,582 | |||||
As of June 30, 2010 and December 31, 2009, the Companys residential real estate loan, residential construction loan, home equity loan and equity lines of credit portfolios are collateralized by one-to-four family homes and condominiums, the majority of which are located in Connecticut and Massachusetts. The commercial real estate loan and commercial construction portfolios are collateralized primarily by multi-family, commercial and industrial properties located predominately in Connecticut and Massachusetts. A variety of different assets, including accounts receivable, inventory and property, plant and equipment, collateralize the majority of the commercial business loan portfolio. The Company does not originate or directly invest in subprime loans. |
16
NewAlliance
Bancshares, Inc.
Notes to Unaudited Consolidated Financial
Statements
Allowance for Loan Losses | |
The following table provides a summary of activity in the allowance for loan losses for the periods presented: |
At or For the Three Months | At or For the Six Months | |||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||
(In thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||
Balance at beginning of period | $ | 54,164 | $ | 50,635 | $ | 52,463 | $ | 49,911 | ||||||
Provisions charged to operations | 5,500 | 5,000 | 10,300 | 9,100 | ||||||||||
Charge-offs | ||||||||||||||
Residential real estate loans |
1,293 | 990 | 2,345 | 1,489 | ||||||||||
Commercial real estate loans |
1,244 | 1,493 | 1,994 | 1,996 | ||||||||||
Commercial construction loans |
832 | 264 | 953 | 2,046 | ||||||||||
Commercial business loans |
1,459 | 1,346 | 2,406 | 2,151 | ||||||||||
Consumer loans |
213 | 254 | 533 | 413 | ||||||||||
Total charge-offs |
5,041 | 4,347 | 8,231 | 8,095 | ||||||||||
Recoveries | ||||||||||||||
Residential real estate loans |
8 | 103 | 11 | 137 | ||||||||||
Commercial real estate loans |
- | - | - | - | ||||||||||
Commercial construction loans |
- | - | - | - | ||||||||||
Commercial business loans |
276 | 84 | 321 | 291 | ||||||||||
Consumer loans |
38 | 27 | 81 | 158 | ||||||||||
Total recoveries |
322 | 214 | 413 | 586 | ||||||||||
Net charge-offs | 4,719 | 4,133 | 7,818 | 7,509 | ||||||||||
Balance at end of period | $ | 54,945 | $ | 51,502 | $ | 54,945 | $ | 51,502 | ||||||
Nonperforming Assets | |
Nonperforming assets include loans that are 90 days or more past due, restructured loans due to a weakening in the financial condition of the borrower, other loans which have been identified by the Company as presenting uncertainty with respect to the collectability of principal or interest and other real estate owned. All of the Companys nonperforming assets do not accrue interest. |
|
The following table provides a summary of nonperforming assets for the periods presented: |
June 30, | December 31, | |||||||
(In thousands) | 2010 | 2009 | ||||||
Nonaccrual loans | $ | 68,295 | $ | 50,507 | ||||
Other real estate owned | 2,648 | 3,705 | ||||||
Total nonperforming assets |
$ | 70,943 | $ | 54,212 | ||||
Troubled debt restructured loans included in nonaccrual loans above | $ | 4,073 | $ | 3,294 | ||||
17
NewAlliance
Bancshares, Inc.
Notes to Unaudited Consolidated Financial
Statements
5. | Goodwill and Identifiable Intangible Assets |
The changes in the carrying amount of goodwill and identifiable intangible assets are summarized as follows: |
Total | |||||||||||||
Identifiable | Identifiable | ||||||||||||
Intangible | Intangible | ||||||||||||
(In thousands) | Goodwill | Assets | Assets | ||||||||||
Balance, December 31, 2008 | $ | 527,167 | $ | 43,860 | $ | 43,860 | |||||||
Amortization expense | - | (8,501 | ) | (8,501 | ) | ||||||||
Balance, December 31, 2009 | 527,167 | 35,359 | 35,359 | ||||||||||
Amortization expense | - | (3,905 | ) | (3,905 | ) | ||||||||
Balance, June 30, 2010 | $ | 527,167 | $ | 31,454 | $ | 31,454 | |||||||
Estimated amortization expense for the year ending: | |||||||||||||
Remaining 2010 |
$ | 3,904 | $ | 3,904 | |||||||||
2011 |
7,556 | 7,556 | |||||||||||
2012 |
7,556 | 7,556 | |||||||||||
2013 |
7,461 | 7,461 | |||||||||||
2014 |
3,617 | 3,617 | |||||||||||
2015 |
982 | 982 | |||||||||||
Thereafter |
378 | 378 | |||||||||||
The Company completed its annual test for goodwill impairment during the first quarter of 2010 and no impairment charge was deemed necessary. There have been no impairments recorded for goodwill and identifiable intangible assets since inception. |
|
The components of identifiable intangible assets are core deposit and customer relationships and had the following balances at June 30, 2010: |
Original | Balance | |||||||||||
Recorded | Cumulative | June 30, | ||||||||||
(In thousands) | Amount | Amortization | 2010 | |||||||||
Core deposit and customer relationships | $ | 86,908 | $ | 55,454 | $ | 31,454 | ||||||
6. | Other Assets |
Selected components of other assets are as follows: |
June 30, | December 31, | |||||||
(In thousands) | 2010 | 2009 | ||||||
Deferred tax asset, net | $ | 5,433 | $ | 14,078 | ||||
Accrued interest receivable | 32,106 | 33,078 | ||||||
Investments in limited partnerships and other investments | 9,858 | 8,003 | ||||||
Receivables arising from securities transactions | 13,227 | 14,165 | ||||||
Prepaid FDIC assessments | 22,584 | 26,001 | ||||||
All other | 24,689 | 18,616 | ||||||
Total other assets |
$ | 107,897 | $ | 113,941 | ||||
18
NewAlliance
Bancshares, Inc.
Notes to Unaudited Consolidated Financial
Statements
7. | Deposits |
A summary of deposits by account type is as follows: |
June 30, | December 31, | |||||||
(In thousands) | 2010 | 2009 | ||||||
Savings | $ | 1,798,881 | $ | 1,817,787 | ||||
Money market | 915,510 | 790,453 | ||||||
NOW | 406,069 | 400,176 | ||||||
Demand | 568,414 | 534,180 | ||||||
Time | 1,447,872 | 1,481,446 | ||||||
Total deposits |
$ | 5,136,746 | $ | 5,024,042 | ||||
8. | Borrowings |
The following is a summary of the Companys borrowed funds: |
December 31, | ||||||||
(In thousands) | June 30, 2010 | 2009 | ||||||
FHLB advances (1) | $ | 1,900,561 | $ | 1,755,533 | ||||
Repurchase agreements | 100,951 | 112,095 | ||||||
Mortgage loans payable | 1,085 | 1,165 | ||||||
Junior subordinated debentures issued to affiliated trusts (2) | 21,135 | 21,135 | ||||||
Total borrowings |
$ | 2,023,732 | $ | 1,889,928 | ||||
(1) | Includes fair value adjustments on acquired borrowings, in accordance with purchase accounting standards of $2.4 million and $3.1 million at June 30, 2010 and December 31, 2009, respectively. The acquisition fair value adjustments (premiums) are being amortized as an adjustment to interest expense on borrowings over their remaining terms using the level yield method. |
|
(2) | The trusts were organized to facilitate the issuance of "trust preferred" securities. The Company acquired these subsidiaries when it acquired Alliance Bancorp of New England, Inc. and Westbank Corporation, Inc. ("Westbank"). The affiliated trusts are wholly-owned subsidiaries of the Company and the payments of these securities are irrevocably and unconditionally guaranteed by the Company. |
FHLB advances are secured by the Companys investment in FHLB stock, a blanket security agreement and other eligible investment securities. This agreement requires the Bank to maintain as collateral certain qualifying assets, principally mortgage loans. Investment securities currently maintained as collateral are all U.S. Agency mortgage-backed securities. At June 30, 2010 and December 31, 2009, the Bank was in compliance with the FHLB collateral requirements. At June 30, 2010, the Company could immediately borrow an additional $315.5 million from the FHLB, inclusive of a line of credit of approximately $20.0 million. Additional borrowing capacity of approximately $1.53 billion would be available by pledging additional eligible securities as collateral. The Company also has borrowing capacity at the Federal Reserve Bank of Bostons discount window, which was approximately $101.3 million as of June 30, 2010, all of which was available on that date. Repurchase agreements with commercial or municipal customers or dealer/brokers are secured by the Companys investment in specific issues of agency mortgage-backed securities and agency obligations of $38.6 million and $92.6 million, respectively, as of June 30, 2010. Repurchase agreement lines of credit with four large broker-dealers totaled $200.0 million at June 30, 2010, with availability of $175.0 million. At June 30, 2010, all of the Companys $1.90 billion outstanding FHLB advances were at fixed rates ranging from 0.22% to 8.17%. The weighted average rate for all FHLB advances at June 30, 2010 was 3.35%. |
|
9. | Pension and Other Postretirement Benefit Plans |
The Company provides various defined benefit and other postretirement benefit plans (postretirement health and life insurance benefits) to substantially all employees hired prior to January 1, 2008. The Company also has supplemental retirement plans (the Supplemental Plans) that provide benefits for certain key executive officers. Benefits under the supplemental plans are based on a predetermined formula and are reduced by other benefits. The liability arising from these plans is being accrued over the participants remaining periods of service so that at the expected retirement dates, the present value of the annual payments will have been expensed. Due to the retirement of an executive officer, the Company expects to record additional expense of approximately $1.3 million for the supplemental executive retirement plans in the third quarter of 2010. |
|
The following table presents the amount of net periodic pension cost for the three months ended June 30, 2010 and 2009. |
19
NewAlliance
Bancshares, Inc.
Notes to Unaudited Consolidated Financial
Statements
Supplemental | |||||||||||||||||||||||||
Executive | Other Postretirement | ||||||||||||||||||||||||
Qualified Pension | Retirement Plans | Benefits | |||||||||||||||||||||||
(In thousands) | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||
Service cost - benefits earned during the period | $ | 853 | $ | 809 | $ | 139 | $ | 112 | $ | 62 | $ | 55 | |||||||||||||
Interest cost on projected benefit obligation | 1,471 | 1,430 | 173 | 194 | 80 | 89 | |||||||||||||||||||
Expected return on plan assets | (1,693 | ) | (1,741 | ) | - | - | - | - | |||||||||||||||||
Amortization: | |||||||||||||||||||||||||
Transition |
- | - | - | - | 13 | 13 | |||||||||||||||||||
Prior service cost |
14 | 13 | 2 | 2 | - | - | |||||||||||||||||||
Loss (gain) |
324 | 204 | - | - | (40 | ) | (43 | ) | |||||||||||||||||
Net periodic benefit cost |
$ | 969 | $ | 715 | $ | 314 | $ | 308 | $ | 115 | $ | 114 | |||||||||||||
The following table presents the amount of net periodic pension cost for the six months ended June 30, 2010 and 2009. |
Supplemental | |||||||||||||||||||||||||
Executive | Other Postretirement | ||||||||||||||||||||||||
Qualified Pension | Retirement Plans | Benefits | |||||||||||||||||||||||
(In thousands) | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||
Service cost - benefits earned during the period | $ | 1,706 | $ | 1,617 | $ | 278 | $ | 225 | $ | 123 | $ | 109 | |||||||||||||
Interest cost on projected benefit obligation | 2,943 | 2,861 | 346 | 389 | 160 | 179 | |||||||||||||||||||
Expected return on plan assets | (3,386 | ) | (3,482 | ) | - | - | - | - | |||||||||||||||||
Amortization: | |||||||||||||||||||||||||
Transition |
- | - | - | - | 26 | 26 | |||||||||||||||||||
Prior service cost |
27 | 26 | 3 | 3 | - | - | |||||||||||||||||||
Loss (gain) |
648 | 408 | - | - | (80 | ) | (86 | ) | |||||||||||||||||
Net periodic benefit cost |
$ | 1,938 | $ | 1,430 | $ | 627 | $ | 617 | $ | 229 | $ | 228 | |||||||||||||
In connection with its conversion to a state-chartered stock bank, the Company established an employee stock ownership plan (ESOP) to provide substantially all employees of the Company the opportunity to become stockholders. The ESOP borrowed $109.7 million of a $112.0 million line of credit from the Company and used the funds to purchase 7,454,562 shares of common stock in the open market subsequent to the subscription offering. The loan will be repaid principally from the Banks discretionary contributions to the ESOP over a remaining period of 24 years. The unallocated ESOP shares are pledged as collateral on the loan. |
|
At June 30, 2010, the loan had an outstanding balance of $96.3 million and an interest rate of 4.0%. The Company accounts for its ESOP in accordance with FASB ASC 718-40, Compensation Stock Compensation. Under this guidance, unearned ESOP shares are not considered outstanding and are shown as a reduction of stockholders equity as unearned compensation. The Company will recognize compensation cost equal to the fair value of the ESOP shares during the periods in which they are committed to be released. To the extent that the fair value of the Companys ESOP shares differs from the cost of such shares, this difference will be credited or debited to equity. The Company will receive a tax deduction equal to the cost of the shares released to the extent of the principal paydown on the loan by the ESOP. As the loan is internally leveraged, the loan receivable from the ESOP to the Company is not reported as an asset nor is the debt of the ESOP shown as a liability in the Companys financial statements. Dividends on unallocated shares are used to pay the ESOP debt. The ESOP compensation expense for the three and six months ended June 30, 2010 was approximately $759,000 and $1.5 million. The ESOP compensation expense for the three and six months ended June 30, 2009 was approximately $779,000 and $1.5 million. The amount of loan repayments made by the ESOP is used to reduce the unallocated common stock held by the ESOP. |
|
The ESOP shares as of June 30, 2010 were as follows: |
Shares released for allocation | 1,536,437 | |||
Unreleased shares | 5,918,125 | |||
Total ESOP shares |
7,454,562 | |||
Market value of unreleased shares at June 30, 2010 (in thousands) | $ | 66,342 |
20
NewAlliance
Bancshares, Inc.
Notes to Unaudited Consolidated Financial
Statements
10. | Stock-Based Compensation |
The Company provides compensation benefits to employees and non-employee directors under its 2005 Long-Term Compensation Plan (the LTCP) which was approved by shareholders. The Company accounts for stock-based compensation using the fair value recognition provisions of FASB ASC 718, Compensation - Stock Compensation. Pursuant to this guidance, the fair value of stock option and restricted stock awards, measured at grant date, is amortized to compensation expense on a straight-line basis over the vesting period or over the requisite service period for awards expected to vest. |
|
The LTCP allows for the issuance of up to 11.4 million Options or Stock Appreciation Rights and up to 4.6 million Stock Awards or Performance Awards. As of June 30, 2010, a mix of stock options, restricted stock and performance-based restricted shares were awarded to employees. |
|
Option Awards | |
Options awarded to date are for a term of ten years and total approximately 10.0 million shares. The majority of these options were awarded on the original award date of June 17, 2005 and these 2005 option awards had the following vesting schedule: 40% vested at year-end 2005 and 20% vested at year-end 2006, 2007 and 2008, respectively. Subsequent awards have vesting periods of either three or four years. The Company assumed a 2.9% average forfeiture rate on options granted subsequent to June 17, 2005 as the majority of the options were awarded to senior level management. Compensation expense recorded on options for the three and six months ended June 30, 2010 was $133,000 and $249,000, respectively, or after tax expense of approximately $86,000 and $160,000, respectively. Compensation expense for the three and six months ended June 30, 2009 was $78,000 and $132,000, respectively, or after tax expense of approximately $50,000 and $86,000, respectively, was recorded. Under the terms of the LTCP, additional awards are likely to be granted, which will increase the amount of expense in future periods. |
|
Options to purchase 407,068 shares and 411,130 shares were granted to employees during the six months ended June 30, 2010 and June 30, 2009, respectively. Using the Black-Scholes option pricing model, the weighted-average grant date fair value was $2.10 and $2.37 per share for the options which were granted in 2010 and 2009, respectively. The weighted-average assumptions for the six months ended June 30, 2010 and 2009 are presented in the following table. |
2010 | 2009 | ||||||||
Risk-free interest rate | 2.60 | % | 2.63 | % | |||||
Expected dividend yield | 2.37 | % | 2.15 | % | |||||
Expected volatility | 19.82 | % | 19.31 | % | |||||
Expected life (years) | 6.25 | 6.25 | |||||||
A summary of option activity as of June 30, 2010 and changes during the period ended is presented below. |
Weighted- | ||||||||||||||
Weighted- | Average | Aggregate | ||||||||||||
Average | Remaining | Intrinsic | ||||||||||||
Exercise | Contractual | Value | ||||||||||||
Shares | Price | Term | ($000) | |||||||||||
Options outstanding at beginning of year | 7,884,801 | $ | 14.30 | |||||||||||
Granted | 407,068 | 11.80 | ||||||||||||
Exercised | - | - | ||||||||||||
Forfeited/cancelled | (22,985 | ) | 12.94 | |||||||||||
Expired | (566,164 | ) | 14.39 | |||||||||||
Options outstanding at June 30, 2010 | 7,702,720 | $ | 14.16 | 5.54 | $ | 16 | ||||||||
Options exercisable at June 30, 2010 | 6,829,861 | $ | 14.38 | 5.07 | $ | - | ||||||||
21
NewAlliance
Bancshares, Inc.
Notes to Unaudited Consolidated Financial
Statements
The following table summarizes the nonvested options during the six months ended June 30, 2010. |
|||||||
Weighted-average | |||||||
Grant-Date | |||||||
Shares | Fair Value | ||||||
Nonvested at January 1, 2010 | 631,154 | $ | 2.38 | ||||
Granted | 407,068 | 2.10 | |||||
Vested | (142,378 | ) | 2.36 | ||||
Forfeited / Cancelled | (22,985 | ) | 2.34 | ||||
Nonvested at June 30, 2010 | 872,859 | $ | 2.26 | ||||
Restricted Stock and Performance-Based Restricted Stock Awards | |
To date, approximately 4.0 million shares of restricted stock have been awarded under the LTCP. The majority of these shares were awarded in 2005 and these 2005 awards have a vesting schedule of 15% per year for six years and 10% in the seventh year. Subsequent awards have vesting schedules of three years, four years, or cliff vest after three years. During the six months ended June 30, 2010, the Company granted approximately 252,000 restricted stock awards. |
|
Performance-based restricted stock shares were awarded to executive management and other key members of senior management during 2010. The vesting for these performance-based awards is conditional upon fulfillment of a market condition and on meeting a service period requirement. The actual number of performance shares to be earned will be based on performance criteria over a three-year performance period which began May 28, 2010 and ending May 31, 2013. Performance shares vest based on total shareholder return (TSR) (defined as share price appreciation from the beginning of the performance period to the end of the performance period, plus the total dividends paid on the common stock during the period) for the group of banks and thrifts listed on the SNL Thrift Index versus the Companys TSR (the TSR Percentage). The performance shares, if earned, will vest on May 31, 2013. A simulation model was used to provide a grant date fair value for the performance-based shares. Expense for the performance-based awards is recognized based on the probability of attaining the performance targets and over the service period similar to the recognition of the expense associated with the other restricted stock awards that only have a service condition. |
|
Total compensation expense for the three months ended June 30, 2010 and 2009 was approximately $1.7 million and $1.2 million or after tax expense of approximately $1.3 million and $946,000 million, respectively. For the six months ended June 30, 2010 and 2009, compensation expense was $3.2 million and $2.9 million or after tax expense of approximately $2.5 million and $2.2 million was recorded. The Company anticipates that it will record expense of approximately $7.0 million, $5.6 million and $1.5 million and $389,000 in calendar years 2010 through 2013, respectively. Under the terms of the LTCP, additional awards are likely to be granted, which will increase the amount of expense recognized in future periods. |
|
The following table summarizes the nonvested restricted stock and performance-based restricted stock awards during the six months ended June 30, 2010. |
Weighted-average | ||||||||
Grant-Date | ||||||||
Shares | Fair Value | |||||||
Nonvested at January 1, 2010 | 1,225,063 | $ | 14.37 | |||||
Granted | 251,795 | 13.44 | ||||||
Vested | (394,747 | ) | 14.29 | |||||
Forfeited / Cancelled | (57,643 | ) | 14.51 | |||||
Nonvested at June 30, 2010 | 1,024,468 | $ | 14.17 | |||||
11. | Income Taxes |
The Company has transactions in which the related tax effect was recorded directly to stockholders equity or goodwill instead of operations. Transactions in which the tax effect was recorded directly to stockholders equity included the tax effects of unrealized gains and losses on available for sale securities and excess tax benefits related to stock awards. Deferred taxes charged to goodwill were in connection with prior acquisitions. The Company had a net deferred tax asset of $5.4 million and $14.1 million at June 30, 2010 and December 31, 2009, respectively. |
|
As of June 30, 2010 and December 31, 2009, the Company has a valuation allowance of $1.1 million and $1.5 million, respectively, for the tax effect of capital loss carryforwards associated with realized and unrealized capital losses on capital |
22
NewAlliance
Bancshares, Inc.
Notes to Unaudited Consolidated Financial
Statements
assets, of which $434,000 and $462,000, respectively, was recorded as an adjustment to other comprehensive income and the remainder had an effect on continuing operations. |
|
The components of income tax expense are summarized as follows: |
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(In thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Current tax expense | ||||||||||||||||
Federal |
$ | 10,453 | $ | 5,826 | $ | 15,916 | $ | 11,326 | ||||||||
State |
275 | 136 | 422 | 324 | ||||||||||||
Total current |
10,728 | 5,962 | 16,338 | 11,650 | ||||||||||||
Deferred tax expense, net of valuation reserve | ||||||||||||||||
Federal |
(2,447 | ) | (257 | ) | (493 | ) | 240 | |||||||||
State |
(55 | ) | - | (11 | ) | - | ||||||||||
Total deferred |
(2,502 | ) | (257 | ) | (504 | ) | 240 | |||||||||
Total income tax expense |
$ | 8,226 | $ | 5,705 | $ | 15,834 | $ | 11,890 | ||||||||
The allocation of changes in net deferred tax assets involving items charged to income, items charged directly to shareholders equity and items charged to goodwill is as follows: |
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(In thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Deferred tax asset allocated to: | ||||||||||||||||
Stockholders equity, tax effect of net unrealized gain on investment securities available for sale, net of valuation allowance |
$ | 11,270 | $ | 3,344 | $ | 9,149 | $ | 8,521 | ||||||||
Reclass as a result of adoption of new OTTI accounting pronouncement |
578 | 578 | ||||||||||||||
Income |
(2,502 | ) | (257 | ) | (504 | ) | 240 | |||||||||
Total change in deferred tax assets, net |
$ | 8,768 | $ | 3,665 | $ | 8,645 | $ | 9,339 | ||||||||
The Company accounts for uncertainty in income taxes in accordance with FASB ASC 740-10. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: |
June 30, | ||||
(In thousands) | 2010 | |||
Balance, beginning of period | $ | 400 | ||
Additions for tax positions of current year |
- | |||
Additions for tax positions of prior year |
- | |||
Reductions for tax positions of prior year |
- | |||
Balance, end of period | $ | 400 | ||
Included in the balance at June 30, 2010 is $400,000 of tax positions for which the ultimate deductibility is highly uncertain and for which the disallowance of the tax position would affect the annual effective tax rate. The Company anticipates that $140,000 of the unrecognized tax benefits will reverse in the next twelve months due to statute expirations. The Company recognizes interest and penalties accrued related to unrecognized tax benefits as a component of income tax expense. As of June 30, 2010, the Company has accrued approximately $420,000 in interest and penalties. |
|
The Company is generally no longer subject to federal, state or local income tax examinations by tax authorities for the years before 2006. In the third quarter of 2008, the IRS commenced an examination of the 2006 and 2007 tax years for Westbank. As of June 30, 2010, the IRS has completed their audit and they have communicated that there are no adjustments to Westbanks tax returns for the audited tax years. In the second quarter of 2009, the IRS commenced an examination of the 2006 and 2007 tax years for the Company. As of June 30, 2010, the IRS has not proposed any significant adjustments to the Companys tax returns for these tax years. |
|
12. | Commitments and Contingencies |
The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist primarily of commitments to extend credit and standby letters of credit. Commitments to extend credit are agreements to lend to customers as long as there is no violation of any terms or |
23
NewAlliance
Bancshares, Inc.
Notes to Unaudited Consolidated Financial
Statements
covenants established in the contract. Commitments generally have fixed expiration dates or other termination clauses that may require payment of a fee. The Company monitors customer compliance with commitment terms. Since many of the commitments could expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. These commitments consist principally of unused commercial and consumer lines of credit. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of an underlying contract with a third party. The credit risks associated with commitments to extend credit and standby letters of credit are essentially the same as those involved with extending loans to customers and are subject to normal credit policies. Collateral may be obtained based on managements assessment of the customers creditworthiness. |
|
The table below summarizes the Companys commitments and contingencies discussed above. |
June 30, | December 31, | |||||||
(In thousands) | 2010 | 2009 | ||||||
Loan origination commitments | $ | 248,918 | $ | 146,369 | ||||
Unadvanced portion of construction loans | 52,401 | 40,700 | ||||||
Standby letters of credit | 12,580 | 6,587 | ||||||
Unadvanced portion of lines of credit | 679,105 | 608,854 | ||||||
Total commitments |
$ | 993,004 | $ | 802,510 | ||||
Other Commitments | |
As of June 30, 2010 and December 31, 2009, the Company was contractually committed under limited partnership agreements to make additional partnership investments of approximately $1.4 million which constitutes the Companys maximum potential obligation to these partnerships. The Company is obligated to make additional investments in response to formal written requests, rather than a funding schedule. Funding requests are submitted when the partnerships plan to make additional investments. |
|
Legal Proceedings | |
We are not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. We believe that those routine proceedings involve, in the aggregate, amounts which are immaterial to the financial condition and results of operations of NewAlliance Bancshares, Inc. |
|
13. | Fair Value Measurements |
Fair value estimates are made as of a specific point in time based on the characteristics of the financial instruments and relevant market information. In accordance with FASB ASC 820, the fair value estimates are measured within the fair value hierarchy. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are described below: |
Basis of Fair Value Measurement | |||
Level 1 | Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; |
||
Level 2 | Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability; |
||
Level 3 | Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity). |
When available, quoted market prices are used. In other cases, fair values are based on estimates using present value or other valuation techniques. These techniques involve uncertainties and are significantly affected by the assumptions used and judgments made regarding risk characteristics of various financial instruments, discount rates, estimates of future cash flows, future expected loss experience and other factors. Changes in assumptions could significantly affect these estimates. Derived fair value estimates cannot be substantiated by comparison to independent markets and, in certain cases, could not be realized in an immediate sale of the instrument. |
|
Fair value estimates are based on existing financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not financial instruments. Accordingly, the aggregate fair value amounts presented do not purport to represent the underlying market value of the Company. |
24
NewAlliance
Bancshares, Inc.
Notes to Unaudited Consolidated Financial
Statements
Fair Value Option | |
FASB ASC 825-10 allows for the irrevocable option to elect fair value accounting for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis that may otherwise not be required to be measured at fair value under other accounting standards. The Company elected the fair value option as of January 1, 2009 for its portfolio of mortgage loans held for sale pursuant to forward loan sale commitments originated after January 1, 2009 in order to reduce certain timing differences and better match changes in fair values of the loans with changes in the value of the derivative forward loan sale contracts used to economically hedge them. In the first quarter of 2009 as a result of the surge of refinances resulting from the drop in mortgage rates within the industry, the balance of loans held for sale and derivative contracts relating to those loans increased significantly. Mortgage loan activity has slowed from 2009 levels, however, it is still strong thus far in 2010. The fair value option election relating to mortgage loans held for sale did not result in a transition adjustment to retained earnings and instead changes in the fair value have an impact on earnings as a component of noninterest income. |
|
At June 30, 2010, mortgage loans held for sale pursuant to forward loan sale commitments had a fair value of $11.7 million, which includes a positive fair value adjustment of $132,000. For the three and six months ended June 30, 2010, gains from fair value changes of $182,000 and $353,000, respectively, and for the three and six months ended June 30, 2009, losses from fair value changes of $712,000 and $581,000, respectively were recorded in non-interest income as mortgage origination activity and loan sale income. |
|
Assets and Liabilities Measured at Fair Value on a Recurring Basis | |
The following table details the financial instruments carried at fair value on a recurring basis as of June 30, 2010 and December 31, 2009 and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value. There were no transfers in and out of Level 1 and Level 2 measurements during the quarter ended June 30, 2010. |
June 30, 2010 | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets | Significant | Significant | ||||||||||||||
for Identical | Observable | Unobservable | ||||||||||||||
Assets | Inputs | Inputs | ||||||||||||||
(In thousands) | Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Securities Available for Sale | ||||||||||||||||
Marketable equity securities |
$ | 8,779 | $ | 1,279 | $ | 7,500 | $ | - | ||||||||
Bonds and obligations |
426,170 | 401,172 | 24,998 | - | ||||||||||||
Auction rate certificates |
12,050 | - | - | 12,050 | ||||||||||||
Trust preferred equity securities |
34,782 | - | 28,240 | 6,542 | ||||||||||||
Residential mortgage-backed securities |
1,921,536 | - | 1,921,536 | - | ||||||||||||
Total Securities Available for Sale | $ | 2,403,317 | $ | 402,451 | $ | 1,982,274 | $ | 18,592 | ||||||||
Mortgage Loans Held for Sale | 11,744 | - | 11,744 | - | ||||||||||||
Mortgage Loan Derivative Assets | 601 | - | 601 | - | ||||||||||||
Mortgage Loan Derivative Liabilities | (504 | ) | - | (504 | ) | - | ||||||||||
December 31, 2009 | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets | Significant | Significant | ||||||||||||||
for Identical | Observable | Unobservable | ||||||||||||||
Assets | Inputs | Inputs | ||||||||||||||
(In thousands) | Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Securities Available for Sale | ||||||||||||||||
Marketable equity securities |
$ | 8,783 | $ | 1,283 | $ | 7,500 | $ | - | ||||||||
Bonds and obligations |
222,078 | 196,060 | 26,018 | - | ||||||||||||
Auction rate certificates |
24,795 | - | - | 24,795 | ||||||||||||
Trust preferred equity securities |
33,296 | - | 27,924 | 5,372 | ||||||||||||
Residential mortgage-backed securities |
2,038,903 | - | 2,038,903 | - | ||||||||||||
Total Securities Available for Sale | $ | 2,327,855 | $ | 197,343 | $ | 2,100,345 | $ | 30,167 | ||||||||
Mortgage Loans Held for Sale | 12,908 | - | 12,908 | - | ||||||||||||
Mortgage Loan Derivative Assets | 495 | - | 495 | - | ||||||||||||
Mortgage Loan Derivative Liabilities | (75 | ) | - | (75 | ) | - | ||||||||||
25
NewAlliance
Bancshares, Inc.
Notes to Unaudited Consolidated Financial
Statements
The following table presents additional information about assets measured at fair value on a recurring basis for which the Company utilized Level 3 inputs to determine fair value. |
Securities Available for Sale | |||||||||||||||||
For the three months ended | For the six months ended | ||||||||||||||||
June 30, | June 30, | ||||||||||||||||
(In thousands) | 2010 | 2009 | 2010 | 2009 | |||||||||||||
Balance at beginning of period | $ | 25,056 | $ | 28,543 | $ | 30,167 | $ | 26,626 | |||||||||
Transfer into Level 3 |
- | - | - | - | |||||||||||||
Total gains (losses) - (realized/unrealized): |
|||||||||||||||||
Included in earnings |
- | - | - | - | |||||||||||||
Included in other comprehensive income |
3,703 | (772 | ) | 3,960 | 1,159 | ||||||||||||
Settlements |
(10,150 | ) | - | (15,500 | ) | - | |||||||||||
Discount accretion |
4 | 4 | 8 | 7 | |||||||||||||
Principal payments |
(21 | ) | (74 | ) | (43 | ) | (91 | ) | |||||||||
Balance at end of period | $ | 18,592 | $ | 27,701 | $ | 18,592 | $ | 27,701 | |||||||||
The following is a description of the valuation methodologies used for instruments measured at fair value. |
|
Securities Available for Sale: Included in the available for sale category are both debt and equity securities. The Company utilizes Interactive Data Corp., a third-party, nationally-recognized pricing service (IDC) to estimate fair value measurements for 99.2% of this portfolio. The pricing service evaluates each asset class based on relevant market information considering observable data that may include dealer quotes, reported trades, market spreads, cash flows, the U.S. Treasury yield curve, the LIBOR swap yield curve, trade execution data, market prepayment speeds, credit information and the bonds terms and conditions, among other things, but these prices are not binding quotes. The fair value prices on all investment securities are reviewed for reasonableness by management through an extensive process. This review process was implemented to determine any unusual market price fluctuations and the analysis includes changes in the LIBOR / swap curve, the treasury curve, mortgage rates and credit spreads as well as a review of the securities inventory list which details issuer name, coupon and maturity date. The review resulted in no adjustments to the IDC pricing as of June 30, 2010. Also, management assessed the valuation techniques used by IDC based on a review of their pricing methodology to ensure proper hierarchy classifications. The Companys Level 3 available for sale debt securities include auction rate certificates, a pooled trust preferred security and an individual named trust preferred security which were valued through means other than quoted market prices due to the fact that these securities were not priced by the pricing service. The fair value for these securities are based on Level 3 inputs in accordance with FASB ASC 820. |
|
The major categories of securities available for sale are: |
| Marketable Equity Securities: Included within this category are exchange-traded securities, including common and preferred equity securities, measured at fair value based on quoted prices for identical securities in active markets and therefore meet the Level 1 criteria. Also included are auction rate preferred securities rated AAA, which are priced at par and are classified as Level 2 of the valuation hierarchy. |
||
| Bonds and obligations: Included within this category are highly liquid government obligations and government agency obligations that are measured at fair value based on quoted prices for identical securities in active markets and therefore are classified within Level 1 of the fair value hierarchy. Also included in this category are municipal obligations, corporate obligations and a mortgage mutual fund where the fair values are estimated by using pricing models (i.e. matrix pricing) with observable market inputs including recent transactions and/or benchmark yields or quoted prices of securities with similar characteristics and are therefore classified within Level 2 of the valuation hierarchy. |
||
| Auction Rate Certificates: The Company owns auction rate certificates which are pools of government guaranteed student loans issued by state student loan departments. Due to the lack of liquidity in the auction rate market, the Company had been obtaining a price from the market maker that factored in credit risk and liquidity premiums to determine a current fair value market price. At June 30, 2010, these securities were priced at par as the Company tendered its three remaining positions to the underwriter at par as part of their 2008 settlement agreement. The auction rate certificates fall into the classification of Level 3 within the fair value hierarchy. These securities were not priced by the pricing service. |
26
NewAlliance
Bancshares, Inc.
Notes to Unaudited Consolidated Financial
Statements
| Trust preferred equity securities: Included in this category are two pooled trust preferred securities and individual name trust preferred securities of financial companies. One of the pooled trust preferred securities of $2.8 million and an individual name trust preferred security of $3.7 million are not priced by IDC, both of which are classified within Level 3 of the valuation hierarchy. The remaining securities are at Level 2 and are priced by IDC based upon matrix pricing factoring in observable benchmark yields and issuer spreads. The Company calculates the fair value of the Level 3 pooled trust preferred security based on a cash flow methodology that uses the Bloomberg A rated bank yield curve to discount the current expected cash flows. In order to derive the fair value of the individual name security, the Company uses the Bloomberg A rated insurance yield curve to discount the current expected cash flows. Additionally, the low level of the three month LIBOR rate, the general widening of credit spreads compared to when these securities were purchased and the reduced level of liquidity in the fixed income markets, were all factors in the determination of the current fair value market price. |
||
| Mortgage-Backed Securities: The Company owns residential mortgage-backed securities. As there are no quoted market prices available, the fair values of mortgage backed securities are based upon matrix pricing factoring in observable benchmark yields and issuer spreads and are therefore classified within Level 2 of the valuation hierarchy. |
Mortgage Loans Held for Sale: Fair values were estimated utilizing quoted prices for similar assets in active markets. Any change in the valuation of mortgage loans held for sale is based upon the change in market interest rates between closing the loan and the measurement date. As the loans are sold in the secondary market, the market prices are obtained from Freddie Mac and represent a delivery price which reflects the underlying price Freddie Mac would pay the Company for an immediate sale on these mortgages. |
|
Derivatives: Derivative instruments related to loans held for sale are carried at fair value.
Fair value is determined through quotes obtained from actively traded mortgage markets.
Any change in fair value for rate lock commitments to the borrower is based upon
the change in market interest rates between making the rate lock commitment and
the measurement date and, for forward loan sale commitments to the investor, is
based upon the change in market interest rates from entering into the forward loan
sales contract and the measurement date. Both the rate lock commitments to the borrowers
and the forward loan sale commitments to investors are derivatives pursuant to the
requirements of FASB ASC 815-10, however, the Company has not designated them as
hedging instruments. Accordingly, they are marked to fair value through earnings.
|
June 30, 2010 | |||||||||
Notional or | |||||||||
Principal | Fair Value | ||||||||
(In thousands) | Amount | Adjustment | |||||||
Rate Lock Commitments | $ | 36,212 | $ | 601 | |||||
Forward Sales Commitments | 45,214 | (504 | ) | ||||||
Mortgage Loans Held for Sale | 11,612 | 132 | |||||||
The Company sells the majority of its fixed rate mortgage loans with original terms of 15 years or more on a servicing released basis and receives a servicing released premium upon sale. The servicing value has been included in the pricing of the rate lock commitments and loans held for sale. The Company estimates a fallout rate of approximately 13% based upon historical averages in determining the fair value of rate lock commitments. Although the use of historical averages is based upon unobservable data, the Company believes that this input is insignificant to the valuation and, therefore, has concluded that the fair value measurements meet the Level 2 criteria. The collection of upfront fees from the borrower is the driver of the Companys low fallout rate. If this practice were to change, the fallout rate would most likely increase and the Company would reassess the significance of the fallout rate on the fair value measurement. |
|
Assets
and Liabilities Measured at Fair Value on a Nonrecurring Basis |
27
NewAlliance
Bancshares, Inc.
Notes to Unaudited Consolidated Financial
Statements
June 30, 2010 | |||||||||||||||||
Quoted Prices in | |||||||||||||||||
Active Markets | Significant | Significant | |||||||||||||||
for Identical | Observable | Unobservable | |||||||||||||||
Assets | Inputs | Inputs | |||||||||||||||
(In thousands) | Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Loan Servicing Rights | $ | 1,825 | $ | - | $ | - | $ | 1,825 | |||||||||
Other Real Estate Owned | 2,648 | - | - | 2,648 | |||||||||||||
Impaired Loans | 19,502 | - | - | 19,502 | |||||||||||||
December 31, 2009 | |||||||||||||||||
Quoted Prices in | |||||||||||||||||
Active Markets | Significant | Significant | |||||||||||||||
for Identical | Observable | Unobservable | |||||||||||||||
Assets | Inputs | Inputs | |||||||||||||||
(In thousands) | Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Loan Servicing Rights | $ | 2,063 | $ | - | $ | - | $ | 2,063 | |||||||||
Other Real Estate Owned | 3,705 | - | - | 3,705 | |||||||||||||
Impaired Loans | 16,733 | - | - | 16,733 | |||||||||||||
The following is a description of the valuation methodologies used for instruments measured at fair value. |
|
Loan Servicing Rights: A loan servicing right asset represents the amount by which the present value of the estimated future net cash flows to be received from servicing loans are expected to more than adequately compensate the Company for performing the servicing. The fair value of servicing rights is estimated using a present value cash flow model. The most important assumptions used in the valuation model are the anticipated rate of the loan prepayments and discount rates. Adjustments are only recorded when the discounted cash flows derived from the valuation model are less than the carrying value of the asset. As such, measurement at fair value is on a nonrecurring basis. Although some assumptions in determining fair value are based on standards used by market participants, some are based on unobservable inputs and therefore are classified in Level 3 of the valuation hierarchy. |
|
Other Real Estate Owned: The Company classifies property acquired through foreclosure or acceptance of deed-in-lieu of foreclosure as other real estate owned in its financial statements. Upon foreclosure, the property securing the loan is written down to fair value. The writedown is based upon differences between the appraised value and the book value. Appraisals are based upon observable market data such as comparable sale within the real estate market, however assumptions made in determining comparability are unobservable and therefore these assets are classified as Level 3 within the valuation hierarchy. |
|
Impaired Loans: Impaired loans are measured based on the present value of expected future cash flows discounted at the loans original effective interest rate, at the loans observable market price or the fair value of the collateral if the loan is collateral dependent. Consequently, measurement at fair value is on a nonrecurring basis. These loans are written down through a valuation allowance within the Banks total loan loss reserve allowance. The fair value of these assets are classified within Level 3 of the valuation hierarchy and are estimated based on collateral values supported by appraisals. |
|
Disclosures
about Fair Value of Financial Instruments |
|
Cash and cash equivalents: Carrying value is assumed to represent fair value for cash and due from banks and short-term investments, which have original maturities of 90 days or less. |
|
Investment securities: Refer to the above discussion on securities |
|
Federal Home Loan Bank of Boston stock: FHLB Boston stock is a non-marketable equity security which is assumed to have a fair value equal to its carrying value due to the fact that it can only be redeemed back to the FHLB Boston at par value. |
|
Loans held for sale: The fair value of residential mortgage loans held for sale is estimated using quoted market prices provided by government-sponsored entities as described above. The fair value of SBA loans is estimated using quoted market prices from a secondary market broker. |
28
NewAlliance
Bancshares, Inc.
Notes to Unaudited Consolidated Financial
Statements
Accrued income receivable: Carrying value is assumed to represent fair value. |
|
Loans: The fair value of the net loan portfolio is determined by discounting the estimated future cash flows using the prevailing interest rates and appropriate credit and prepayment risk adjustments as of period-end at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair value of nonperforming loans is estimated using the Banks 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 Companys financial assets and liabilities as of June 30, 2010 and December 31, 2009: |
June 30, 2010 | December 31, 2009 | ||||||||||||||||
Carrying | Estimated | Carrying | Estimated | ||||||||||||||
(In thousands) | Amounts | Fair Value | Amounts | Fair Value | |||||||||||||
Financial Assets | |||||||||||||||||
Cash and due from banks |
$ | 97,693 | $ | 97,693 | $ | 96,927 | $ | 96,927 | |||||||||
Short-term investments |
20,000 | 20,000 | 50,000 | 50,000 | |||||||||||||
Investment securities |
2,726,572 | 2,739,053 | 2,568,621 | 2,580,186 | |||||||||||||
Loans held for sale |
13,362 | 13,362 | 14,659 | 14,659 | |||||||||||||
Loans, net |
4,873,426 | 4,923,384 | 4,709,582 | 4,779,888 | |||||||||||||
Federal Home Loan Bank of Boston stock |
120,821 | 120,821 | 120,821 | 120,821 | |||||||||||||
Accrued income receivable |
32,106 | 32,106 | 33,078 | 33,078 | |||||||||||||
Derivative assets |
601 | 601 | 495 | 495 | |||||||||||||
Financial Liabilities | |||||||||||||||||
Interest and non-interest bearing checking, savings and money market accounts |
$ | 3,688,874 | $ | 3,688,874 | $ | 3,542,774 | $ | 3,542,774 | |||||||||
Time deposits |
1,447,872 | 1,472,018 | 1,481,446 | 1,498,126 | |||||||||||||
Borrowed funds |
2,023,732 | 2,059,039 | 1,889,928 | 1,919,918 | |||||||||||||
Derivative liabilities |
504 | 504 | 75 | 75 | |||||||||||||
14. | Derivative Financial Instruments |
The Company accounts for derivatives in accordance with FASB ASC 815, Derivatives and Hedging, which requires that all derivative instruments be recorded on the consolidated balance sheets at their fair values. The Company does not enter into derivative transactions for speculative purposes, does not have any derivatives designated as hedging instruments, nor is party to a master netting agreement as of June 30, 2010. |
|
Loan Commitments and Forward Loan Sale Commitments: The Company enters into interest rate lock commitments with borrowers, to finance residential mortgage loans. Primarily to mitigate the interest rate risk on these commitments, the Company also enters into mandatory and best effort forward loan sale delivery commitments with investors. The interest rate lock commitments and the forward loan delivery commitments meet the definition of a derivative, however, the Company has not designated them as hedging instruments. Upon closing the loan, the loan commitment expires and the Company records a loan held for sale subject to the same forward loan sale commitment. Prior to January 1, 2009, the Company accounted for loans held for sale at the lower of cost or fair value in accordance with accounting guidance for certain mortgage banking activities. Fluctuations in the fair value of loan commitments, loans held for sale, and forward loan sale commitments generally move in opposite directions, and the net impact of the changes in these valuations on net income is generally inconsequential to the financial statements. |
29
NewAlliance
Bancshares, Inc.
Notes to Unaudited Consolidated Financial
Statements
The following table summarizes the Companys derivative positions at June 30. |
2010 | 2009 | ||||||||||||||||
Notional or | Notional or | ||||||||||||||||
Principal | Fair Value | Principal | Fair Value | ||||||||||||||
(In thousands) | Amount | Adjustment (1) | Amount | Adjustment (1) | |||||||||||||
Interest Rate Lock Commitments | $ | 36,212 | $ | 601 | $ | 41,112 | $ | 65 | |||||||||
Forward Sales Commitments | 45,214 | (504 | ) | 91,827 | 1,042 | ||||||||||||
(1) An immaterial portion of these amounts was attributable to changes in instrument-specific credit risk. | |
The following two tables present the fair values of the Companys derivative instruments and their effect on the Statement of Income: | |
Fair Values of Derivative Instruments |
Asset Derivatives | Liability Derivatives | |||||||||||||||||||||||
June 30, | December 31, | June 30, | December 31, | |||||||||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||
Balance Sheet | Balance Sheet | |||||||||||||||||||||||
(In thousands) | Location | Fair Value | Fair Value | Location | Fair Value | Fair Value | ||||||||||||||||||
Derivatives not designated as hedging instruments | ||||||||||||||||||||||||
Interest rate contracts |
Other Assets | $ | 601 | $ | 495 | Other Liabilities | $ | 504 | $ | 75 | ||||||||||||||
Total derivatives not designated as hedging instruments | $ | 601 | $ | 495 | $ | 504 | $ | 75 | ||||||||||||||||
Effect of Derivative Instruments on the Statement of Income | |||||||||||||||||||
For the Three | For the Six | ||||||||||||||||||
Months Ended | Months Ended | ||||||||||||||||||
June 30, | June 30, | ||||||||||||||||||
2010 | 2009 | 2010 | 2009 | ||||||||||||||||
Amount of Gain or (Loss) | Amount of Gain or (Loss) | ||||||||||||||||||
Location of Gain or (Loss) Recognized | Recognized in Income on | Recognized in Income on | |||||||||||||||||
(In thousands) | in Income on Derivatives | Derivatives | Derivatives | ||||||||||||||||
Derivatives not designated as hedging instruments | |||||||||||||||||||
Interest rate contracts |
Non-interest income | $ | (130 | ) | $ | 807 | $ | (323 | ) | $ | 1,107 | ||||||||
Total derivatives not designated as hedging instruments | $ | (130 | ) | $ | 807 | $ | (323 | ) | $ | 1,107 | |||||||||
15. | Stockholders Equity |
At June 30, 2010 and December 31, 2009, stockholders equity amounted to $1.46 billion and $1.43 billion, respectively, representing 16.8% and 17.0% of total assets, respectively. The Company paid cash dividends totaling $0.14 per share on common stock during the six months ended June 30, 2010. |
|
Dividends | |
The Company and the Bank are subject to dividend restrictions imposed by various regulators. Connecticut banking laws limit the amount of annual dividends that the Bank may pay to the Company to an amount that approximates the Banks net income retained for the current year plus net income retained for the two previous years. In addition, the Bank may not declare or pay dividends on, and the Company may not repurchase any of its shares of its common stock if the effect thereof would cause stockholders equity to be reduced below applicable regulatory capital maintenance requirements or if such declaration, payment or repurchase would otherwise violate regulatory requirements. |
|
Treasury Shares | |
Share Repurchase
Plan |
30
NewAlliance
Bancshares, Inc.
Notes to Unaudited Consolidated Financial
Statements
Other | |
Upon vesting of shares under the Companys benefit plans, plan participants may choose to have the Company withhold a number of shares necessary to satisfy tax withholding requirements. The withheld shares are classified as treasury shares by the Company. For the six months ended June 30, 2010, approximately 89,000 shares were returned to the Company for this purpose. |
|
Regulatory Capital | |
Capital guidelines of the Federal Reserve Board and the Federal Deposit Insurance Corporation (FDIC) require the Company and its banking subsidiary to maintain certain minimum ratios, as set forth below. At June 30, 2010, the Company and the Bank were deemed to be well capitalized under the regulations of the Federal Reserve Board and the FDIC, respectively, and in compliance with the applicable capital requirements. |
|
The following table provides information on the capital ratios. |
To Be Well | |||||||||||||||||||||||||
For Capital | Capitalized Under | ||||||||||||||||||||||||
Adequacy | Prompt Corrective | ||||||||||||||||||||||||
Actual | Purposes | Action Provisions | |||||||||||||||||||||||
(Dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
NewAlliance Bank | |||||||||||||||||||||||||
June 30, 2010 |
|||||||||||||||||||||||||
Tier 1 Capital (to Average Assets) |
$ | 775,050 | 9.7 | % | $ | 320,203 | 4.0 | % | $ | 400,253 | 5.0 | % | |||||||||||||
Tier 1 Capital (to Risk Weighted Assets) |
775,050 | 17.3 | 179,064 | 4.0 | 268,596 | 6.0 | |||||||||||||||||||
Total Capital (to Risk Weighted Assets) |
830,084 | 18.5 | 358,128 | 8.0 | 447,660 | 10.0 | |||||||||||||||||||
December 31, 2009 |
|||||||||||||||||||||||||
Tier 1 Capital (to Average Assets) |
$ | 734,951 | 9.3 | % | $ | 317,623 | 4.0 | % | $ | 397,029 | 5.0 | % | |||||||||||||
Tier 1 Capital (to Risk Weighted Assets) |
734,951 | 16.7 | 176,043 | 4.0 | 264,064 | 6.0 | |||||||||||||||||||
Total Capital (to Risk Weighted Assets) |
787,510 | 17.9 | 352,085 | 8.0 | 440,107 | 10.0 | |||||||||||||||||||
NewAlliance Bancshares, Inc. | |||||||||||||||||||||||||
June 30, 2010 |
|||||||||||||||||||||||||
Tier 1 Capital (to Average Assets) |
$ | 895,079 | 11.2 | % | $ | 320,554 | 4.0 | % | $ | 400,693 | 5.0 | % | |||||||||||||
Tier 1 Capital (to Risk Weighted Assets) |
895,079 | 20.0 | 179,375 | 4.0 | 269,063 | 6.0 | |||||||||||||||||||
Total Capital (to Risk Weighted Assets) |
950,113 | 21.2 | 358,750 | 8.0 | 448,438 | 10.0 | |||||||||||||||||||
December 31, 2009 |
|||||||||||||||||||||||||
Tier 1 Capital (to Average Assets) |
$ | 878,553 | 11.1 | % | $ | 318,072 | 4.0 | % | $ | 397,590 | 5.0 | % | |||||||||||||
Tier 1 Capital (to Risk Weighted Assets) |
878,553 | 19.9 | 176,422 | 4.0 | 264,633 | 6.0 | |||||||||||||||||||
Total Capital (to Risk Weighted Assets) |
931,113 | 21.1 | 352,844 | 8.0 | 441,055 | 10.0 | |||||||||||||||||||
16. | Other Comprehensive Income |
The following table presents the components of other comprehensive income and the related tax effects for the periods presented: |
Three Months Ended | Six Months Ended | ||||||||||||||||
June 30, | June 30, | ||||||||||||||||
(In thousands) | 2010 | 2009 | 2010 | 2009 | |||||||||||||
Net income | $ | 16,273 | $ | 10,108 | $ | 32,706 | $ | 21,698 | |||||||||
Other comprehensive income, before tax | |||||||||||||||||
Unrealized gains on securities |
|||||||||||||||||
Unrealized holding gains, arising during the period |
31,446 | 15,321 | 25,525 | 31,446 | |||||||||||||
Reclassification adjustment for gains, included in net income |
(198 | ) | (1,617 | ) | (198 | ) | (3,483 | ) | |||||||||
Non-credit unrealized loss on other-than-temporarily impaired debt securities |
- | (1,896 | ) | - | (1,896 | ) | |||||||||||
Credit related other than temporary realized loss transferred out of other comprehensive income |
522 | - | 522 | - | |||||||||||||
Other comprehensive income, before tax | 31,770 | 11,808 | 25,849 | 26,067 | |||||||||||||
Income tax expense, net of valuation allowance | (11,270 | ) | (3,922 | ) | (9,149 | ) | (9,099 | ) | |||||||||
Other comprehensive income, net of tax | 20,500 | 7,886 | 16,700 | 16,968 | |||||||||||||
Comprehensive income | $ | 36,773 | $ | 17,994 | $ | 49,406 | $ | 38,666 | |||||||||
31
NewAlliance
Bancshares, Inc.
Notes to Unaudited Consolidated Financial
Statements
17. | Earnings Per Share |
The following table includes the calculation of basic and diluted earnings per share for the periods presented: |
Three Months Ended | Six Months Ended | ||||||||||||||||
June 30, | June 30, | ||||||||||||||||
(In thousands, except per share data) | 2010 | 2009 | 2010 | 2009 | |||||||||||||
Net income | $ | 16,273 | $ | 10,108 | $ | 32,706 | $ | 21,698 | |||||||||
Average common shares outstanding for basic EPS | 98,781 | 99,278 | 98,900 | 99,266 | |||||||||||||
Effect of dilutive stock options and unvested stock awards | 79 | 33 | 37 | 44 | |||||||||||||
Average common and common-equivalent shares for dilutive EPS | 98,860 | 99,311 | 98,937 | 99,310 | |||||||||||||
Net income per common share: | |||||||||||||||||
Basic |
$ | 0.16 | $ | 0.10 | $ | 0.33 | $ | 0.22 | |||||||||
Diluted |
0.16 | 0.10 | 0.33 | 0.22 | |||||||||||||
32
Forward-Looking Statements |
This report may contain certain forward-looking statements as that term is defined in the U.S. federal securities laws. |
Forward-looking statements are based on certain assumptions and describe future plans, strategies, and expectations of management and are generally identified by use of the word plan, believe, expect, intend, anticipate, estimate, project, or similar expressions. Managements ability to predict results or the actual effects of its plans or strategies is inherently uncertain. Accordingly, actual results may differ materially from anticipated results. |
Factors that could have a material adverse effect on the operations of NewAlliance Bancshares, Inc. (NewAlliance or the Company) and its subsidiaries include, but are not limited to: |
| Changes in the interest rate environment may reduce the net interest margin and/or the volumes and values of loans made or held as well as the value of other financial assets held; |
|
| General economic or business conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, a deterioration in credit quality and/or a reduced demand for credit or other services; |
|
| Adverse changes may occur in the securities markets impacting the value of NewAlliances investments; |
|
| Competitive pressures among depository and other financial institutions may increase significantly and may decrease the profit margin associated with its business; |
|
| Recent government initiatives including the Dodd-Frank Wall Street Reform and Consumer Protection Act is expected to have an effect on the financial services industry; |
|
| Other legislative or regulatory changes, 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; |
|
| Costs or difficulties related to the integration of acquired businesses may be greater than expected; and |
|
| Unfavorable changes related to economic stress and dislocation may impact the Companys vendors, counter-parties, and other entities on which the company has a dependence. |
| Our Business a general description of our business, our objectives and regulatory considerations. |
| Critical Accounting Estimates a discussion of accounting estimates that require critical judgments and estimates. |
| Recent Accounting Changes a discussion of recently adopted accounting pronouncements or changes. |
| Operating Results an analysis of our Companys consolidated results of operations for the periods presented in our Consolidated Financial Statements. |
33
| 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 $8.71 billion and stockholders equity of $1.46 billion at June 30, 2010. 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 88 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. |
NewAlliance has a relentless commitment to improve the financial well-being of the people and businesses in the markets we serve, and to invest in the communities where they reside and work. We accomplish this by operating a community banking business model with a commitment to be a leader in our markets by seeking to continually deliver superior value to our customers, shareholders, employees and communities. |
The Companys results of operations depend primarily on net interest income, which is the difference between the income earned on its loan and securities portfolios and its cost of funds, consisting of the interest paid on deposits and borrowings. Results of operations are also affected by the Companys provision for loan losses, income and expenses pertaining to other real estate owned, gains and losses from sales of loans and securities and non-interest income and expenses. Non-interest income primarily consists of fee income from depositors and wealth management services and increases in cash surrender value of 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, FDIC insurance assessments 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: |
| Grow and retain primary households 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; | ||
| Build and diversify revenue streams through development of banking-related fee income and growth in wealth management services; | ||
| Grow through a disciplined acquisition strategy, de-novo branching and new business lines; | ||
| Maintain expense discipline and improve operating efficiencies; | ||
| Invest in technology to enhance superior customer service and products; and | ||
| Maintain a rigorous risk identification and management process. |
Significant factors management reviews to evaluate achievement of the Companys operating objectives and its operating results and financial condition include, but are not limited to: net income and earnings per share, performance of acquisitions and integration activities, return on equity and assets, net interest margin, non-interest income, operating expenses related to total assets and efficiency ratio, asset quality, loan and deposit growth, capital management, liquidity and interest rate sensitivity levels, customer service standards, market share and peer comparisons. |
Regulatory Considerations |
NewAlliance and its subsidiaries are subject to numerous examinations by federal and state banking regulators, as well as the Securities and Exchange Commission and the Financial Industry Regulatory Authority (FINRA). Please refer to |
34
NewAlliances Annual Report on Form 10-K for the year ended December 31, 2009 for additional disclosures with respect to laws and regulations affecting the Companys businesses. |
NewAlliance is also subject to recent government initiatives. In July the U.S. Senate passed and the President signed into law, the Dodd-Frank Wall Street Reform and Consumer Protection Act. Although NewAlliances asset size is below the threshold for some of the new reforms such as regulation by the Consumer Financial Protection Bureau and the Durbin Amendment on interchange fees, the legislation could have a significant effect on the Company. The change in the FDIC assessment formula will probably be neutral for the Company and, in addition to being compliant with existing rules for corporate governance and executive compensation practices, the Company is also already in compliance with many of the new rules. NewAlliance would be subject to any new rules written by the CFPB governing all banks and compliance costs are expected to rise. The Company will continue to analyze the impact of this act as more information becomes available. Until such time, the Company is unable to fully analyze the impact that the act will have on its financial results. |
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. |
Other-Than-Temporary Impairment of Investments |
|
Allowance for Loan Losses |
The allowance for loan losses reflects managements best estimate of probable losses inherent in the loan portfolio. The adequacy of the allowance is determined based upon a detailed evaluation of the portfolio and sub-portfolios through a process which considers numerous factors, including levels and direction of delinquencies, non-performing loans and assets, risk ratings, estimated credit losses using both internal and external portfolio reviews, current economic and market conditions, concentrations, portfolio volume and mix, changes in underwriting, experience of staff, historical loss rates over the business cycle and current economic trends. All of these factors may be susceptible to significant change. |
Income Taxes |
Management uses the asset and liability method of accounting for income taxes in which deferred tax assets and liabilities are established for the temporary differences between the financial reporting basis and the tax basis of the Companys assets and liabilities. |
35
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. |
Pension and Other Postretirement Benefits |
Management uses key assumptions that include discount rates, expected return on plan assets, benefits earned, interest costs, mortality rates, increases in compensation, and other factors. The two most critical assumptionsestimated return on plan assets and the discount rateare important elements of plan expense and asset/liability measurements. These critical assumptions are evaluated at least annually on a plan basis. Other assumptions are evaluated periodically and are updated to reflect actual experience and expectations for the future. |
Goodwill and Identifiable Intangible Assets |
We evaluate
goodwill and identifiable intangible assets for impairment annually or whenever
events or changes in circumstances indicate the carrying value of the goodwill or
identifiable intangible assets may 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. |
Recent Accounting Changes |
We have adopted the following new accounting pronouncements and authoritative guidance during 2010. Except as indicated, the adoption of the following pronouncements did not have a material impact on the Companys consolidated financial statements. |
FASB ASU 2010-06, Improving Disclosures about Fair Value Measurements. This guidance amends Topic 820, Fair Value Measurements and Disclosures. The guidance requires additional disclosures about fair value measurements including transfer in and out of Levels 1 and 2 and higher levels of disaggregation for the different types of financial instruments. For the reconciliation of Level 3 fair values measurements, information about purchases, sales, issuances and settlements should be presented separately. |
FASB ASU 2009-16, an update to Topic 860 Transfer of Financial Assets. This guidance requires entities to provide more information about sales of securitized financial assets and similar transactions, particularly if the seller retains some risk in the assets. The guidance eliminates the concept of a qualifying special-purpose entity, changes the requirements for the derecognition of financial assets, and enhances the disclosure requirements for sellers of the assets. |
FASB ASU No. 2009-17, an update to Topic 810 Consolidations. The guidance requires an enterprise to perform an analysis to determine whether the enterprises 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 enterprises involvement with a variable interest entity. |
FASB ASU 2010-09, an update to Topic 855 Subsequent Events. The guidance updates certain recognition and disclosure requirements. Among other things, this guidance retracts, for public entities, the requirement to disclose the date through which subsequent events have been evaluated and whether that date is the date the financial statements were issued or were available to be issued. |
36
Operating Results |
Executive Overview |
Earnings for the second quarter of 2010 were $16.3 million, or $0.16 per diluted share, compared to $10.1 million, or $0.10 per diluted share, for the second quarter in 2009. For the six months ended June 30, 2010 and 2009 the Company recorded earnings of $32.7 million, or $0.33 per diluted share, and $21.7 million, or $0.22 per diluted share, respectively. Continued core business momentum has been driven by diversified loan growth, deposit growth and a decrease in the cost of funds, in tandem with solid asset quality and disciplined expense control. |
The Companys momentum in 2010 has also been incremently accentuated by a second quarter gain on a limited partnership investment of $2.6 million, or $1.7 million net of tax, and a gain of $2.6 million from the receipt of tax-exempt life insurance proceeds in the first quarter. Excluding these two items, earnings for the second quarter would have been $14.6 million, or $0.15 per diluted share and $28.4 million, or $0.29 per diluted share for the six months ended June 30, 2010. The gain in limited partnerships was primarily related to an underlying investment in one of the partnerships which completed an initial public offering in June. |
The Companys net interest margin for the three months ended June 30, 2010 was 3.02%, an increase of 39 basis points over the prior year quarter of 2.63%. The net interest margin for the six months ended June 30, 2010 was 2.99% compared to 2.60% for the same period in 2009. The general year over year trends impacting the margin from the first quarter continued in the second quarter, which includes growth in the average balance of interest-earning assets and reductions in the Companys cost of funds, particularly deposits. The reduction in the cost of funds has been the foremost driver of the increase in net interest income and the margin, mainly due to repricing or maturing of interest-bearing liabilities outpacing interest-earning assets and the change in the mix of deposits from higher cost time deposits to core deposits. For both the current quarter and year-to-date periods, the average cost of deposits and borrowings has declined by more than double that of the decline in the average yield earned on interest-earning assets. A sustained period of low interest rates is anticipated, therefore, as interest-earning assets continue to originate or reprice downward, the net interest margin could be adversely affected. |
The asset quality of our loan portfolio has remained strong even as the leading economic indicators have provided mixed results as evidenced in part by the continued high unemployment and foreclosure rates throught the country. The Company has been adversely impacted by these trends but not to the severity experienced nationally. The allowance for loan losses to total loans ratio was 1.11% and 1.10% and the ratio of nonperforming loans to total loans was 1.39% and 1.06% at June 30, 2010 and December 31, 2009, respectively. Net charge-offs for the three months ended June 30, 2010 were $4.7 million, or 0.39% of total average loans compared to $4.1 million, or 0.33% of average loans for the quarter ended June 30, 2009. For the six months ended June 30, 2010 and 2009, net charge-offs were $7.8 million and $7.5 million, respectively, and as a percent to total average loans were 0.33% and 0.30%, respectively. A provision for loan losses of $5.5 million was recorded for the current quarter compared to $5.0 million for the quarter ended June 30, 2009. |
The Companys balance sheet growth has been due in part to targeted marketing efforts. Total loans increased from December 31, 2009 by $166.3 million primarily due to residential real estate and commercial business loans increasing $94.9 million and $62.1 million, respectively. The Company had record loan originations of $534.9 million and has originated a portion of loans for portfolio versus for sale higher than the prior year period. The increase in commercial business loans was primarily due to the Companys asset-based lending business which began in the fourth quarter of 2009 and has begun to intensify. Core deposit generation also continues to be strong for the Company, increasing $146.3 million from December 31, 2009. Total deposits increased $112.7 million from year-end 2009. |
The Company is also very focused on disciplined expense control. Non-interest expense for the three months ended June 30, 2010 declined approximately $800,000 from the 2009 comparative period and increased $1.0 million for the six months ended June 30, 2010. Non-interest expense as a percentage of average assets was 2.04% and 2.02% for the three and six months ended June 30, 2010, respectively. Included in these periods were due diligence related expenses of approximately $500,000. For the past three fiscal years, the Companys ratio has been either 2.03% or 2.04%, demonstrating our expense disclipline. |
NewAlliance will be aggressive in pursuing its strategic goals while practicing prudent risk management to achieve continued positive business momentum and success. |
Selected financial data, ratios and per share data are provided in Table 1. |
37
Table 1: Selected Data | ||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(Dollars in thousands, except share data) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Condensed Income Statement | ||||||||||||||||
Interest and dividend income | $ | 87,061 | $ | 94,082 | $ | 174,461 | $ | 188,837 | ||||||||
Interest expense | 29,320 | 44,155 | 61,078 | 90,917 | ||||||||||||
Net interest income before provision for loan losses | 57,741 | 49,927 | 113,383 | 97,920 | ||||||||||||
Provision for loan losses | 5,500 | 5,000 | 10,300 | 9,100 | ||||||||||||
Net interest income after provision for loan losses | 52,241 | 44,927 | 103,083 | 88,820 | ||||||||||||
Non-interest income | 15,886 | 15,291 | 31,285 | 29,554 | ||||||||||||
Operating expenses | 43,628 | 44,405 | 85,828 | 84,786 | ||||||||||||
Income before income taxes | 24,499 | 15,813 | 48,540 | 33,588 | ||||||||||||
Income tax provision | 8,226 | 5,705 | 15,834 | 11,890 | ||||||||||||
Net income | $ | 16,273 | $ | 10,108 | $ | 32,706 | $ | 21,698 | ||||||||
Weighted average shares outstanding | ||||||||||||||||
Basic |
98,780,567 | 99,278,162 | 98,899,821 | 99,266,268 | ||||||||||||
Diluted |
98,859,822 | 99,310,611 | 98,936,601 | 99,309,719 | ||||||||||||
Earnings per share | ||||||||||||||||
Basic |
$ | 0.16 | $ | 0.10 | $ | 0.33 | $ | 0.22 | ||||||||
Diluted |
0.16 | 0.10 | 0.33 | 0.22 | ||||||||||||
Financial Ratios | ||||||||||||||||
Return on average assets (1) | 0.76 | % | 0.47 | % | 0.77 | % | 0.51 | % | ||||||||
Return on average equity (1) | 4.49 | 2.89 | 4.53 | 3.12 | ||||||||||||
Net interest margin (1) | 3.02 | 2.63 | 2.99 | 2.60 | ||||||||||||
Dividend payout ratio | 43.75 | 70.00 | 42.42 | 63.64 | ||||||||||||
Average equity to average assets ratio | 16.91 | 16.39 | 16.99 | 16.48 | ||||||||||||
Non-GAAP Ratios | ||||||||||||||||
Efficiency ratio (2) | 61.05 | 69.65 | 60.20 | 67.72 | ||||||||||||
Tangible common equity ratio (3) | 11.11 | 10.49 | 11.11 | 10.49 | ||||||||||||
Per share data | ||||||||||||||||
Book value per share | $ | 13.93 | $ | 13.18 | $ | 13.93 | $ | 13.18 | ||||||||
Tangible book value per share | 8.62 | 7.87 | 8.62 | 7.87 | ||||||||||||
(1) | Annualized. |
(2) | The efficiency ratio represents the ratio of non-interest expenses, net of OREO expenses, to the sum of net interest income before provision for loan losses 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 a useful tool to investors in evaluating how effectively the Company generates revenue. |
(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 analyze the relative strength of NewAlliances capital position and is useful to investors in evaluating Company performance due to the importance that analysts placed on the ratio since the introduction of TARP. |
Average Balances, Interest,
Average Yields/Cost and Rate/Volume Analysis
Tables 2 and 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 Companys interest income and interest expense during the periods indicated. Information is provided in each category with respect to: (i) change attributable to change in volume (change in volume multiplied by prior rate), (ii) change attributable to change in rate (change in rate multiplied by prior volume); and (iii) the change attributable to rate and volume (change in rate multiplied by change in volume), which is prorated between the changes in rate and volume.
38
Table 2: Average Balance Sheets for the Three Months Ended June 30, 2010 and 2009
Three Months Ended June 30, | ||||||||||||||||||||||||
2010 | 2009 | |||||||||||||||||||||||
Average | Average | |||||||||||||||||||||||
Average | Yield/ | Average | Yield/ | |||||||||||||||||||||
(Dollars in thousands) | Balance | Interest | Rate | Balance | Interest | Rate | ||||||||||||||||||
Interest-earning assets | ||||||||||||||||||||||||
Loans |
||||||||||||||||||||||||
Residential real estate |
$ | 2,431,315 | $ | 29,589 | 4.87 | % | $ | 2,542,771 | $ | 33,782 | 5.31 | % | ||||||||||||
Commercial real estate |
1,269,942 | 18,662 | 5.88 | 1,207,563 | 17,448 | 5.78 | ||||||||||||||||||
Commercial business |
434,904 | 5,591 | 5.14 | 443,738 | 5,527 | 4.98 | ||||||||||||||||||
Consumer |
707,878 | 7,946 | 4.49 | 743,531 | 8,596 | 4.62 | ||||||||||||||||||
Total loans |
4,844,039 | 61,788 | 5.10 | 4,937,603 | 65,353 | 5.29 | ||||||||||||||||||
Fed funds sold and other short-term investments |
73,736 | 34 | 0.18 | 65,684 | 116 | 0.71 | ||||||||||||||||||
Federal Home Loan Bank of Boston stock |
120,821 | - | - | 120,821 | - | - | ||||||||||||||||||
Securities |
2,609,442 | 25,239 | 3.87 | 2,482,036 | 28,613 | 4.61 | ||||||||||||||||||
Total securities, short-term investments |
||||||||||||||||||||||||
and federal home loan bank stock |
2,803,999 | 25,273 | 3.61 | 2,668,541 | 28,729 | 4.31 | ||||||||||||||||||
Total interest-earning assets |
7,648,038 | $ | 87,061 | 4.55 | % | 7,606,144 | $ | 94,082 | 4.95 | % | ||||||||||||||
Non-interest earning assets |
924,626 | 925,389 | ||||||||||||||||||||||
Total assets |
$ | 8,572,664 | $ | 8,531,533 | ||||||||||||||||||||
Interest-bearing liabilities | ||||||||||||||||||||||||
Deposits |
||||||||||||||||||||||||
Money Markets |
$ | 933,663 | $ | 2,291 | 0.98 | % | $ | 508,796 | $ | 2,163 | 1.70 | % | ||||||||||||
NOW |
390,424 | 238 | 0.24 | 368,666 | 261 | 0.28 | ||||||||||||||||||
Savings |
1,802,266 | 2,756 | 0.61 | 1,769,134 | 6,661 | 1.51 | ||||||||||||||||||
Time |
1,411,178 | 7,179 | 2.03 | 1,604,027 | 12,192 | 3.04 | ||||||||||||||||||
Total interest-bearing deposits |
4,537,531 | 12,464 | 1.10 | 4,250,623 | 21,277 | 2.00 | ||||||||||||||||||
Repurchase agreements |
98,885 | 342 | 1.38 | 140,269 | 389 | 1.11 | ||||||||||||||||||
FHLB advances and other borrowings |
1,847,531 | 16,514 | 3.58 | 2,135,450 | 22,489 | 4.21 | ||||||||||||||||||
Total interest-bearing liabilities |
6,483,947 | 29,320 | 1.81 | % | 6,526,342 | 44,155 | 2.71 | % | ||||||||||||||||
Non-interest-bearing demand deposits |
559,250 | 512,167 | ||||||||||||||||||||||
Other non-interest-bearing liabilities |
79,788 | 94,840 | ||||||||||||||||||||||
Total liabilities |
7,122,985 | 7,133,349 | ||||||||||||||||||||||
Equity |
1,449,679 | 1,398,184 | ||||||||||||||||||||||
Total liabilities and equity |
$ | 8,572,664 | $ | 8,531,533 | ||||||||||||||||||||
Net interest-earning assets |
$ | 1,164,091 | $ | 1,079,802 | ||||||||||||||||||||
Net interest income |
$ | 57,741 | $ | 49,927 | ||||||||||||||||||||
Interest rate spread |
2.74 | % | 2.24 | % | ||||||||||||||||||||
Net interest margin (net interest income |
||||||||||||||||||||||||
as a percentage of total interest-earning assets) |
3.02 | % | 2.63 | % | ||||||||||||||||||||
Ratio of total interest-earning assets |
||||||||||||||||||||||||
to total interest-bearing liabilitites |
117.95 | % | 116.55 | % | ||||||||||||||||||||
39
Table 3: Average Balance Sheets for the Six Months Ended June 30, 2010 and 2009
Six Months Ended June 30, | |||||||||||||||||||||||
2010 | 2009 | ||||||||||||||||||||||
Average | Average | ||||||||||||||||||||||
Average | Yield/ | Average | Yield/ | ||||||||||||||||||||
(Dollars in thousands) | Balance | Interest | Rate | Balance | Interest | Rate | |||||||||||||||||
Interest-earning assets | |||||||||||||||||||||||
Loans |
|||||||||||||||||||||||
Residential real estate |
$ | 2,410,020 | $ | 59,273 | 4.92 | % | $ | 2,552,766 | $ | 68,376 | 5.36 | % | |||||||||||
Commercial real estate |
1,261,647 | 36,915 | 5.85 | 1,214,446 | 35,065 | 5.77 | |||||||||||||||||
Commercial business |
425,334 | 10,785 | 5.07 | 446,472 | 11,239 | 5.03 | |||||||||||||||||
Consumer |
712,329 | 16,083 | 4.52 | 740,715 | 17,304 | 4.67 | |||||||||||||||||
Total loans |
4,809,330 | 123,056 | 5.12 | 4,954,399 | 131,984 | 5.33 | |||||||||||||||||
Fed funds sold and other short-term investments |
79,731 | 67 | 0.17 | 60,117 | 278 | 0.92 | |||||||||||||||||
Federal Home Loan Bank of Boston stock |
120,821 | - | - | 120,821 | - | - | |||||||||||||||||
Securities |
2,562,333 | 51,338 | 4.01 | 2,393,353 | 56,575 | 4.73 | |||||||||||||||||
Total securities, short-term investments |
|||||||||||||||||||||||
and federal home loan bank stock |
2,762,885 | 51,405 | 3.72 | 2,574,291 | 56,853 | 4.42 | |||||||||||||||||
Total interest-earning assets |
7,572,215 | $ | 174,461 | 4.61 | % | 7,528,690 | $ | 188,837 | 5.02 | % | |||||||||||||
Non-interest earning assets |
924,120 | 920,923 | |||||||||||||||||||||
Total assets |
$ | 8,496,335 | $ | 8,449,613 | |||||||||||||||||||
Interest-bearing liabilities | |||||||||||||||||||||||
Deposits |
|||||||||||||||||||||||
Money Markets |
$ | 893,360 | $ | 4,542 | 1.02 | % | $ | 461,185 | $ | 4,080 | 1.77 | % | |||||||||||
NOW |
378,663 | 500 | 0.26 | 357,640 | 498 | 0.28 | |||||||||||||||||
Savings |
1,800,199 | 6,241 | 0.69 | 1,654,073 | 13,424 | 1.62 | |||||||||||||||||
Time |
1,419,645 | 15,063 | 2.12 | 1,671,359 | 26,116 | 3.13 | |||||||||||||||||
Total interest-bearing deposits |
4,491,867 | 26,346 | 1.17 | 4,144,257 | 44,118 | 2.13 | |||||||||||||||||
Repurchase agreements |
105,084 | 690 | 1.31 | 150,046 | 926 | 1.23 | |||||||||||||||||
FHLB advances and other borrowings |
1,828,653 | 34,042 | 3.72 | 2,171,038 | 45,873 | 4.23 | |||||||||||||||||
Total interest-bearing liabilities |
6,425,604 | 61,078 | 1.90 | % | 6,465,341 | 90,917 | 2.81 | % | |||||||||||||||
Non-interest-bearing demand deposits |
544,055 | 499,077 | |||||||||||||||||||||
Other non-interest-bearing liabilities |
82,935 | 93,121 | |||||||||||||||||||||
Total liabilities |
7,052,594 | 7,057,539 | |||||||||||||||||||||
Equity |
1,443,741 | 1,392,074 | |||||||||||||||||||||
Total liabilities and equity |
$ | 8,496,335 | $ | 8,449,613 | |||||||||||||||||||
Net interest-earning assets |
$ | 1,146,611 | $ | 1,063,349 | |||||||||||||||||||
Net interest income |
$ | 113,383 | $ | 97,920 | |||||||||||||||||||
Interest rate spread |
2.71 | % | 2.21 | % | |||||||||||||||||||
Net interest margin (net interest income |
|||||||||||||||||||||||
as a percentage of total interest-earning assets |
2.99 | % | 2.60 | % | |||||||||||||||||||
Ratio of total interest-earning assets |
|||||||||||||||||||||||
to total interest-bearing liabilitites |
117.84 | % | 116.45 | % | |||||||||||||||||||
40
Table 4: Rate/Volume Analysis
Three Months Ended | Six Months Ended | |||||||||||||||||||||||
June 30, 2010 | June 30, 2010 | |||||||||||||||||||||||
Compared to | Compared to | |||||||||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||||||||||
June 30, 2009 | June 30, 2009 | |||||||||||||||||||||||
Increase (Decrease) | Increase (Decrease) | |||||||||||||||||||||||
Due to | Due to | |||||||||||||||||||||||
(In thousands) | Rate | Volume | Net | Rate | Volume | Net | ||||||||||||||||||
Interest-earning assets | ||||||||||||||||||||||||
Loans |
||||||||||||||||||||||||
Residential real estate |
$ | (2,755 | ) | $ | (1,438 | ) | $ | (4,193 | ) | $ | (5,407 | ) | $ | (3,696 | ) | $ | (9,103 | ) | ||||||
Commercial real estate |
302 | 912 | 1,214 | 474 | 1,376 | 1,850 | ||||||||||||||||||
Commercial business |
176 | (112 | ) | 64 | 81 | (535 | ) | (454 | ) | |||||||||||||||
Consumer |
(245 | ) | (405 | ) | (650 | ) | (570 | ) | (651 | ) | (1,221 | ) | ||||||||||||
Total loans |
(2,522 | ) | (1,043 | ) | (3,565 | ) | (5,422 | ) | (3,506 | ) | (8,928 | ) | ||||||||||||
Fed funds sold and other short-term investments |
(94 | ) | 12 | (82 | ) | (281 | ) | 70 | (211 | ) | ||||||||||||||
Federal Home Loan Bank of Boston stock |
- | - | - | - | - | - | ||||||||||||||||||
Securities |
(4,786 | ) | 1,412 | (3,374 | ) | (9,039 | ) | 3,802 | (5,237 | ) | ||||||||||||||
Total securities, short-term investments |
||||||||||||||||||||||||
and federal home loan bank stock |
(4,880 | ) | 1,424 | (3,456 | ) | (9,320 | ) | 3,872 | (5,448 | ) | ||||||||||||||
Total interest-earning assets |
$ | (7,402 | ) | $ | 381 | $ | (7,021 | ) | $ | (14,742 | ) | $ | 366 | $ | (14,376 | ) | ||||||||
Interest-bearing liabilities | ||||||||||||||||||||||||
Deposits |
||||||||||||||||||||||||
Money market |
$ | (1,171 | ) | $ | 1,299 | $ | 128 | $ | (2,242 | ) | $ | 2,704 | $ | 462 | ||||||||||
NOW |
(37 | ) | 14 | (23 | ) | (26 | ) | 28 | 2 | |||||||||||||||
Savings |
(4,028 | ) | 123 | (3,905 | ) | (8,278 | ) | 1,095 | (7,183 | ) | ||||||||||||||
Time |
(3,676 | ) | (1,337 | ) | (5,013 | ) | (7,523 | ) | (3,530 | ) | (11,053 | ) | ||||||||||||
Total interest bearing deposits |
(8,912 | ) | 99 | (8,813 | ) | (18,069 | ) | 297 | (17,772 | ) | ||||||||||||||
Repurchase agreements |
83 | (130 | ) | (47 | ) | 56 | (292 | ) | (236 | ) | ||||||||||||||
FHLB advances and other borrowings |
(3,158 | ) | (2,817 | ) | (5,975 | ) | (5,087 | ) | (6,744 | ) | (11,831 | ) | ||||||||||||
Total interest-bearing liabilities |
$ | (11,987 | ) | $ | (2,848 | ) | $ | (14,835 | ) | $ | (23,100 | ) | $ | (6,739 | ) | $ | (29,839 | ) | ||||||
Increase in net interest income | $ | 4,585 | $ | 3,229 | $ | 7,814 | $ | 8,358 | $ | 7,105 | $ | 15,463 | ||||||||||||
Net Interest Income Analysis
Net interest income is the amount that interest and fees on earning assets (loans and investments) exceeds the cost of funds, primarily interest paid to the Companys depositors and interest on external borrowings. Net interest margin is the difference between the income on earning assets and the cost of interest-bearing funds as a percentage of average earning assets.
As shown in Tables 2 and 4, net interest income increased $7.8 million for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. For the six months ended June 30, 2010, as shown in Tables 3 and 4, net interest income was $113.4 million, an increase of $15.5 million, compared to the same period in 2009. These increases were primarily due to: a) repricing or maturing interest-bearing liabilities outpacing interest-earning assets during the period, thereby allowing us to reduce our cost of funds at a faster pace and b) the shift in the mix of funding sources from higher cost time deposits and borrowings to core interest and non-interest bearing deposits which was a factor in reducing the cost of funds. The net interest margin increased 39 basis points for both the three and six month periods ended June 30, 2010 compared to June 30, 2009. The net interest margin for the three and six months ended June 30, 2010 was 3.02% and 2.99%, respectively.
Comparison
of Quarter-to-Date June 2010 and June 2009
Interest and dividend income decreased
$7.1 million to $87.1 million at June 30, 2010 compared to $94.1 million at June
30, 2009 primarily due to lower asset yields. Partially offsetting this decrease
was an increase in average interest-earning assets which have increased $41.9 million
from the same period a year ago due to the growth in investment securities, partially
offset by a decrease in average loan balances.
The decrease in income attributable to the loan portfolio was $3.6 million due to a decrease of $2.5 million due to lower yields and $1.0 million due to a decrease in the average balance. The decline in average yield of 19 basis points was primarily in organic residential mortgage loans as homeowners took advantage of refinancing opportunities at lower rates throughout 2009. The decrease in interest income attributable to the average balance was primarily due to a decrease in residential mortgage loans, specifically the purchased residential loan portfolio, as runoff in this portfolio was not replaced due to disruptions in the marketplace resulting in a lack of opportunities for purchases that met the Companys pricing and underwriting criteria. Loan yields have also been negatively impacted by the increase in nonperforming loans of $13.4 million from June 2009.
The investment securities portfolio interest and dividend income decreased $3.5 million due to the decline in the average yield, partially offset by an increase due to the average growth in the portfolio. Interest income declined $1.4 million resulting from a
41
decrease of 70 bps in the average yield due to the low level of market interest rates. Although yields on the securities portfolio have declined, the growth in the portfolio has partially offset that decline. The average portfolio growth of $135.5 million was primarily in collateralized mortgage obligations and other bonds of $172.6 million and $192.8 million, respectively, partially offset by a decrease in the average balance of mortgage-backed securities. The increase in other bonds is attributable to select purchases of bullet, callable and step-up coupon agency debentures. The growth in average deposits, specifically core deposits was the main driver for the Companys purchases of these securities since June 30, 2009.
The cost of funds for the three months ended June 30, 2010 decreased $14.8 million, or 33.6% to $29.3 million, compared to $44.2 million for the same period a year ago. The decrease in the cost of funds was due primarily to a decrease due to rate and to a lesser extent volume of $12.0 million and $2.8 million, respectively.
The Companys continued strategy during this period has been to reduce deposit costs through disciplined pricing while maintaining a focus on the continued growth of core interest and non-interest-bearing deposits. While the average interest-bearing deposit balances increased $286.9 million, deposit costs declined $8.8 million. The Company experienced a decrease of $8.9 million in deposit interest expense due to a reduction of 90 basis points on the average rate paid. The decrease in deposit interest expense due to the decline in the average rate paid was attributable to all deposit categories, the majority of which was from savings, certificates and money markets deposits. Deposit interest expense increased approximately $99,000 due to the increase of the average balance of interest-bearing core deposits of $479.8 million, partially offset by a decrease of $192.9 million in the average certificate balances. Through our continued emphasis on building core deposit relationships and migration from maturing time deposits as they repriced at reduced rates, the Company has been able to grow core deposit average balances. The main driver of core deposit growth has been money market accounts with an average balance increase of $424.9 million. Additionally, when combined with the decline in the average rate paid of 72 basis points, interest expense increased by $128,000 during this period for this product.
A further benefit of the core deposit growth has been a substantial reduction in and reliance on borrowings from the Federal Home Loan Bank (FHLB). FHLB advances and other borrowing costs decreased $6.0 million due to the decline in the average balance and the average rate paid of $287.9 million and 63 basis points, respectively, primarily on FHLB advances. The Company was able to replace maturing advances with new advances at substantially lower rates or payoff maturing advances.
Comparison
of Year-to-Date June 2010 and June 2009
Interest and dividend income decreased
$14.4 million to $174.5 million for the six months ended June 30, 2010 compared
to $188.8 million at June 30, 2009 and was due to a decrease of $14.7 million due
to lower yields earned, partially offset by a $366,000 increase due to volume. The
decline in average yield was primarily due to the decline in loan and investment
yields due to lower market interest rates and to a lesser extent the level of nonperforming
loans. The increase in organic loans and investment securities helped to relieve
some of the interest rate pressure as the Company, with ready liquidity, increased
the average balance of these earning assets by $243.5 million. Similar to the quarter-to-date
discussion, the interest income decline in the loan portfolio related to the average
balance was primarily due to the decrease in the average balance of the purchased
loan portfolio of $200.0 million.
The cost of funds for the six months ended June 30, 2010 decreased $29.8 million to $61.1 million, compared to $90.9 million for the same period a year ago primarily resulting from the Companys diligence in bringing deposit costs down while continuing to increase core deposits. As shown in Table 4, deposit costs were reduced by $18.1 million due to a decrease in the average rate paid of 96 basis points, partially offset by an increase of $297,000 due to the increase in the average balances of $347.6 million. This $17.8 million net decrease in deposit interest costs has been accomplished in tandem with growth in all core deposits of $644.3 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
managements 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 $5.5 million for the three months ended June 30, 2010. The primary factors that influenced managements decision to record this provision were increases in nonperforming loans since December 31, 2009 of $17.8 million, or 35.2%, an increase in total delinquencies since December 31, 2009 of $11.3 million, or 15.5%, primarily residential mortgages, net charge-offs of $4.7 million for the current quarter and to support estimated credit losses embedded in the portfolio. A provision for loan losses of $5.0 million was
42
recorded for the three months ended June 30, 2009 based on the level of delinquencies, net charge-offs and nonperforming loans at that time.
For the year to date period ending June 30, 2010, the provision for loan losses was $10.3 million compared to $9.1 million for the same period ended June 30, 2009. 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 49.
At June 30, 2010, the allowance for loan losses was $54.9 million, which represented 1.11% of total loans and 80.45% of nonperforming loans. This compared to the allowance for loan losses of $52.5 million at December 31, 2009 which represented 1.10% of total loans and 103.87% of nonperforming loans.
Table 5: Non-Interest Income
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
June 30, | Change | June 30, | Change | |||||||||||||||||||||||||||||
(Dollars in thousands) | 2010 | 2009 | Amount | Percent | 2010 | 2009 | Amount | Percent | ||||||||||||||||||||||||
Depositor service charges | $ | 7,457 | $ | 6,953 | $ | 504 | 7 | % | $ | 14,165 | $ | 12,906 | $ | 1,259 | 10 | % | ||||||||||||||||
Loan and servicing income | 351 | 357 | (6 | ) | (2 | ) | 668 | 176 | 492 | 280 | ||||||||||||||||||||||
Trust fees | 1,573 | 1,392 | 181 | 13 | 3,174 | 2,651 | 523 | 20 | ||||||||||||||||||||||||
Investment management, brokerage & insurance fees | 1,302 | 1,564 | (262 | ) | (17 | ) | 2,816 | 3,814 | (998 | ) | (26 | ) | ||||||||||||||||||||
Bank owned life insurance | 847 | 899 | (52 | ) | (6 | ) | 4,309 | 1,770 | 2,539 | 143 | ||||||||||||||||||||||
Net gain on securities | 198 | 1,617 | (1,419 | ) | (88 | ) | 198 | 3,483 | (3,285 | ) | (94 | ) | ||||||||||||||||||||
Mortgage origination activity & loan sale income | 571 | 1,481 | (910 | ) | (61 | ) | 1,299 | 3,500 | (2,201 | ) | (63 | ) | ||||||||||||||||||||
Net gain (loss) on limited partnerships | 2,372 | 89 | 2,283 | 2,565 | 2,703 | (659 | ) | 3,362 | 510 | |||||||||||||||||||||||
Other | 1,215 | 939 | 276 | 29 | 1,953 | 1,913 | 40 | 2 | ||||||||||||||||||||||||
Total non-interest income |
$ | 15,886 | $ | 15,291 | $ | 595 | 4 | % | $ | 31,285 | $ | 29,554 | $ | 1,731 | 6 | % | ||||||||||||||||
Non-Interest Income
Comparison
of Quarter-to-Date June 2010 and June 2009
As displayed in Table 5, non-interest
income increased $595,000 to $15.9 million for the three months ended June 30, 2010
compared to $15.3 million for the prior year period. The main drivers of the increase
were depositor service charges, trust fees, net gain on limited partnerships and
other income. These increases were partially offset by decreases in investment management,
brokerage and insurance fees, net security gains and mortgage origination and loan
sale income.
| Depositor service charges increased due to overdraft fee income, merchant services income and check card fees. Growth of fee income is attributable to an increase in consumer spending and the growth in retail and business core deposits. During the third quarter of 2010, federal banking regulations will change how the bank charges ATM and debit card transactions. The Company recently launched a campaign to raise awareness to our customers about the upcoming regulation changes. If customers do not opt-in, overdrafts for their ATM and debit card transactions will be denied. Depositor service charge income may be negatively impacted effective with these new regulatory changes. |
||
| Trust fees increased due to the overall improvement in market conditions during the period. For the three months ended June 30, 2010, average assets under management were consistently ahead of 2009, and averaged $1.06 billion compared to $817.0 million for the prior year quarter, a 20% overall increase, evidencing the continued market corrections. |
||
| Net gain on limited partnerships increased $2.3 million due primarily to the net increase in the carrying value on certain limited partnerships. Approximately a $2.0 million increase in the carrying value and a realized gain of $529,000 resulted from the initial public offering (IPO) of an underlying portfolio company in a limited partnership. The realized gain represents the Companys allocated income on 25.0% of the shares sold by the partnership in the IPO. The increase in the carrying value was due to an equity method adjustment for the remaining shares. |
||
| Other income increased primarily due to net gains recorded on the sale of other real estate owned. |
||
| Investment management, brokerage and insurance fee income decreased due to the low interest rate environment as well as customer preference for deposit products over other investment alternatives. |
||
| Net gain on securities decreased $1.4 million due to higher prior year gains recorded on the sale of mortgage backed securities. The net gain of $198,000 recorded in 2010 was due to the sale of residential mortgage-backed securities, partially offset by an impairment write-down on an investment in a pooled trust preferred security based on a cash flow analysis. The second quarter of 2009 included an impairment write-down of $626,000 for an adjustable rate mortgage mutal fund. Residential mortgage-backed securities were sold during the current |
43
year quarter to reduce FNMA pre-payment buy-out risk. Further information related to the impairment can be found in Footnote 3 of the Notes to Unaudited Consolidated Financial Statements. |
|||
| Mortgage origination and loan sale income decreased due to a lower number of mortgage loans originated for sale and sold in the secondary market and the effect of originations that were in the pipeline under commitments to be sold at June 30, 2010 compared to June 30, 2009. Although the Company has had record residential mortgage originations of $332.0 milion during the quarter, the majority were originated for portfolio. |
Comparison of Year-to-Date June 2010
and June 2009
As displayed in Table 5, non-interest income increased $1.7
million to $31.3 million for the three months ended June 30, 2010 from the prior
year period. The main drivers of the increase were depositor service charges, loan
and servicing income, trust fees, bank owned life insurance (BOLI) and
net gain on limited partnerships. These increases were offset by a decrease in investment
management, brokerage and insurance fees, net security gains and mortgage origination
and loan sale income.
| Depositor service charges increased due to overdraft fee income, merchant services income and check card fees. Growth in fee related income has resulted from profit improvement initiatives to expand core banking fee income, the increase in consumer spending and growth in retail and business core deposits. |
||
| Loan and servicing income increased primarily due to a prior year write-down of approximately $475,000 on the Banks mortgage servicing asset. |
||
| Trust fees increased due to the overall improvement in market conditions during this time period. For the six months ended June 30, 2010, average assets under management were $1.02 billion compared to $851.0 million for the year-to-date period ended June 30, 2010 , a 30% overall increase, evidencing the continued market corrections. |
||
| BOLI income increased as the Company recorded a gain of approximately $2.6 million related to tax-exempt life insurance proceeds. This increase was partially offset by a decline in the average yield earned as a result of current market interest rates and a reduction in the BOLI asset. |
||
| Limited partnership income increased due primarily to the same reasons as outlined in the quarterly discussion, in addition to an increase in the carrying value on certain limited partnerships compared to a net loss and an impairment write down recorded in the prior year period. |
||
| The decreases in net security gains, investment management, brokerage and insurance fees and mortgage origination and loan sale income from a year ago are similar to those outlined in the quarterly discussion above. |
Table 6: Non-Interest Expense
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
June 30, | Change | June 30, | Change | |||||||||||||||||||||||||||||
(Dollars in thousands) | 2010 | 2009 | Amount | Percent | 2010 | 2009 | Amount | Percent | ||||||||||||||||||||||||
Salaries and employee benefits | $ | 23,982 | $ | 21,607 | $ | 2,375 | 11 | % | $ | 46,203 | $ | 42,838 | $ | 3,365 | 8 | % | ||||||||||||||||
Occupancy | 4,094 | 4,644 | (550 | ) | (12 | ) | 8,715 | 9,399 | (684 | ) | (7 | ) | ||||||||||||||||||||
Furniture and fixtures | 1,426 | 1,453 | (27 | ) | (2 | ) | 2,771 | 2,929 | (158 | ) | (5 | ) | ||||||||||||||||||||
Outside services | 4,718 | 4,455 | 263 | 6 | 9,867 | 9,805 | 62 | 1 | ||||||||||||||||||||||||
Advertising, public relations, and sponsorships | 1,486 | 981 | 505 | 51 | 3,017 | 2,115 | 902 | 43 | ||||||||||||||||||||||||
Amortization of identifiable intangible assets | 1,953 | 2,129 | (176 | ) | (8 | ) | 3,905 | 4,257 | (352 | ) | (8 | ) | ||||||||||||||||||||
FDIC insurance premiums | 1,898 | 5,893 | (3,995 | ) | (68 | ) | 3,755 | 6,838 | (3,083 | ) | (45 | ) | ||||||||||||||||||||
Other | 4,071 | 3,243 | 828 | 26 | 7,595 | 6,605 | 990 | 15 | ||||||||||||||||||||||||
Total non-interest expense |
$ | 43,628 | $ | 44,405 | $ | (777 | ) | (2 | )% | $ | 85,828 | $ | 84,786 | $ | 1,042 | 1 | % | |||||||||||||||
Non-Interest Expense
Comparison of Quarter-to-Date June 2010 and June 2009
As displayed
in Table 6, non-interest expense decreased $777,000 to $43.6 million for the three
months ended June 30, 2010 from $44.4 million for the same period a year ago. The
main drivers of the decrease were lower FDIC insurance premiums and occupancy expense,
partially offset by an increase in salaries and employee benefits, advertising,
public relations, and sponsorships and other expense.
| FDIC insurance premium expense decreased $4.0 million due entirely to the special assessment that was imposed by the FDIC in the second quarter of 2009. |
||
| Occupancy expenses declined primarily due to leasing costs related to the closure of two branch offices in the second quarter of 2009 and reduced maintenance costs throughout the branch network. |
44
| Salaries and employee benefits increased mainly as a result of a) general merit increases, b) additions to the management team, c) higher levels of employee incentive accruals, d) a decrease in capitalized salaries due to a decline in the number of residential loan originations, e) increases in restricted stock and option expense due to additional grant awards, and f) increased expense for the Companys pension due to changes in assumption for 2010. We expect to record additional SERP expense in the third quarter of approximately $1.3 million due to the retirement of an executive officer. |
||
| Advertising, public relations and sponsorships increased primarily due to advertising expenses associated with new marketing campaigns. These campaigns include expenses associated with TV commercials, radio, print and online advertising, branch merchandising and collateral pieces, a redesigned website, select sponsorships and cash incentive awards and is expected to continue throughout the remainder of the year. |
||
| Other expense increased due to expenses primarily associated with telephone costs, increased foreclosure expenses and merger related charges. Merger related expenses increased approximately $500,000 due to expenses pertaining to due diligence efforts. |
Comparison of Year-to-Date June 2010
and June 2009
As displayed in Table 6, non-interest expense increased $1.0
million to $85.8 million for the six months ended June 30, 2010 from $84.8 million
for the same period a year ago. The main driver of the increase was salaries and
employee benefits, advertising, public relations, and sponsorships and other expenses.
These increases were partially offset by decreased occupancy expense, FDIC insurance
premiums and amortization of identifiable intangible assets.
| The increase in salaries and employee benefits, advertising, public relations and sponsorships and other expenses in addition to the decrease in occupancy expenses were primarily due to the same reasons as outlined in the quarterly discussion above. |
||
| FDIC insurance premium expense decreased $3.1 million primarily due to the special assessment of $4.0 million during the second quarter of 2009. The decrease was partially offset by an increase of approximately one basis point in the base assessment rate for 2010, compared to 2009 based on new assessment rates implemented by the FDIC in April 2009. Additionally, the Bank was able to offset some of the first quarter 2009 assessment costs through the exhaustion of the one-time credit established by the FDIC Reform Act of 2005. Although FDIC insurance premium expense may continue to be somewhat volatile, the FDIC has issued a final rule maintaining current deposit insurance rates at their current levels through the end of 2010 but will apply a three basis-point increase in assessment rates effective January 1, 2011. |
||
| Amortization of identifiable intangible assets decreased due to less amortization on core deposit intangibles from using the accelerated method of accounting, therefore, there was more amortization expense in 2009 compared to 2010. |
Income Tax Provision
For the three
months ended June 30, 2010 and 2009, income tax expense was $8.2 million and $5.7
million and the effective tax rate for these periods was 33.6% and 36.1%, respectively.
The decrease in the effective tax rate for the three months ended June 30, 2010,
as compared to the 2009 period, was primarily due to the decrease in the valuation
allowance against capital loss carryforwards. The decrease in the valuation allowance
was treated as a discrete item in the second quarter of 2010.
For the six months ended June 30, 2010 and 2009, income tax expense was $15.8 million and $11.9 million and the effective tax rate for these periods was 32.6% and 35.4%, respectively. The decrease in the effective tax rate for the six months ended June 30, 2010, as compared to the 2009 period, was primarily due to an increase in the favorable permanent differences relating to a $2.6 million gain on tax exempt bank owned life insurance proceeds and the decrease in the valuation allowance related to capital loss carryforwards. The gain was treated as a discrete item in the first quarter of 2010 and the decrease in the valuation allowance was treated as a discrete item in the second quarter of 2010.
The projected effective rate for the year ended December 31, 2010 is 33.7%.
45
Financial Condition
Financial Condition Summary
From December 31, 2009 to June 30, 2010, total assets and total liabilities
increased $277.8 million and $248.6 million, respectively, due mainly to increases
in loans, investments, deposits and borrowings. Stockholders equity increased
$29.2 million.
Investment Securities
The following table presents the amortized cost and fair value of investment
securities at June 30, 2010 and December 31, 2009.
Table 7: Investment Securities
June 30, 2010 | December 31, 2009 | |||||||||||||||
Amortized | Fair | Amortized | Fair | |||||||||||||
(In thousands) | cost | value | cost | value | ||||||||||||
Available for sale | ||||||||||||||||
U.S. Treasury obligations |
$ | - | $ | - | $ | 597 | $ | 597 | ||||||||
U.S. Government sponsored enterprise obligations |
399,327 | 405,179 | 198,692 | 199,730 | ||||||||||||
Corporate obligations |
8,118 | 8,730 | 8,139 | 8,517 | ||||||||||||
Other bonds and obligations |
13,496 | 12,261 | 14,625 | 13,234 | ||||||||||||
Auction rate certificates |
12,050 | 12,050 | 27,550 | 24,795 | ||||||||||||
Marketable equity securities |
8,582 | 8,779 | 8,567 | 8,783 | ||||||||||||
Trust preferred equity securities |
48,223 | 34,782 | 48,754 | 33,296 | ||||||||||||
Private label residential mortgage-backed securities |
21,428 | 20,226 | 23,871 | 20,856 | ||||||||||||
Residential mortgage-backed securities |
1,820,482 | 1,901,310 | 1,951,297 | 2,018,047 | ||||||||||||
Total available for sale |
2,331,706 | 2,403,317 | 2,282,092 | 2,327,855 | ||||||||||||
Held to maturity | ||||||||||||||||
Residential mortgage-backed securities |
313,520 | 325,692 | 230,596 | 241,956 | ||||||||||||
Other bonds |
9,735 | 10,044 | 10,170 | 10,375 | ||||||||||||
Total held to maturity |
323,255 | 335,736 | 240,766 | 252,331 | ||||||||||||
Total securities |
$ | 2,654,961 | $ | 2,739,053 | $ | 2,522,858 | $ | 2,580,186 | ||||||||
At June 30, 2010, the Company had total investments of $2.73 billion, or 31.3% of total assets. The increase of $158.0 million, from $2.57 billion at December 31, 2009 was primarily in U.S Government agency obligations and held to maturity residential mortgage-backed securities partially offset by a decrease in available-for-sale residential mortgage-backed securities. 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 June 30, 2010, mortgage-backed securities comprised 80.0% and 97.0% 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 1.53 years at June 30, 2010 compared to 1.62 years at December 31, 2009.
The Companys underlying investment strategy has been to purchase FNMA and FHLMC short-term front sequential collateralized mortgage obligations 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, callable and step-up coupon agency debentures. 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 seven years depending upon the rate structure of the bond.
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 Companys intent regarding its investments at the time of purchase. The Company does not currently maintain a portfolio of trading securities. As of June 30, 2010, $2.40 billion, or 88.1% of the portfolio, was classified as available for sale and $323.3 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 13 of the Notes to Unaudited Consolidated Financial Statements.
During the three months ended June 30, 2010, a pooled trust preferred security, which had a previous impairment charge during 2009, was deemed to have an additional credit related OTTI loss in the amount of $552,000 based on a further decline in expected cash flows. The credit related impairment, which was reclassified from other comprehensive income as it was
46
previously recognized as non-credit related, was due to a cash flow analysis that indicated further credit related impairment. The Company received nine cash flow scenarios from the underwriter which were utilized by management to analyze this security for potential OTTI. The nine scenarios covered various default rates, recovery rates and prepayment options over different time periods. Two of the nine cash flow analyses indicated impairment over the life of the security. The driver of the indicated impairment was the recovery rate, which was modeled at 0% in these two cash flow scenarios. As the severity of the estimated loss in these two cash flow scenarios increased by a factor of five since the prior OTTI analysis in the first quarter of 2010 and due to the fact that the past history of the security indicates that there have not been any recoveries to date from securities that have defaulted, the Company recorded a credit-related impairment charge. The credit impairment represents the average loss of the two negative cash flow analyses. After the write-down, the pooled trust preferred security had an amortized cost and fair value of approximately $869,000 and $220,000, respectively. There is no intent to sell nor is it more likely than not that the Company will be required to sell this security.
The net unrealized gain on securities classified as available for sale as of June 30, 2010 was $71.6 million compared to an unrealized gain of $45.8 million as of December 31, 2009. All investment categories except marketable equity securities experienced positive movement in the mark to market since December 31, 2009. 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 due to the decrease in intermediate LIBOR/Swap rates and the slight tightening in mortgage spreads. Mortgage spreads tightened due to increased bank demand for mortgages due to renewed concerns regarding world-wide financial concerns. The net unrealized gain on the available for sale investment portfolio is primarily within the mortgage-backed securities, partially offset by unrealized losses on trust preferred equity securities. The changes in unrealized gains and losses on the investment portfolio were also due to credit spreads, liquidity and fluctuations in market interest rates during the period.
The net unrealized gain on residential mortgage-backed securities is primarily from agency mortgage-backed securities issued by FNMA and FHLMC resulting from the general decline in interest rates and the tightening in mortgage-backed security spreads since date of purchase. Although the Federal Reserve Bank mortgage-backed securities purchase program ended on March 31, 2010, mortgage rates and spreads continue to remain at relatively low levels.
The unrealized loss on private label residential mortgage-backed securities is approximately 50% concentrated in one BBB rated private-label mortgage-backed security which is substantially paid down, well seasoned and of an earlier vintage that has not been significantly affected by high delinquency levels or vulnerable to lower collateral coverage as seen in later issued pools. Widening in non-agency mortgage spreads since the date purchased is the primary factor for the unrealized losses reported on private label residential mortgage-backed securities. None of the securities are backed by subprime mortgage loans and none have suffered losses. One of the private issue securities is rated BBB and the remaining securities are AA through AAA rated. All are still paying principal and interest and are expected to continue to pay their contractual cash flows. Management reviewed potential impairment factors and issuer specific data and concluded that these private-label mortgage-backed securities are not other-than-temporarily impaired.
The unrealized losses on other bonds and obligations primarily relates to a position in an adjustable rate mortgage mutual fund that holds positions in non-agency mortgage-backed securities that are facing negative mark to market pressures due to widening spreads in non-agency mortgage products. Although the fund has experienced declines in credit ratings during 2009, it was not due to customer redemptions or forced selling of the investments. During 2009, the Company recorded a credit-related OTTI loss of $816,000 on this adjustable rate mortgage mutual fund due to a decrease in the credit quality of the security coupled with a loss recognized by the fund. As of June 30, 2010, the investment carries a market value to book value ratio of 82.43%, a weighted average underlying investment credit rating of A+ and it continues to pay normal monthly dividends. There is no intent to sell nor is it more likely than not that the Company will be required to sell these securities and management has therefore concluded that the fund experienced no further OTTI in the quarter ended June 30, 2010.
Trust preferred securities are comprised of two pooled trust preferreds with an amortized cost of $5.6 million, one of which is rated A and the other is rated CC at June 30, 2010, a slight downgrade from BB at December 31, 2009. During 2009, the Company recorded a credit related OTTI loss of $581,000 on the CC rated pooled trust preferred security based on a cash flow analysis and a subsequent credit-related impairment of $552,000 during the second quarter ending June 30, 2010 as discussed above. The remaining $42.6 million of trust preferred securities are comprised of twelve individual names issues with the following ratings: $15.6 million rated A to AA-, $14.6 million rated BBB- to BBB+ and $12.4 million rated BB. The unrealized losses reported for trust preferred securities relate to the financial and liquidity stresses in the fixed income markets and in the banking sector and are not reflective of individual stresses in the individual company names. The ratings on all of the issues with the exception of the CC rated pooled security have improved or remained the same since December 31, 2009. Additionally, there have not been any disruptions in the cash flows of these securities and all are currently paying the contractual principal and interest payments. A detailed review of the two pooled trust preferreds and the individual names trust preferred equity securities was completed by management. This review included an analysis of collateral reports, cash flows, stress default levels and financial ratios of the underlying issuers. Management reviewed the above factors and issuer specific data and
47
concluded that after the OTTI loss recorded on the CC rated pooled trust preferred security, these securities are not other-than-temporarily impaired.
The Company has no intent to sell nor is it more likely than not that the Company will be required to sell any of 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 Companys loan portfolio as of June 30, 2010 and December
31, 2009.
Table 8: Loan Portfolio
June 30, 2010 | December 31, 2009 | |||||||||||||
Percent | Percent | |||||||||||||
(Dollars in thousands) | Amount | of Total | of Total | |||||||||||
Residential real estate | $ | 2,472,730 | 50.1 | % | $ | 2,382,514 | 50.0 | % | ||||||
Residential real estate construction | 18,431 | 0.4 | 13,789 | 0.3 | ||||||||||
Total residential real estate |
2,491,161 | 50.5 | 2,396,303 | 50.3 | ||||||||||
Commercial real estate | 1,192,934 | 24.2 | 1,100,880 | 23.1 | ||||||||||
Commercial real estate construction | 68,884 | 1.4 | 132,370 | 2.8 | ||||||||||
Total commercial real estate |
1,261,818 | 25.6 | 1,233,250 | 25.9 | ||||||||||
Commercial business | 473,329 | 9.6 | 411,211 | 8.6 | ||||||||||
Home equity and equity lines of credit | 687,635 | 14.0 | 705,673 | 14.9 | ||||||||||
Other consumer | 14,428 | 0.3 | 15,608 | 0.3 | ||||||||||
Total loans |
$ | 4,928,371 | 100.0 | % | $ | 4,762,045 | 100.0 | % | ||||||
As shown in Table 8, gross loans were $4.93 billion, up $166.3 million, at June 30, 2010 from December 31, 2009. The Company experienced increases in residential real estate, commercial real estate and business loans partially offset by home equity loans.
Residential real estate loans continue to represent the largest segment of the Companys loan portfolio as of June 30, 2010, comprising 50.5% of total loans. The increase of $94.9 million from December 31, 2009 was primarily due to origination volume partially offset by the net impact of prepayments. The Company had significant originations of both adjustable and fixed rate mortgages of $549.2 million during the first half of the year, with approximately $439.0 million 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 and in 2010 the Company originated and retained $53.2 million of these mortgages. The residential portfolio increased in the first half of year due to continued strong mortgage activity resulting from relatively low market interest rates, competitive pricing and increased marketing campaigns. The residential real estate loan portfolio has a weighted average FICO score of 749 and a current estimated weighted loan to value ratio of 63%. 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 June 30, 2010 the Companys purchased portfolio had an outstanding balance of approximately $427.4 million with the largest concentration in our footprint of Connecticut and Massachusetts at 19.3%, followed by New York at 13.6% and California at 12.8%.
Commercial real estate loans increased $28.6 million from December 31, 2009, as the Bank has experienced increased demand in refinancing commercial real estate loans. Mid-sized businesses continue to look to regional community banks for relationship banking and personalized lending services. The commercial construction portfolio of $68.9 million includes $22.0 million of loans to commercial borrowers for residential housing development, approximately $8.3 million of which are for condominium projects. The decrease in commercial construction is mainly the result of transfers of construction to permanent loans to the commercial real estate portfolio as well as a drop in residential housing development loans.
The Companys long term strategy continues to be that of building a larger percentage of the Companys assets in commercial loans including real estate and other business loans, such as asset-based lending. In the fourth quarter of 2009, the Company formed an asset-based lending business. Asset-based lending expands the Banks business lending offerings to include revolving lines of credit and term loans secured by accounts receivable, inventory, and other assets. An asset-based loan is
48
collateralized with a customers balance sheet assets, which are considered the primary source of loan repayment. This type of financing is particularly attractive to start-up and growth companies, as well as those in restructuring, turn-around, or other financially distressed situations that result in the inability to secure traditional commercial lending.
Commercial business loans increased $62.1 million from December 31, 2009, primarily due to asset-based lending. As of June 30th, the asset-based lending portfolio was $69.1 million or 1.4% of total loans. We remain an active commercial lender and will continue promoting strong business development efforts to obtain new business banking relationships, while maintaining strong credit quality and profitability. We believe that our status as a healthy regional community bank focused on relationship banking bodes well for us to retain customers and to be a potential source of credit for new businesses.
Home equity loans and lines of credit decreased $18.0 million from December 31, 2009 to June 30, 2010. The Company continues to offer competitive pricing and is committed to growing this loan segment while maintaining credit quality. However, as a result of the continuing interest rate environment, consumer demand has shifted to residential mortgages and away from home equity products, attributing to the year-to-date decline in the portfolio. The weighted average FICO score and current estimated weighted combined loan to value ratio for home equity loans and lines of credit is 749 and 68%, respectively. Lending has been from organic originations in the Companys 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
$22.0 million of commercial construction loans for residential development. All
of these loans are collateralized and carry a reserve allocation of approximately
$2.9 million. This segment has total delinquencies of $321 thousand, all of which
are in the over 90 day category.
Within the residential portfolio, management uses an early warning technique to more closely monitor credit deterioration and potential nonperforming loans. 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 June 30, 2010, higher-risk loans comprised approximately $53.0 million, or 2.2% of the residential real estate portfolio.
Additionally, the Company also tracks loans that have a FICO score that has declined 20 points or more and are below 660. As of June 30, 2010 loans meeting this criteria represent approximately $56.3 million, or 2.26% 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 June 30, 2010 increased to $70.9 million compared to $54.2 million at December 31, 2009. The increase is primarily due to loans secured by residential one-to-four family loans and commercial real estate loans.
The increase in nonperforming residential loans of $15.5 million was due to current economic conditions including factors such as continued high unemployment rates and softness in the real estate market impacting customers ability to make loan payments. There are 190 loans in the residential nonperforming category totaling $46.7 million, representing 1.87% of the total residential portfolio, just over half of which have property locations in Connecticut and Massachusetts. 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 $3.6 million in restructured loans which have been modified from their original contractual terms.
The increase in nonperforming commercial real estate loans primarily relates to two loans totaling $6.9 million which are in the process of restructured workouts, partially offset by a decrease of $1.7 million due to a note sale.
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 which may be
49
a reduction in interest rate to market rate or below, a change in the term, movement of the past due amounts to the back end of the loan or refinance. Loans are placed on nonaccrual status upon being restructured, even if they were not previously. The Banks policy to restore a restructured loan to performing status is dependent on the receipt of regular payments, generally for a period of six months.
While the economic data indicates the worst of the recession is over, if unfavorable 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 June 30, 2010 were 1.39%, compared to 1.06% at December 31, 2009.
Table 9: Nonperforming Assets
June 30, | December 31, | |||||||
(Dollars in thousands) | 2010 | 2009 | ||||||
Nonperforming loans (1) | ||||||||
Real estate loans |
||||||||
Residential (one- to four-family) |
$ | 46,663 | $ | 31,140 | ||||
Commercial real estate loans |
9,638 | 6,136 | ||||||
Commercial construction |
321 | 2,459 | ||||||
Total real estate loans |
56,622 | 39,735 | ||||||
Commercial business |
9,093 | 8,497 | ||||||
Consumer loans |
||||||||
Home equity and equity lines of credit |
2,386 | 2,187 | ||||||
Other consumer |
194 | 88 | ||||||
Total consumer loans |
2,580 | 2,275 | ||||||
Total nonperforming loans |
68,295 | 50,507 | ||||||
Other real estate owned | 2,648 | 3,705 | ||||||
Total nonperforming assets |
$ | 70,943 | $ | 54,212 | ||||
Total nonperforming loans as a percentage of total loans (2) |
1.39 | % | 1.06 | % | ||||
Total nonperforming assets as a percentage of total assets |
0.81 | 0.64 | ||||||
Troubled debt restructured loans included in nonaccruing loans above |
$ | 4,073 | $ | 3,294 |
(1) | Nonperforming loans, except guaranteed U.S. Government certificates totaling $1,000 and $477,000 at June 30, 2010 and December 31, 2009, respectively, include all loans 90 days or more past due, restructured loans due to a weakening in the financial condition of the borrower and other loans which have been identified by the Company as presenting uncertainty with respect to the collectability of principal or interest. All of the Companys non-performing loans do not accrue interest. | |
(2) | Total loans are stated at their principal amounts outstanding, net of deferred loan fees and net unamortized premiums on acquired loans. |
Allowance for Loan Losses
Deteriorating market conditions have adversely impacted the loan
portfolios since the latter part of 2007. As displayed in Table 10 below, the Company
recorded net charge-offs of $4.7 million during the three ended June 30, 2010, compared
to net charge-offs of $4.1 million for the three months ended June 30, 2009. Net
charge-offs of $1.3 million, $1.2 million, $832,000 and $1.2 million were recorded
against the residential, commercial real estate, commercial construction and commercial
business 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 persistent adverse economic and housing pressures
are affecting charge-off levels in the commercial real estate, commercial construction
and commercial business portfolios. As a result of the net charge-offs and reserve
requirements for impaired loan classifications, a provision for loan losses of $5.5
million was recorded for the three months ended June 30, 2010 compared to $5.0 million
for the three months ended June 30, 2009. For the six months ended June 30, 2010,
net charge-offs were $7.8 million compared to $7.5 million for the six months ended
June 30, 2009 and were primarily in the residential and commercial portfolios.
The Company has a loan loss allowance of $54.9 million, or 1.11% of total loans as compared to a loan loss allowance of $52.5 million, or 1.10% of total loans at December 31, 2009. Management believes that the allowance for loan losses is adequate and consistent with asset quality indicators and that it represents the best estimate of probable losses inherent in the loan portfolio. To achieve this estimate, numerous factors are evaluated and applied to the allowance for loan loss calculation.
The allowance for loan losses to nonperforming loans ratio at June 30, 2010 was 80.45% compared to 103.87% at December 31, 2009 and 93.86% at June 30, 2009. This ratio has declined because growth in the allowance is not proportionate to growth in
50
nonperforming
loans as the result of the following: 1) the majority of the Companys nonperforming loans are secured by real estate
collateral and while the entire loan is classified as nonperforming, only the amount
of estimated losses would have been captured in the allowance for loan losses; 2)
growth in nonperforming loans has been concentrated in residential real estate loans
in which a significant loss in event of default is relatively low; 3) certain nonperforming
loans have already been partially charged-off to the expected net realizable value; and 4) a portion of the allowance is to cover losses established
under FASB ASC 450, Contingencies, for performing loans. The increase in
total loans since December 31, 2009 has been concentrated in well secured residential
mortgage and asset-based loans. Additionally, there has been a continued reduction
in the construction loan portfolio.
The increase in residential real estate nonperforming loans has been the main driver of the overall increase in
total nonperforming loans. Nonperforming loans increased $17.8 million, or 35.2%, since December 31,
2009, of which $15.5 million, or 87.3%, was in residential real estate loans. The residential portfolio presents
a low risk of significant loss due to the Companys conservative underwriting standards and low LTV ratios.
Additionally, during the quarter, the Company analyzed the majority of its nonperforming loans for specific
reserves and its on-going reappraisal process continued to support high collateral levels and coverage.
During the most recent quarter the loan portfolio experienced a moderate increase in nonperforming loans as
compared to prior periods. In addition, total delinquencies declined slightly from the previous quarter.
Criticized loans have declined and adversely classified loans have remained relatively flat since December 31,
2009.
The Company employs a formal quarterly process
to assess the adequacy of the Companys allowance for loan losses. The process
is designed to adequately capture inherent losses in the loan portfolio. The Company
continues to aggressively address and dispose of impaired and adversely classified
assets particularly as it relates to loans with a potentially higher risk of loss.
Net charge-offs and overall loan portfolio performance continues to remain well
within expected ranges.
Table 10: Schedule of Allowance for Loan Losses
At or For the Three Months | At or For the Six Months | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Balance at beginning of period | $ | 54,164 | $ | 50,635 | $ | 52,463 | $ | 49,911 | ||||||||
Provision for loan losses | 5,500 | 5,000 | 10,300 | 9,100 | ||||||||||||
Charge-offs | ||||||||||||||||
Residential real estate loans |
1,293 | 990 | 2,345 | 1,489 | ||||||||||||
Commercial real estate loans |
1,244 | 1,493 | 1,994 | 1,996 | ||||||||||||
Commercial construction loans |
832 | 264 | 953 | 2,046 | ||||||||||||
Commercial business loans |
1,459 | 1,346 | 2,406 | 2,151 | ||||||||||||
Consumer loans |
213 | 254 | 533 | 413 | ||||||||||||
Total charge-offs |
5,041 | 4,347 | 8,231 | 8,095 | ||||||||||||
Recoveries | ||||||||||||||||
Residential real estate loans |
8 | 103 | 11 | 137 | ||||||||||||
Commercial real estate loans |
- | - | - | - | ||||||||||||
Commercial construction loans |
- | - | - | - | ||||||||||||
Commercial business loans |
276 | 84 | 321 | 291 | ||||||||||||
Consumer loans |
38 | 27 | 81 | 158 | ||||||||||||
Total recoveries |
322 | 214 | 413 | 586 | ||||||||||||
Net charge-offs | 4,719 | 4,133 | 7,818 | 7,509 | ||||||||||||
Balance at end of period | $ | 54,945 | $ | 51,502 | $ | 54,945 | $ | 51,502 | ||||||||
Net charge-offs to average loans (annualized) | 0.39 | % | 0.33 | % | 0.33 | % | 0.30 | % | ||||||||
Allowance for loan losses to total loans | 1.11 | 1.06 | 1.11 | 1.06 | ||||||||||||
Allowance for loan losses to nonperforming loans | 80.45 | 93.86 | 80.45 | 93.86 | ||||||||||||
Net charge-offs to allowance for loan losses | 8.59 | 8.02 | 14.23 | 14.58 | ||||||||||||
Total recoveries to total charge-offs | 6.39 | 4.92 | 5.02 | 7.24 |
Loans Held for Sale
The Company currently sells the majority of its originated fixed rate
residential real estate loans with terms of 15 years or more. Loans held for sale
were $13.4 million at June 30, 2010, a decrease of $1.3 million from $14.7 million
at December 31, 2009. The decrease is primarily due to a combination of market rates
and the Company retaining a higher percentage of residential mortgage originations
in the first half of 2010. During the year, the Company originated approximately
$110.4 million mortgage loans 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 June 30, 2010, the Company had intangible assets of
$558.6 million, a decrease of $3.9 million, from $562.5 million at December 31,
2009. 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
51
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. For purposes of goodwill impairment evaluation, the Bank is identified as
the reporting unit. The Company engaged an external third party to assist with the
annual test for goodwill impairment during the first quarter of 2010. 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 that the reporting unit was not at
risk of failing Step 1 of the impairment test; therefore, an impairment charge was
not deemed necessary. No events or circumstances subsequent to the analysis through
June 30, 2010 indicate that the carrying value of the Companys goodwill may
not be recoverable.
Sources of Funds
Cash flows from deposits, loan and mortgage-backed securities repayments,
securities sales proceeds and maturities, borrowings and earnings are the primary
sources of the Companys funds available for use in its lending and investment
activities and in meeting its operational needs. While scheduled loan and securities
repayments are a relatively stable source of funds, deposit flows and loan and investment
security prepayments are influenced by prevailing interest rates and local and economic
conditions and are inherently uncertain. See Note 8 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 87
additional banking offices throughout Connecticut (76 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
June 30, | December 31, | |||||||
(In thousands) | 2010 | 2009 | ||||||
Savings | $ | 1,798,881 | $ | 1,817,787 | ||||
Money market | 915,510 | 790,453 | ||||||
NOW | 406,069 | 400,176 | ||||||
Demand | 568,414 | 534,180 | ||||||
Time | 1,447,872 | 1,481,446 | ||||||
Total deposits |
$ | 5,136,746 | $ | 5,024,042 | ||||
As displayed in Table 11, deposits increased $112.7 million compared to December 31, 2009. The Companys strategy has been to increase core deposits and reduce rates paid on interest bearing deposits, particularly on time deposits, in order to improve the net interest margin and the interest rate spread while continuing to build core relationships. Through well-designed product offerings, the Company has been able to grow core deposits by $146.3 million, particularly through the Companys money market products. Money market deposits have shown significant increases and have grown approximately $125.0 million since year end due to the premium money market product which offers competitive pricing with a tiered rate structure. The Company has executed several marketing 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. Partially offsetting the growth in core deposits was a decrease in time deposit accounts of approximately $34.0 million, as the Company repriced maturing CDs at reduced rates causing retention of time deposits to drop. However, the Company was able to retain a portion of maturing time deposit accounts through the free savings and premium money market products that offer competitive interest rates.
52
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 summarizes the Companys recorded
borrowings at June 30, 2010.
June 30, | December 31, | ||||||||
(In thousands) | 2010 | 2009 | |||||||
FHLB advances (1) | $ | 1,900,561 | $ | 1,755,533 | |||||
Repurchase agreements | 100,951 | 112,095 | |||||||
Mortgage loans payable | 1,085 | 1,165 | |||||||
Junior subordinated debentures issued to affiliated trusts (2) | 21,135 | 21,135 | |||||||
Total borrowings |
$ | 2,023,732 | $ | 1,889,928 | |||||
(1) | Includes fair value adjustments on acquired borrowings, in accordance with purchase accounting standards of $2.4 million and $3.1 million at June 30, 2010 and December 31, 2009, respectively. The acquisition fair value adjustments (premiums) are being amortized as an adjustment to interest expense on borrowings over their remaining terms using the level yield method. |
(2) | The trusts were organized to facilitate the issuance of "trust preferred" securities. The Company acquired these subsidiaries when it acquired Alliance Bancorp of New England, Inc. and Westbank Corporation, Inc. 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 $2.02 billion at June 30, 2010, an increase of $133.8 million from the balance recorded at December 31, 2009, and were mainly in FHLB advances. This increase represents the Company taking advantage of reduced rates offered by the FHLB for advances that were competitive with current market deposit rates. Combined with the growth in our core deposits, the advances assist the Company with the growth in our loan portfolio, to invest in securities and meet other liquidity needs, while effectively managing interest rate risk. At June 30, 2010, all of the Companys outstanding FHLB advances were at fixed rates ranging from 0.22% to 8.17%.
Stockholders Equity
Total stockholders equity equaled $1.46 billion at June 30,
2010, an increase of $29.2 million compared to $1.43 billion at December 31, 2009.
The increase was primarily due to earnings of $32.7 million and the increase in
the fair market value of available-for-sale investment securities of $16.7 million,
net of tax. The increase in equity was partially offset by the acquisition of treasury
stock totaling $11.3 million and $14.0 million for the payment of cash dividends
declared on our common stock during the six months ended June 30, 2010. For information
regarding our compliance with applicable capital requirements, see Liquidity
and Capital Position below.
Dividends declared during the six months
ended June 30, 2010 and 2009 were $0.14 per share. On July 27, 2010, we declared
a $0.07 per share cash dividend payable on August 19, 2010 to shareholders of record
on August 9, 2010. This will be the Companys 25th consecutive quarterly dividend
payment. Book value per share amounted to $13.93 and $13.53 at June 30, 2010 and
December 31, 2009, respectively, and tangible book value amounted to $8.62 and $8.23
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 are government agency securities. 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 Companys
capital and liquidity requirements, business strategy, performance objectives
53
and operating environment and maintenance
of such risks within guidelines approved by the Board of Directors. Through such
management, the Company seeks to reduce the vulnerability of its net earnings to
changes in interest rates. The Asset/Liability Committee, comprised of numerous
senior executives, is responsible for managing interest rate risk. On a quarterly
basis, the Board of Directors reviews the Companys gap position and interest
rate sensitivity exposure described below and Asset/Liability Committee minutes
detailing the Companys activities and strategies, the effect of those strategies
on the Companys operating results, interest rate risk position and the effect
changes in interest rates would have on the Companys net interest income.
The extent of movement of interest rates is an uncertainty that could have a negative
impact on earnings.
The principal strategies used to manage interest rate
risk include (i) emphasizing the origination, purchase and retention of adjustable
rate loans, and the origination and purchase of loans with maturities matched with
those of the deposits and borrowings funding the loans, (ii) investing in debt securities
with relatively short maturities and/or average lives and (iii) classifying a significant
portion of its investment portfolio as available for sale so as to provide sufficient
flexibility in liquidity management. By its strategy of limiting the Banks
risk to rising interest rates, the Bank is also limiting the benefit of falling
interest rates.
The Company employs two approaches to interest rate risk measurement;
gap analysis and income simulation analysis.
Gap Analysis
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are interest rate sensitive and
by monitoring a banks interest rate sensitivity gap. An asset
or liability is deemed to be interest rate sensitive within a specific time period
if it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that same time period. At June 30, 2010,
the Companys cumulative one-year interest rate gap (which is the difference
between the amount of interest-earning assets maturing or repricing within one year
and interest-bearing liabilities maturing or repricing within one year), was positive
$418.3 million, or 4.80% of total assets. The Banks approved policy limit
is plus or minus 20%. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap
is considered negative when the amount of interest rate sensitive liabilities exceeds
the amount of interest rate sensitive assets. During a period of rising interest
rates, a negative gap would tend to adversely affect net interest income while a
positive gap would tend to result in an increase in net interest income. Conversely,
during a period of falling interest rates, a negative gap would tend to result in
an increase in net interest income while a positive gap would tend to adversely
affect net interest income.
Income Simulation Analysis
Income simulation analysis considers the maturity and repricing characteristics
of assets and liabilities, as well as the relative sensitivities of these balance
sheet components over a range of interest rate scenarios. Tested scenarios include
instantaneous rate shocks, rate ramps over a six-month or one-year period, static
rates, non-parallel shifts in the yield curve and a forward rate scenario. The simulation
analysis is used to measure the exposure of net interest income to changes in interest
rates over a specified time horizon, usually a three-year period. Simulation analysis
involves projecting a future balance sheet structure and interest income and expense
under the various rate scenarios. The Companys internal guidelines on interest
rate risk specify that for a range of interest rate scenarios, the estimated net
interest margin over the next 12 months should decline by less than 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 June 30, 2010 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 (FRB)
officials that interest rates would likely remain flat for an extended period. As
of June 30, 2010, the Companys estimated exposure as a percentage of estimated
net interest income for the next twelve-month period as compared to the forecasted
net interest income in the base case scenario are as follows:
Percentage change in | |||
estimated net interest | |||
income over twelve months | |||
100 basis point upward shock in interest rates | 3.68 | % | |
25 basis point downward shock in interest rates | -1.16 | % | |
As of June 30, 2010, a downward rate shock of 25 basis points was a realistic representation of the risk of falling rates as the FRB 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 recent beginnings of an economic rebound due to the past reductions in the federal funds rate, the benefits of the government stimulus package and the expansion of the FRBs balance sheet.
54
Based on the scenarios above, net interest income would increase slightly in the 12-month period after an upward movement in rates, and would decrease slightly after a downward movement in rates. Computation of prospective effects of hypothetical interest rate changes are based on a number of assumptions including the level of market interest rates, the degree to which non-maturity deposits react to changes in market rates, the expected prepayment rates on loans and investments, the degree to which early withdrawals occur on time deposits and other deposit flows. As a result, these computations should not be relied upon as indicative of actual results. Further, the computations do not reflect any actions that management may undertake in response to changes in interest rates.
Liquidity and Capital Position
Liquidity is the ability to meet current and future short-term
financial obligations. The Company further defines liquidity as the ability to respond
to the needs of depositors and borrowers as well as maintaining the flexibility
to take advantage of investment opportunities. The Companys primary sources
of funds consist of deposit inflows, loan repayments and sales, maturities, paydowns
and sales of investment and mortgage-backed securities, borrowings from the Federal
Home Loan Bank and repurchase agreements.
The Companys most liquid
assets are cash and due from banks, short-term investments and debt securities.
The levels of these assets are dependent on the Companys operating, financing,
lending and investment activities during any given period. At June 30, 2010, cash
and due from banks, short-term investments and debt securities maturing within one
year amounted to $380.1 million, or 4.4% of total assets.
The Company manages
liquidity by determining its cash position daily. The Investment Department compiles
reports detailing the Companys cash activity and cash balances occurring at
its various correspondents and through its various funding sources. The Investment
Department then settles all correspondent and bank accounts by either investing
excess funds or borrowing to cover the projected shortfall.
Factors affecting
liquidity include loan origination volumes, loan prepayment rates, maturity structure
of existing loans, core deposit growth levels, time deposit maturity structure and
retention, investment portfolio cash flows, the market value of investment securities
that can be used to collateralize FHLB advances and repurchase agreements. The liquidity
position is influenced by general interest rate levels, economic conditions and
competition. For example, as interest rates decline, payments of principal from
the loan and mortgage-backed securities portfolio accelerate, as borrowers are more
willing to prepay. Additionally, the market value of the securities portfolio generally
increases as rates decline, thereby increasing the amount of collateral available
for funding purposes.
The Company has used borrowings from the Federal Home
Loan Bank of Boston to fund loan growth while managing interest rate risk and liquidity.
At June 30, 2010, total borrowings from the Federal Home Loan Bank amounted to $1.90
billion, exclusive of $2.4 million in purchase accounting adjustments, and the Company
had the immediate capacity to increase that total to $2.23 billion. Additional borrowing
capacity of approximately $1.53 billion would be readily available by pledging eligible
investment securities as collateral. Depending on market conditions and the Companys liquidity and gap position, the Company may continue to borrow from the Federal
Home Loan Bank or initiate borrowings through the repurchase agreement market. At
June 30, 2010 the Companys repurchase agreement lines of credit with four
large broker dealers totaled $200.0 million, $175.0 million of which was available
on that date. Agreement terms vary based on the collateral submitted.
NewAlliances main source of liquidity at the parent company level is dividends from NewAlliance
Bank. The main uses of liquidity are payments of dividends to common stockholders,
repurchase of NewAlliances common stock, the payment of principal and interest
to holders of trust preferred securities, and help fund acquisitions. There are
certain restrictions on the payment of dividends. See Note 15 of Notes to Consolidated
Financial Statements contained elsewhere within this report for further information
on dividend restrictions.
At June 30, 2010, the Company had commitments to
originate loans, unused outstanding lines of credit and standby letters of credit
totaling $993.4 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 June 30, 2010 amount to $941.4 million. FHLB advances maturing within
one year from June 30, 2010 amount to $518.7 million and interest payments of approximately
$15.2 million are payable within that same time frame.
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.
55
In October 2009, the Company filed a shelf
registration with the SEC, which facilitates increased flexibility to seize market
opportunities as they present themselves.
At June 30, 2010, the Companys
Tier 1 leverage ratio, a primary measure of regulatory capital was $895.1 million,
or 11.2% of average assets, which is above the threshold level of $400.7 million,
or 5.0% to be considered well-capitalized. The Tier 1 risk-based capital
ratio stood at 20.0% and the Total risk-based capital ratio stood at 21.2%. The
Bank also exceeded all of its regulatory capital requirements with leverage capital
of $775.1 million, or 9.7% of average assets, which is above the required level
of $320.2 million or 4.0%. The Tier 1 risk-based capital ratio was 17.3% and the
Total risk-based capital ratio was 18.5%. These ratios qualify the Bank as a well
capitalized institution under federal capital guidelines.
Item
3. Quantitative and Qualitative Disclosures About Market Risk
Quantitative and qualitative disclosures about the Companys market risk appears under Item 2, Managements Discussion and Analysis of Financial Condition and Results of Operations, under the caption Management of Market and Interest Rate Risk on pages 53 through 55.
Item 4. Controls and Procedures
The Companys management, including
our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of our disclosure controls and procedures (as defined in Rule 13(a)-15(e) or Rule
15(d)-15(e) under the Exchange Act) as of June 30, 2010. Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective.
Disclosure controls and procedures
are our controls and other procedures that are designed to ensure that the information
required to be disclosed by us in our reports filed or submitted under the Securities
Exchange Act of 1934 (the Exchange Act) is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange Commissions rules and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be disclosed
by us in our reports filed under the Exchange Act is accumulated and communicated
to our management, including the principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding required disclosure
in the second quarter 2010.
In addition, based on that evaluation, no change
in the Companys internal control over financial reporting occurred during
the quarter ended June 30, 2010 that has materially affected, or is reasonably likely
to materially affect, the Companys internal control over financial reporting.
Item 4T. Controls and Procedures
Not applicable.
PART II - OTHER INFORMATION
There are no material legal proceedings or other litigation. See the caption Legal Proceedings under Footnote 12 Commitments and Contingencies in Part I, Item I, Financial Statements (Unaudited) of this Form 10-Q.
There have been no material changes in our risk factors from those disclosed in our 2009 Annual Report on form 10K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) None.
(b) Not applicable.
(c) The following table sets forth information about
the Companys stock repurchases for the three months ended June 30, 2010.
56
(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 | |||||
April 1-30, 2010 | 0 | $ - | 0 | 2,303,813 shares | |
May 1-31, 2010 | 500,000 | $ 11.71 | 500,000 | 1,803,813 shares | |
June 1-30, 2010 | (1) | 385,013 | $ 11.34 | 381,875 | 1,421,938 shares |
Total | 885,013 | $ 11.55 | 881,875 |
On January 31, 2006, the Companys second stock repurchase plan was announced and provides for the repurchase of up to 10.0 million shares of common stock of the Company. There is no set expiration date for this plan.
(1) | Includes 3,138 shares of common stock withheld by the Company to satisfy tax withholding requirements on the vesting of shares under the Companys benefit plans. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. (Removed and Reserved)
None.
None.
Exhibit
Number
3.1 | Amended and Restated Certificate of Incorporation of NewAlliance Bancshares, Inc. Incorporated herein by reference is Exhibit 3.1 filed with the Companys Quarterly Report on Form 10-Q, filed August 13, 2004. |
|
3.2 | Amended and Restated Bylaws of NewAlliance Bancshares, Inc. Incorporated herein by reference is Exhibit 3.2 filed with the Companys 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 Companys Quarterly Report on Form 10-Q, filed November 7, 2008. |
|
10.3 | NewAlliance Amended and Restated Employee Stock Ownership Plan Supplemental Executive Retirement Plan. Incorporated herein by reference is Exhibit 10.3 filed with the Companys Quarterly Report on Form 10-Q, filed November 7, 2008. |
|
10.4 | The NewAlliance Bank Amended and Restated 401(k) Supplemental Executive Retirement Plan. Incorporated herein by reference is Exhibit 10.4 filed with the Companys Quarterly Report on Form 10-Q, filed November 7, 2008. |
|
10.5 | NewAlliance Bank Executive Incentive Plan approved by shareholders on April 17, 2008, as amended. Incorporated herein by reference is Exhibit 10.5 filed with the Companys 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 Companys Quarterly Report on Form 10-Q, filed November 8, 2007. |
|
10.7.1 | Amended and Restated Employment Agreement among NewAlliance Bancshares, Inc., NewAlliance Bank and Peyton R. Patterson, effective December 15, 2009. Incorporated herein by reference is Exhibit 10.7.1 filed with the Companys Annual Report on Form 10-K, filed February 26, 2010. |
|
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 December 15, 2009. Incorporated herein by reference is Exhibit 10.7.1 filed with the Companys Annual Report on Form 10-K, filed February 26, 2010. |
57
10.7.4 | Intentionally omitted. |
|
10.7.5 | Intentionally omitted. |
|
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 December 15, 2009. Incorporated herein by reference is Exhibit 10.7.8 filed with the Companys Annual Report on Form 10-K, filed February 26, 2010. |
|
10.7.9 | Amended and Restated Employment Agreement between NewAlliance Bank and Paul A. McCraven, effective December 15, 2009. Incorporated herein by reference is Exhibit 10.7.9 filed with the Companys Annual Report on Form 10-K, filed February 26, 2010. |
|
10.7.10 | Amended and Restated Employment Agreement between NewAlliance Bank and Koon-Ping Chan, effective December 15, 2009. Incorporated herein by reference is Exhibit 10.7.10 filed with the Companys Annual Report on Form 10-K, filed February 26, 2010. |
|
10.7.11 | Amended and Restated Employment Agreement between NewAlliance Bank and Mark Gibson, effective December 15, 2009. Incorporated herein by reference is Exhibit 10.7.11 filed with the Companys Annual Report on Form 10-K, filed February 26, 2010. |
|
10.7.12 | Amended and Restated Employment Agreement among NewAlliance Bank, NewAlliance Bancshares, Inc. and Cecil Eugene Kirby, Jr., effective December 15, 2009. Incorporated herein by reference is Exhibit 10.7.12 filed with the Companys Annual Report on Form 10-K, filed February 26, 2010. |
|
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 Companys Current Report on Form 8-K, filed October 14, 2009. |
|
10.8.1 | Form of Stock Option Agreement for conversion awards (for outside directors). Incorporated herein by reference is Exhibit 10.8.1 filed with the Companys Quarterly Report on Form 10-Q, filed August 9, 2005. |
|
10.8.2 | Form of Stock Option Agreement for conversion awards (for employees, including senior officers). Incorporated herein by reference is Exhibit 10.8.2 filed with the Companys Quarterly Report on Form 10-Q, filed August 9, 2009. |
|
10.9.1 | Form of Restricted Stock Award Agreement for conversion awards (for outside directors). Incorporated herein by reference is Exhibit 10.9.1 filed with the Companys Quarterly Report on Form 10-Q, filed August 9, 2005. |
|
10.9.2 | Form of Restricted Stock Award Agreement for conversion awards (for employees, including senior officers). Incorporated herein by reference is Exhibit 10.9.2 filed with the Companys Quarterly Report on Form 10-Q, filed August 9, 2005. |
|
10.10 | NewAlliance Bancshares, Inc. 2005 Long-Term Compensation Plan. Incorporated herein by reference is Exhibit 4.3 filed with the Companys Registration Statement on Form S-8, filed November 4, 2005. |
|
10.11 | (Intentionally omitted) |
|
10.12 | Form of Indemnification Agreement for Directors and Certain Executive Officers. Incorporated herein by reference is Exhibit 10.12 filed with the Companys Annual Report on Form 10-K, filed March 1, 2007. |
|
10.13 | General Severance Plan. Incorporated herein by reference is Exhibit 10.13 filed with the Companys Annual Report on Form 10-K, filed February 27, 2009. |
|
10.14 | Form of Performance Share Award Agreement (for senior officers). Incorporated herein by reference is Exhibit 10.14 filed with the Company Current Report on Form 8-K, filed June 1, 2009. |
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10.15 | Form of Restricted Stock Award Agreement (for senior officers). Incorporated herein by reference is Exhibit 10.15 filed with the Company Current Report on Form 8-K, filed June 1, 2009. |
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10.16 | Form of Stock Option Award Agreement (for senior officers). Incorporated herein by reference is Exhibit 10.16 filed with the Company Current Report on Form 8-K, filed June 1, 2009. |
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10.17 | Form of Stock Option Agreement for annual awards (for outside directors). Incorporated herein by reference is Exhibit 10.17 filed with the Companys Annual Report on Form 10-K, filed February 26, 2010. |
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10.18 | Form of Restricted Stock Agreement for annual awards (for outside directors). Incorporated herein by reference is Exhibit 10.18 filed with the Companys Annual Report on Form 10-K, filed February 26, 2010. |
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14 | Code of Ethics for Senior Financial Officers. Incorporated herein by reference is Exhibit 14 filed with the Companys Annual Report on Form 10-KT, filed March 30, 2004. |
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21 | Subsidiaries of NewAlliance Bancshares, Inc. and NewAlliance Bank. Incorporated herein by reference is Exhibit 21 filed with the Companys Annual Report on Form 10-K, filed March 1, 2007. |
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23.1 | Consent of PricewaterhouseCoopers LLP. Incorporated herein by reference is Exhibit 23.1 filed with the Companys Annual Report on Form 10-K, filed February 26, 2010. |
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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). |
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31.2 | Certification of Glenn I. MacInnes pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 (filed herewith). |
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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). |
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32.2 | Certification of Glenn I. MacInnes pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
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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. |
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NewAlliance Bancshares, Inc. |
By: | /s/ Glenn I. MacInnes | |
Glenn I. MacInnes | ||
Executive Vice President and Chief Financial Officer | ||
Date: | August 4, 2010 |
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