<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1997 or
|_| Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
FORM 10-K
Commission file number: 001-13405
----------------------------------------------
ALLIANCE BANCORP OF NEW ENGLAND, INC.
(Exact Name of Registrant as Specified in its Charter)
----------------------------------------------
DELAWARE 06-1495617
(State or other jurisdiction of (I.R.S. Employer
of incorporation or organization) Identification Number)
348 Hartford Turnpike
Vernon, Connecticut 06066
(Address of Principal Executive Office) (Zip Code)
(860)-875-2500
Registrant's telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 per share, American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-K or any
amendment to this form 10-K. |_|
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based on the closing sale price of January 30, 1998, as reported
by American Stock Exchange, was $28,839,000.
The number of shares outstanding of common stock was 1,661,794 as of
January 30, 1998.
1
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The Alliance Bancorp of New England, Inc. Proxy Statement for the Annual Meeting
of Stockholders to be held on April 8, 1998 is incorporated by reference into
Part III of this Form 10-K.
Table of Contents
<TABLE>
<CAPTION>
<S> <C> <C>
PAGE
----
PART I Item 1 - Business 2
Item 2 - Properties 5
Item 3 - Legal Proceedings 5
Item 4 - Submission of Matters to a Vote of Security Holders 5
- ----------------------------------------------------------------------------------------------------
PART II Item 5 - Market for Registrants Common Equity and Related Shareholder Matters 6
Item 6 - Selected Consolidated Financial Data 7
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Item 7A- Quantitative and Qualitative Disclosures about Market Risk 17
Item 8 - Consolidated Financial Statements and Supplementary Data 18
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 18
- ----------------------------------------------------------------------------------------------------
PART III Item 10 - Directors and Executive Officers of the Registrant 18
Item 11 - Executive Compensation 18
Item 12 - Security Ownership of Certain Beneficial Owners and Management 18
Item 13 - Certain Relationships and Related Transactions 18
- ----------------------------------------------------------------------------------------------------
PART IV Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K 18
- ----------------------------------------------------------------------------------------------------
</TABLE>
PART I
Special Note Regarding Forward-Looking Statements
This report contains certain "forward-looking statements." These forward-looking
statements, which are included in Management's Discussion and Analysis, describe
future plans or strategies and include the Company's expectations of future
financial results. The words "believe," expect," "anticipate," "estimate,"
"project" and similar expressions identify forward-looking statements. The
Company's ability to predict results or the effect of future plans or strategies
or qualitative or quantitative changes based on market risk exposure is
inherently uncertain. Factors which could affect actual results include but are
not limited to change in general market interest rates, general economic
conditions, legislative/regulatory changes, fluctuations of interest rates,
changes in the quality or composition of the Company's loan and investment
portfolios, deposit flows, competition, demand for financial services in the
Company's markets, and changes in the accounting principles, policies, and
guidelines. These factors should be considered in evaluating the forward-looking
statements, and undue reliance should not be placed on such statements.
ITEM 1. BUSINESS
--------
General. Alliance Bancorp of New England, Inc. ("Alliance" or the "Company") is
a Delaware corporation that was organized in 1997. Alliance's primary activity
is to act as the holding company for Tolland Bank (the "Bank"), which is its
sole subsidiary and principal asset.
The Bank is a Connecticut chartered savings bank which was founded in 1841 and
is headquartered in Vernon, as is Alliance. In 1986, Tolland Bank converted from
mutual to stock form. The Bank's deposits are insured up to applicable limits by
the Federal Deposit Insurance Corporation ("FDIC").
The Bank operates seven offices in Tolland County and provides retail and
commercial banking products and services in Tolland County and surrounding
towns. Retail activities consist of branch deposit services, home mortgage and
consumer lending, and mortgage banking. Commercial activities include merchant
deposit services, business cash management, and construction mortgages,
permanent
2
<PAGE>
mortgages, and working capital and equipment loans. Through third party
relationships, the Bank also provides investment products, insurance products,
and electronic payment services to retail and commercial customers.
At December 31, 1997, Tolland Bank had total deposits of $221.7 million, total
loans of $157.4 million, and total assets of $247.1 million. There are no
material concentrations of loans or deposits with one customer, a group of
related customers, or in a single industry.
Market Area. The Bank's market area is centered in Tolland County, Connecticut,
a suburban and rural area east of Hartford. The bank operates seven offices and
its wider market area extends throughout much of northeastern Connecticut and
into Massachusetts. Much of the market is part of the Greater Hartford
metropolitan area.
Lending Activities. The Bank actively solicits retail and commercial loans in
and around its market area. Retail lending consists primarily of the origination
of residential first mortgages and home equity lines of credit, which are
generally secured by second mortgages. Commercial lending focuses primarily on
owner occupied first mortgage loans, along with general commercial and
industrial loans and subdivision development and construction loans.
Additionally, the Bank has a portfolio of 100% Government guaranteed loans
purchased in the secondary market to supplement local loan originations. Except
for the Government guaranteed loans, the Bank attempts to cross-sell other loan
and deposit products to build multiple sales to its customer base.
Most of the Bank's residential mortgage originations are underwritten to
secondary market standards and are sold on a non-recourse, servicing released
basis. The Bank offers an extensive list of mortgage types, including FHA and VA
loans, land loans, and subprime loans (which are also sold to investors).
Consumer loans primarily consist of home equity lines and loans and are normally
secured by second mortgages. These loans are subject to the same general
underwriting standards as residential mortgage loans, and the bank retains
ownership and servicing of all home equity lines and loans that it originates.
Consumer loans also include secured installment loans, which are primarily well
seasoned mobile home loans and indirect loans which were originated in the
1980's.
Commercial mortgages are primarily first mortgage loans on a variety of owner
occupied commercial properties. The Bank also provides commercial mortgages on
investor owned properties, including retail, office, and light manufacturing.
Commercial mortgages normally amortize over
<PAGE>
15 - 20 years and typically mature in 5-10 years. Commercial mortgages are
normally guaranteed by the principals and by owner occupant businesses. Other
commercial loans include commercial and industrial loans, and real estate
secured loans, as well as subdivision development and construction loans.
Government guaranteed loans are purchased in the secondary market and are 100%
guaranteed by either the Small Business Administration (SBA) or the U.S.
Department of Agriculture (USDA). These are business term loans and mortgages,
and are primarily loan certificates registered with and serviced by a national
service corporation.
All loan originations are governed by a Board approved credit policy, which
requires that all policy exceptions be reported to the Board. Loan approval
limits are based on loan and relationship size, and most commercial loans are
approved either by the Chief Lending Officer, the Company's Credit Committee,
and/or the Board. The loan policy sets certain limits on concentrations of
credit related to one borrower. The Bank's policy is to assign a risk rating to
all commercial loans. The Bank conducts an ongoing program of commercial loan
reviews and quality control sample inspections of residential and consumer loan
originations.
Total real estate secured loans were $117.5 million (74.6% of total loans) at
year-end 1997. Local real estate prices have declined throughout much of the
current decade. Aided by favorable interest rates and a modest recovery in the
Connecticut economy, real estate prices have firmed in some sectors over the
last two years, while some sectors continue to show further modest softening.
The Bank conducts an overall review of real estate market trends at least once
each year, and real estate lending activities are governed by real estate
lending and appraisal policies. New construction has remained active in certain
residential markets, along with commercial retail, medical office, and lodging
properties.
Investment Activities. Securities investments are a source of interest and
dividend income, provide for diversification, are a tool for asset/liability
management, and are a source of liquidity. In 1997, investment activities were
limited to purchases and sales of available for sale securities. The Company's
investment portfolio consists of high grade investment securities, and is
primarily composed of mortgage backed securities, U.S. agency securities, and
exchange traded equity securities. Investment activities are governed by a Board
approved investment policy, and the Board reviews all investment activities on a
monthly basis.
3
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Deposits and Other Sources of Funds. The Banks' major sources of funds are
deposits, borrowings, principal payments on loans and securities, and maturities
of investments. Borrowings are generally used to fund long-term assets and
short-term liquidity requirements or to manage interest rate risk. The Bank is a
member of the Federal Home Loan Bank of Boston ("FHLBB") and may borrow from the
FHLBB subject to certain limitations. The Bank also has available lines of
credit for federal funds purchases and reverse repurchase agreements.
Competition. The Company's market area is highly competitive with a wide range
of financial institutions including commercial banks, both mutual and stock
owned savings banks, savings and loan associations, and credit unions. The Bank
also competes with insurance and finance companies, investment companies, and
brokers for the same funds. Factors affecting competition include ongoing
mergers and acquisitions (including expansion of regional and national banks),
the introduction of new product types and rate structures, and the development
of new delivery channels (including supermarket banking and home banking). The
Bank competes through pricing, product development, focused marketing, and
providing more convenience through technology and business hours. The Bank
strives to provide the personal service advantage of a community bank and to
take advantage of potential market changes following consolidations by the large
regional banks.
Employees. As of year-end 1997, the Company had 83 full-time equivalent
employees. None of the employees are represented by a collective bargaining
group, and management considers relations with its employees to be good.
Regulation And Supervision. The Company and the Bank are heavily regulated. As a
bank holding company, Alliance is supervised by the Board of Governors of the
Federal Reserve System ("FRB") and it is also subject to the jurisdiction of the
Connecticut Department of Banking. As a Connecticut-chartered savings bank, the
regulation and supervision by the FDIC and the Connecticut Department of
Banking.
The FDIC insures the Bank's deposit accounts to the $100,000 maximum per
separately insured account. The Bank is subject to regulation, examination, and
supervision by the FDIC and to reporting requirements of the FDIC. The FDIC has
adopted requirements setting minimum standards for capital adequacy and imposing
minimum leverage capital ratios. The Company and Bank exceeded all applicable
requirements at December 31, 1997. Furthermore, under the capital standards, the
Company and the Bank are currently well-capitalized.
<PAGE>
Connecticut statutes and regulations govern, among other things, investment
powers, lending powers, deposit activities, maintenance of surplus and reserve
accounts, the distribution of earnings, the payments of dividends, issuance of
capital stock, branching, acquisitions and mergers and consolidations.
Connecticut banks that do not operate in accordance with the regulations,
policies and directives of the Banking Commissioner may be subject to sanctions
for noncompliance. The Commissioner may, under certain circumstances, suspend or
remove officers or directors who have violated the law, conducted the Bank's
business in a manner which is unsafe, unsound or contrary to the depositor's
interest, or been negligent in the performance of their duties.
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Under the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("Riegle-Neal"), different types of interstate transactions and activities will
be permitted, each with different effective dates. Interstate transactions and
activities provided for under the law include: (i) bank holding company
acquisitions of separately held banks in a state other than a bank holding
company's home state; (ii) mergers between banks with different home states,
including consolidations of affiliated banks; (iii) establishment of interstate
branches either de novo or by branch acquisition; and (iv) affiliate banks
acting as agents for one another for certain banking functions without being
considered a "branch." In general, subject to certain limitations, nationwide
interstate acquisitions are now permissible, irrespective of state law
limitations other than limitations related to deposit concentrations and bank
age requirements. Interstate mergers were permissible on June 1, 1997, unless a
state passed legislation either to prevent or to permit the earlier occurrence
of interstate mergers. States may at any time enact legislation permitting
interstate branching either de novo or through acquisition. Affiliated banks may
act as agents for one another beginning one year after enactment. Each of the
transactions and activities must be approved by the appropriate federal bank
regulator, with separate and specific criteria established for each category.
Year 2000 Considerations. The Company uses computer systems extensively in its
operations. The Company has established a Year 2000 project plan to address
systems and facilities changes necessary to properly recognize dates after 1999.
The Company's Year 2000 Considerations are discussed more fully in Management's
Discussion and Analysis of Financial Condition and Results of Operation.
4
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Supplementary Information
- -------------------------
The following supplementary information, some of which is required under Guide 3
(Statistical Disclosure by Bank Holding Companies), is found in this report on
the pages indicated below, and should be read in conjunction with the related
financial statements and notes thereto.
Selected Consolidated Financial Data 7
Average Balance Sheet, Net Interest Income
and Interest Rates 9
Loan Portfolio 11
Nonaccruing Loans 12
Provision and Allowance for Loan Losses 12
Interest Rate Sensitivity 14
Maturity of Securities 11 Exhibit 99-
Foreclosed Properties 13
Time Deposits of $100 Thousand or More 13
Short-term Borrowings 13
Deposits 13
Volume and Rate Analysis-FTE Basis 22 Exhibit 99
Selected Quarterly Financial Data 22 Exhibit 99
Construction and Commercial Loans 23 Exhibit 99
Securities Cost and Fair Value 23 Exhibit 99
Market Risk Sensitive Instruments 24 Exhibit 99
ITEM 2. PROPERTIES
----------
The premises of Alliance are located in Connecticut as follows (see the notes
"Premises and Equipment, Net" and "Commitments and Contingencies" in Item 8 for
additional information about the Company's premises):
Year Lease
Location - Town (Street) Owned / Leased Expires
- --------------------------------------------------------------------------------
o Tolland - (Olde Tolland Common) Owned
o Vernon - (348 Hartford Turnpike) Owned
o Coventry - (Routes 31 and 44) Owned
o Ellington - (287 Somers Road) Owned
o Stafford Springs - (34 West Stafford Road) Leased 1999
o Willington - (Routes 74 and 32) Leased 2005
o Tolland - (Merrow Road) Leased 2000
o Approximately 9 acres of land adjacent to the Company's office on Olde Tolland
Common in Tolland.
o A commercial property leased to a child care operation adjacent to the
Company's office on Olde Tolland Common in Tolland.
o Approximately 10 acres of land adjacent to the Company's office in Coventry,
Connecticut.
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company is not involved in any material legal proceedings other than
ordinary routine litigation incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
5
<PAGE>
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY & RELATED SHARE HOLDER MATTERS
--------------------------------------------------------------------
The Company's common stock is listed on the American Stock Exchange (AMEX) under
the symbol "ANE." A total of 752,400 shares of the Company's stock, or 47% of
outstanding shares, were traded on AMEX in 1997. As of January 31, 1998, the
Company had 524 holders of record of its common stock. This does not reflect the
number of persons or entities who hold their stock in nominee or "street" name.
The closing sale price of the stock on January 31, 1998 was $17.63. The Company
declared and paid a $.05 cent dividend in the fourth quarter of 1997. A $0.02
cent dividend was declared and paid in 1996. Dividends are subject to the
restrictions of applicable regulations. See the "Shareholders' Equity" note in
Item 8 for additional information. See also the information contained in Item 6.
The following table presents quarterly information on the range of high and low
prices for the past two years.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Quarter Ended High Low Dividends Declared Per Share
- ---------------------------------------------------------------------------------------------------------
March 31, 1996 $ 7.88 $ 6.94 $ 0
June 30, 1996 7.78 7.13 0
September 30, 1996 9.28 7.22 0
December 31, 1996 10.03 8.25 .02
March 31, 1997 12.09 8.63 .04
June 30, 1997 15.00 10.31 .04
September 30, 1997 18.25 13.03 .05
December 31, 1997 18.00 16.38 .05
</TABLE>
6
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
December 31 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Year (in thousands)
Net interest income $ 7,960 $ 7,663 $ 7,364 $ 6,954 $ 6,923
Provision for loan losses 829 978 1,975 639 191
Service charges and fees 1,148 1,115 1,005 789 828
Net gain (loss) on securities 961 (40) 22 (16) 66
Net gain (loss) on assets (148) 200 (967) (28) (438)
Non-interest expense 6,411 6,640 6,582 6,545 6,850
Income (loss) before income taxes 2,681 1,320 (1,133) 515 338
Income tax expense (benefit) 664 (118) 12 61 94
Cumulative effect of change in accounting
principle - - - - 189
Net income (loss) $ 2,017 $ 1,438 $(1,145) $ 454 $ 433
- ---------------------------------------------------------------------------------------------------------------------------
Per Share
Diluted earnings (loss) $ 1.23 $ .92 $ (.74) $ .29 $ .28
Basic earnings (loss) 1.27 .93 (.74) .29 .28
Dividends declared .18 .02 - - -
Book value 11.49 9.98 8.60 8.56 9.58
Common stock price:
High 18.25 10.04 7.79 7.22 7.41
Low 8.63 6.94 5.25 5.44 4.79
Close 16.50 9.00 7.12 5.72 5.44
- ---------------------------------------------------------------------------------------------------------------------------
At Year End (in millions)
Total assets $ 247.1 $ 232.3 $ 214.1 $ 201.1 $ 193.7
Total loans 157.5 147.8 152.9 131.4 115.2
Other earning assets 78.4 71.2 47.8 52.1 58.0
Deposits 221.7 205.6 193.4 180.4 166.2
Borrowings 5.7 10.4 6.9 6.9 12.0
Shareholders' equity 18.8 15.6 13.3 13.2 14.8
- ---------------------------------------------------------------------------------------------------------------------------
Operating Ratios (in percent)
Return (loss) on average assets .86% .65% (.54)% .24% .22%
Return (loss) on average equity 12.29 9.84 (8.37) 3.19 2.90
Equity % total assets (period end) 7.61 6.71 6.20 6.57 7.63
Net interest spread (fully taxable equivalent) 3.30 3.34 3.35 3.72 3.90
Net interest margin (fully taxable equivalent) 3.80 3.78 3.71 3.95 4.00
Dividend payout ratio 13.78 2.43 - - -
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS
1997 SUMMARY
Alliance Bancorp of New England, Inc. ("Alliance" or the "Company") earned a
record $2.02 million ($1.23 per diluted share) for the year ended December 31,
1997. Net income increased by 40.3% from $1.44 million in 1996. As of year-end,
Alliance had recorded seven consecutive quarters of increasing earnings.
1997 results benefited from improvements in all major areas of operations. Net
interest income increased by 3.9%, total service charges and fees increased by
2.9%, and non-interest expense declined by 3.4%. Collectively, these
improvements contributed $559 thousand to 1997 earnings, providing an increase
of 42.3% over 1996 pre-tax earnings.
During the year, the Company realized securities gains totaling $961 thousand as
a result of an ongoing restructuring of the investment portfolio. The gains
offset losses of $148 thousand on foreclosed assets and a $782 thousand increase
in tax expense. Certain foreclosed assets were written down to accelerate
liquidation. Tax expense in 1996 included the benefit of a reduction in the
valuation allowance on the deferred tax asset.
The Company reduced its nonperforming assets to 1.11% of total assets at
year-end 1997, compared to 1.88% a year ago. The loan loss allowance increased
by 5.3% to $3.0 million, providing 140.7% coverage of nonaccruing loans,
compared to 84.3% a year earlier. Net loan charge-offs totaled $679 thousand in
1997, compared to $468 thousand in 1996, as a result of a reassessment of
probable consumer loan losses. Total nonaccruing loans were reduced to $2.1
million at year-end 1997, compared to $3.4 million a year earlier.
Total assets at year-end 1997 were $247.1 million, 6.4% higher than a year
earlier. Total loans grew by a similar 6.5%, while total deposits grew by 7.8%.
Deposit growth resulted from time account promotions during the first half of
the year, and from the introduction of a new money market account during the
second half of the year. Loan growth was mostly during the second half of the
year, and consisted primarily of commercial loan growth, along with originations
of home equity loans.
Shareholders' equity increased 20.6% from a year earlier to $18.8 million at
December 31, 1997, representing a book value per share of $11.49. At year-end,
the equity to asset ratio stood at 7.61%, up from 6.71% a year earlier. The
Company's capital remained in excess of all regulatory requirements. In addition
to retained earnings, sources of equity growth included option exercises and
unrealized securities gains, which together provided a $1.5 million increase in
net worth.
On July 17, 1997 a 33.33% stock dividend was paid to shareholders, providing one
additional share for each three shares held, as a result of a four-for-three
stock split. Prior period earnings and book value per share have been restated
for this change. Due to the effect of the stock split and a dividend increase in
1997, cash dividends paid to shareholders were 122% higher in the fourth quarter
of 1997 than in the same period of the prior year. Prior period earnings per
share were also restated for the adoption of Statement of Financial Accounting
Standards #128.
On October 3, 1997, the Company completed formation of Alliance Bancorp of New
England as the holding company for Tolland Bank (the "Bank"), in accordance with
an Agreement and Plan of Reorganization adopted by the shareholders at the 1997
Annual Meeting. Under the plan, shareholders of the Bank became shareholders of
the Company on a share for share basis. All existing Tolland Bank shares are
treated the same as Alliance shares, with no need for shareholders to exchange
them.
8
<PAGE>
RESULTS OF OPERATIONS - 1997 VERSUS 1996
Net Interest Income - Fully Taxable Equivalent (FTE) Basis
<TABLE>
<CAPTION>
(dollars in thousands) Average Balance Rate (FTE Basis)
- ---------------------------------------------------------------------------------------------------------------------------
Years ended December 31 1997 1996 1995 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans $ 148,601 $ 150,636 $ 148,605 8.17% 8.20% 8.19%
Securities available for sale 48,159 32,663 16,926 7.39 7.29 5.38
Securities held to maturity 20,634 22,204 31,270 5.85 5.73 5.95
Other earning assets 5,618 4,876 1,897 5.70 5.43 5.17
- ---------------------------------------------------------------------------------------------------------------------------
Total earning assets 223,012 210,379 198,698 7.72 7.73 7.57
Other assets 10,965 11,744 13,460
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $ 233,977 $ 222,123 $ 212,158
===========================================================================================================================
Interest bearing deposits $ 193,371 $ 182,379 $ 170,038 4.39 4.33 4.08
Borrowings 4,244 7,012 11,876 6.22 5.92 6.25
- ---------------------------------------------------------------------------------------------------------------------------
Interest bearing liabilities 197,615 189,391 181,914 4.43 4.39 4.22
Other Liabilities 19,947 18,116 16,567
Shareholder's equity 16,415 14,616 13,677
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 233,977 $ 222,123 $ 212,158
===========================================================================================================================
Net Interest Spread 3.30% 3.34% 3.35%
Net Interest Margin 3.80% 3.78% 3.71%
</TABLE>
Note: The average balance of loans included nonaccruing loans and deferred
costs. Also, the balance and yield on all securities is based on amortized cost
and not on fair value.
<TABLE>
<CAPTION>
Net Interest Income FTE (in thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loan interest $ 12,138 $ 12,347 $ 12,170
Securities available for sale(FTE) 3,561 2,380 911
Securities held to maturity 1,207 1,272 1,860
Other earning assets interest (FTE) 320 265 98
- ---------------------------------------------------------------------------------------------------------------------------
Total interest income(FTE) 17,226 16,264 15,039
Total interest expense 8,751 8,309 7,675
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income (FTE) 8,475 7,955 7,364
Less tax equivalent adjustment (515) (292) -
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income (Book) $ 7,960 $ 7,663 $ 7,364
===========================================================================================================================
</TABLE>
Net interest income on an FTE basis increased by $520 thousand (6.5%) in 1997
due to a $12.6 million (6.0%) increase in average earning assets and a $779
thousand (6.6%) decrease in average non-earning assets. The Company's average
interest-bearing liabilities grew by $8.2 million (4.3%), while average
shareholders' equity grew by $1.8 million (12.3%).
The above favorable shift in the balance of earning assets versus interest
bearing liabilities produced a slight increase in the net interest margin to
3.80% in 1997 from 3.78% in 1996. This offset a decrease in the net interest
spread to 3.30% in 1997 compared to 3.34% in the prior year. The narrowing of
the interest spread was primarily due to a 4 basis point increase in the cost of
interest bearing liabilities as a result of higher rates paid on deposits to
promote growth during the year. This rate increase resulted in a $112 thousand
increase in deposit interest expense in 1997 over 1996. Most of the remaining
$442 thousand increase in interest expense, and the $962 thousand increase in
interest income, was due to higher average balances rather than due to rate
changes.
Approximately 51.7% of the Company's loan growth was booked in the last month of
the year due to scheduled closings of loan applications which had been
originated earlier in the year. Average loans declined by $2.0 million (1.4%)
for the year, and consequently the net interest margin declined throughout the
year. The earnings impact of the loan growth in the last month was generally not
reflected in the above statistics, and will contribute to earnings in future
periods. Conversely, securities contributed most of the growth in average
earning assets, even though they were lower at year-end 1997 compared to 1996.
The growth in average securities reflected the initiation of a new investment
strategy in mid-year 1996 and the first full year results in 1997.
9
<PAGE>
Provision for Loan Losses
The provision for loan losses is made to establish the allowance for loan losses
at a level estimated to be adequate by management and the Board. The provision
for loan losses in 1997 totaled $829 thousand, compared to $978 thousand in
1996. The loan loss allowance increased to $3.00 million at year-end 1997,
compared to $2.85 million at year-end 1996. Please see the later discussion on
the Allowance for Loan Losses and the Summary of Significant Accounting Policies
in the Notes to the Consolidated Financial Statements.
Non-Interest Income
<TABLE>
<CAPTION>
Years ended December 31 (in thousands) 1997 1996 Change %
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loan related income $ 453 $ 412 $ 41 9.8%
Deposit related income 528 510 18 3.6
Miscellaneous charges and other income 167 193 (26) (13.5)
- ---------------------------------------------------------------------------------------------------------------------------
Total service charges and fees 1,148 1,115 33 2.9
Gross gains on securities 961 12 949 -
Gross losses on securities - (52) 52 -
- ---------------------------------------------------------------------------------------------------------------------------
Net gains (losses) on securities 961 (40) 1,001 -
Gross gains on assets 31 341 (310) (90.7)
Gross losses on assets (179) (141) (38) 27.4
- ---------------------------------------------------------------------------------------------------------------------------
Net gains (losses) on assets (148) 200 (348) (173.7)
- ---------------------------------------------------------------------------------------------------------------------------
Total non-interest income $ 1,961 $1,275 $ 686 53.8
===========================================================================================================================
</TABLE>
Total service charges and fees increased by $33 thousand (2.9%) due to increases
in both loan and deposit related service charges, including originations fees on
residential mortgages. During the year, the Company introduced several fee based
services, including life insurance product sales, business PC banking and
telephone bill payment. Additionally, the new money market account includes a
monthly service fee. The Company recorded $961 thousand in gains on investment
securities as a result of ongoing portfolio restructuring in order to balance
the duration and increase the diversification of the investment portfolio. The
net loss on assets in 1997 was due to losses on foreclosed assets; the Company
had recorded a net gain on assets in 1996 primarily due to the sale of
foreclosed assets.
Non-Interest Expense
<TABLE>
<CAPTION>
Years ended December 31 (in thousands) 1997 1996 Change %
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Staff $ 3,199 $ 3,253 $ (54) (1.7)%
Occupancy 586 597 (11) (1.8)
Equipment 283 285 (2) (.5)
Data processing services 620 476 144 30.2
FDIC insurance 87 57 30 53.1
Office and other insurance 466 452 14 3.1
Other 1,082 971 111 11.4
- ---------------------------------------------------------------------------------------------------------------------------
Subtotal - non-interest expense
before problem asset related expenses 6,323 6,091 232 3.8
Problem asset related expense 88 549 (461) (84.0)
- ---------------------------------------------------------------------------------------------------------------------------
Total non-interest expense $ 6,411 $ 6,640 $ (229) (3.4)
===========================================================================================================================
</TABLE>
Total non-interest expense decreased by $229 thousand (3.4%) in 1997. Problem
asset related expense decreased by $461 thousand (84.0%), offsetting a $232
thousand (3.8%) increase in total non-interest expense before problem asset
related expense. The Company recorded higher problem asset related expense in
1996 in relation to actions taken to accelerate the resolution of problem assets
and delinquent loan situations. This expense decreased in 1997 as a result of
these resolutions, and included the benefit of recoveries of previously charged
expenses on the liquidation of certain problem assets.
Total non-interest expense before problem asset related expense benefited from
decreases in staff expense, occupancy, and equipment expense, reflecting ongoing
expense controls. Staff expense also benefited from a $216 thousand increase in
salary deferrals related to higher loan originations activities, and an increase
in the deferral rates based on updated analyses of originations costs.
Additionally, staff expense in 1996 included $272 thousand in one-time charges
related to an agreement described in the Commitments and Contingencies note to
the financial statements. All other operating non-interest expenses
10
<PAGE>
increased by $299 thousand (15.3%). Contributing to this increase were increases
in data processing expenses ($144 thousand due to higher charges under a service
bureau contract), marketing costs ($50 thousand due to loan promotions),
consulting fees ($49 thousand due to higher loan originations) and FDIC premiums
($30 thousand due to the FDIC recapitalization).
Income Tax Expense
The Company recorded a $782 thousand increase in income tax expense in 1997. In
1996, the Company recorded a $118 thousand income tax net benefit, primarily due
to a $554 thousand reduction in the valuation allowance on the deferred tax
asset related to the restoration of taxable earnings in 1996, along with the
resolution of problem assets. In 1997, total income tax expense of $664 thousand
reflected a 24.8% effective tax rate. This tax rate included benefits of $237
thousand related to the federal dividend received deduction on investment income
and $150 thousand due to the reduction and elimination of the valuation
allowance on the deferred tax asset (except for a balance of $85 thousand
related to the tax effect of the net unamortized loss on securities held to
maturity). The Company's net deferred tax asset (net of deferred tax
liabilities) was $73 thousand at year-end 1997. Management believes that it is
more likely than not that the net deferred tax asset is realizable.
FINANCIAL CONDITION - FISCAL YEAR-END 1997 VERSUS 1996
Securities
Securities balances declined nominally in 1997, with available for sale (AFS)
securities down $1.7 million (3.7%) and held to maturity (HTM) securities down
$741 thousand (3.6%). There were no purchases or sales of HTM securities. The
primary component of HTM securities is U.S. agency mortgage-backed securities,
which consist principally of planned amortization class collateralized mortgage
obligations.
While period-end AFS security balances were down slightly, average balances
increased $15.5 million (47.4%), primarily reflecting purchases of U.S. agency
securities and preferred equity securities in the second and third quarters of
1996. During 1997, the Company sold and purchased AFS securities in amounts of
$16.7 million and $23.6 million, respectively. This activity was part of an
ongoing program to lengthen the duration and increase the diversification of
this portfolio. At year-end 1997, the AFS security portfolio included $24.6
million in debt securities and $18.3 million in marketable equity securities.
The debt securities included callable U.S. agency securities and structured
agency securities, consisting primarily of deleveraged notes. Marketable equity
securities included preferred stock (primarily national financial institutions)
and common equity (primarily utilities). All of the Bank's marketable debt and
equity securities were rated in one of the top three rating categories by at
least one rating agency, except for common equities totaling $2.45 million which
were in the fourth highest rating category.
The Company recorded total gains of $961 thousand on the sale of AFS securities
in 1997. The unrealized gain on AFS securities was $1.4 million at year-end
1997, compared to $243 thousand a year earlier, and the average FTE yield on
this portfolio increased to 7.39% in 1997 from 7.29% in 1996.
Lending Activities
<TABLE>
<CAPTION>
December 31 ($ in millions) 1997 1996 1995 1994 1993
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential mortgages $ 39.3 25.0% $ 41.7 28.2% $ 44.0 28.8% $ 44.6 33.9% $ 42.1 36.5%
Commercial mortgages 45.5 28.9 40.5 27.4 40.7 26.6 37.2 28.3 38.0 33.0
Other commercial loans 18.3 11.6 15.3 10.4 18.8 12.3 20.0 15.2 13.7 11.9
Consumer loans 29.5 18.7 26.1 17.7 22.4 14.7 23.6 18.0 21.4 18.6
---------------------------------------------------------------------------------------------------------------------------
Total regular loans 132.6 84.2 123.6 83.7 125.9 82.4 125.4 95.4 115.2 100.0
Government guaranteed loans 24.9 15.8 24.2 16.3 27.0 17.6 6.0 4.6 - -
---------------------------------------------------------------------------------------------------------------------------
Total loans $ 157.5 100.0 $ 147.8 100.0 $ 152.9 100.0 $ 131.4 100.0 $ 115.2 100.0
===========================================================================================================================
</TABLE>
Total loans increased by $9.6 million (6.5%) during 1997, primarily in
commercial mortgages and loans ($8.0 million) and consumer loans ($3.4 million).
Commercial loan growth reflected a higher level of originations activity in
1997. Consumer loan growth was due to ongoing promotions of home equity loans
and lines of credit. While residential mortgage originations were nearly
unchanged from the prior year, the majority of new mortgages were sold to the
secondary market, and regular amortization and prepayments contributed to a $2.4
million decrease in residential mortgage outstandings. Government guaranteed
loans were purchased in the secondary market and are 100% guaranteed by either
the Small Business Administration (SBA) or the U.S. Department of Agriculture
(USDA). These are business term loans and mortgages, and are primarily loan
certificates registered with and serviced by a national servicing corporation.
11
<PAGE>
Nonperforming Assets
<TABLE>
<CAPTION>
December 31 (dollars in millions) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccruing loans $ 2.1 $ 3.4 $ 4.4 $ 0.7 $ 1.1
Foreclosed assets 0.6 1.0 2.0 5.4 9.8
- ---------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 2.7 $ 4.4 $ 6.4 $ 6.1 $ 10.9
===========================================================================================================================
Nonperforming assets as a 1.1% 1.9% 3.0% 3.0% 5.7%
percentage of total assets
</TABLE>
Total nonperforming assets decreased by $1.7 million (38.6%) to $2.7 million, or
1.1% of total assets at year-end 1997. The largest nonperforming assets at
year-end were two nonaccruing loans: a $1.0 million secured commercial loan and
a $424 thousand commercial mortgage in foreclosure. Accruing loans delinquent
more than 30 days decreased by $1.4 million (50.3%) to $1.4 million during 1997;
the largest such loan was a $225 thousand real estate secured commercial loan.
At year-end 1997, loans more than ninety days past due and still accruing
interest totaled $86 thousand. Also, at that date, accruing loans included $1.5
million of classified and/or impaired loans with a potential to become
nonperforming based on identified credit weaknesses.
Allowance for Loan Losses
<TABLE>
<CAPTION>
December 31 (in thousands) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Beginning balance $ 2,850 $ 2,340 $ 2,090 $ 2,070 $ 2,100
Charge-offs:
Residential mortgages (108) (74) (102) (177) (6)
Consumer (366) (273) (252) (251) (230)
Commercial (294) (220) (1,438) (288) (106)
- ---------------------------------------------------------------------------------------------------------------------------
Total Charge-offs (768) (567) (1,792) (716) (342)
- ---------------------------------------------------------------------------------------------------------------------------
Recoveries:
Residential mortgages 11 12 8 1 -
Consumer 45 61 53 89 96
Commercial 33 26 6 7 25
- ---------------------------------------------------------------------------------------------------------------------------
Total Recoveries 89 99 67 97 121
- ---------------------------------------------------------------------------------------------------------------------------
Net Charge-offs (679) (468) (1,725) (619) (221)
Provision for losses 829 978 1,975 639 191
- ---------------------------------------------------------------------------------------------------------------------------
Ending balance $ 3,000 $ 2,850 $ 2,340 $ 2,090 $ 2,070
===========================================================================================================================
</TABLE>
<PAGE>
In allocating the allowance for loan losses, amounts allocated to the individual
categories of loans include (1) allowances for specific impaired loans, (2) an
allocation of remaining allowance amounts based on the experience of management
and the Bank, (3) the overall risk characteristics of the individual loan
category and (4) the current economic conditions that could affect the
individual loan categories.
<TABLE>
<CAPTION>
December 31 ($ in thousands) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses by type of loan:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential mortgage $ 202 6.7% $ 304 10.7% $ 173 7.4% $ 118 5.6% $ 96 4.6%
Consumer 399 13.3 416 14.6 276 11.8 300 14.4 371 17.9
Commercial 1,749 58.3 1,860 65.3 1,743 74.5 1,481 70.9 1,415 68.4
Unallocated 650 21.7 270 9.4 148 6.3 191 9.1 188 9.1
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 3,000 100.0 $ 2,850 100.0 $ 2,340 100.0 $ 2,090 100.0 $ 2,070 100.0
===========================================================================================================================
</TABLE>
Management increased the allowance by $150 thousand in 1997; the increase was in
the unallocated portion of the allowance as a general reserve. Allocated
portions of the allowance decreased due to lower nonperforming assets, but
management increased the overall allowance based on loan growth and based on the
age of the current economic cycle. The ratio of the allowance to regular loans
was 2.26% at year-end 1997, down slightly from 2.33% a year earlier due to loan
growth during the year. No reserves are assigned to Government guaranteed loans,
which are 100% backed by U.S. agency guarantees. The allowance measured 141% of
total nonaccruing loans at December 31, 1997, an increase compared to 84% at the
prior year-end. The year-end allowance was equal to 442% of 1997 net loan
charge-offs, compared to 609% at year-end 1996.
12
<PAGE>
Net loan charge-offs increased by $211 thousand (45.1%) to $679 thousand in
1997. The net charge-off rate measured 0.46% of average loans outstanding,
compared to 0.31% in 1996. The charge-off rate increased in all three categories
(residential, consumer, and commercial), but the primary increase was in
consumer loans, which registered a $109 thousand increase in net charge-offs,
with the loss rate increasing to 1.21% from 0.84%. Residential and commercial
losses remained within the general range for several previous years, but the
consumer loss rate was the highest in five years. These losses were due to a
decision by management to charge-off the full balance of delinquent mobile home
loans after 150 days delinquency. The mobile home loan portfolio is seasoned
about ten years, but collateral values have not recovered as local economic
conditions have improved. As a result of these actions, total nonaccruing
consumer loans declined to only $69 thousand at year-end 1997, compared to $424
thousand at the prior year-end.
<TABLE>
<CAPTION>
Net charge-offs as a percentage of
average loans by type: 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Residential mortgage 0.24% 0.15% 0.21% 0.42% 0.01%
Consumer 1.21 0.84 0.88 0.77 0.52
Commercial 0.46 0.34 1.77 0.50 0.15
Total 0.46 0.31 1.16 0.52 0.18
Allowance as a percentage of
outstanding loans by type:
Residential mortgage 0.51% 0.75% 0.39% 0.26% 0.23%
Consumer 1.35 1.59 1.23 1.29 1.76
Commercial 2.74 3.33 2.93 2.35 2.74
Unallocated - - - - -
Subtotal Regular Loans 2.26 2.33 1.86 1.67 1.80
SBA guaranteed certificates - - - - -
Total 1.91 1.95 1.53 1.59 1.80
</TABLE>
Deposits and Borrowings
<TABLE>
<CAPTION>
December 31 (dollars in millions) 1997 1996 % change
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Demand deposits $ 21.9 $ 19.7 11.2%
NOW deposits 22.3 20.5 8.8
Money market deposits 15.4 6.5 136.9
Savings deposits 34.7 38.1 (8.9)
Time deposits < $100 thousand 112.2 105.4 6.5
Time deposits > $100 thousand 15.2 15.4 (1.3)
- ---------------------------------------------------------------------------------------------------------------------------
Total deposits $ 221.7 $ 205.6 7.8
===========================================================================================================================
Personal $ 190.4 $ 173.9 9.5
Commercial 25.9 26.0 (.4)
Municipal 5.4 5.7 (5.3)
- ---------------------------------------------------------------------------------------------------------------------------
Total deposits $ 221.7 $ 205.6 7.8%
===========================================================================================================================
</TABLE>
Total deposits increased by $16.1 million (7.8%) at year-end 1997 compared to a
year earlier. All major categories of deposits increased except savings
accounts, which declined by 8.9%. Time deposits increased by $6.6 million due to
regular promotions of accounts primarily in the one to three year maturities. In
the second half of the year, the Company introduced a new money market savings
account with tiered interest rates approaching the yield on mutual funds for the
highest balance accounts. Total money market accounts increased by $8.9 million
due to the introduction of this product. Total borrowings decreased by $4.7
million (44.8%) in 1997. Deposit and equity growth exceeded the growth rate of
loans and investments, with the result that short term borrowings were paid down
and excess funds were invested in short term investments.
Time deposits greater than or equal to $100 thousand maturing within one year
were comprised of $3 million maturing within three months, $3 million maturing
after three months but within six months, and $3 million maturing after six
months at year-end 1997. Time deposits greater than or equal to $100 thousand
maturing after one year totaled $6 million at year-end 1997.
13
<PAGE>
Interest Rate Sensitivity
The following table presents a breakdown of the Company's interest rate
sensitive assets and liabilities on December 31, 1997 by specific time frames
and cumulatively. Balances of fixed rate assets are reported by their expected
prepayment schedules or by their expected remaining lives taking into account
call provisions. These estimates are provided by a correspondent bank and are
based on market estimates. Balances of deposit liabilities without a contractual
maturity date are reported by their repricing characteristics. These repricing
characteristics are determined by Management in accordance with an analysis of
the market sensitivity of specific deposit product types.
<TABLE>
<CAPTION>
Total
Interest Rate Sensitivity - Repricing Horizon Within 1-5 Over 5
(dollars in millions) One Year Years Years
- ---------------------------------------------------------------------------------------------------------------------------
December 31, 1997
<S> <C> <C> <C>
Earning Assets:
Loans $ 99 $ 19 $ 39
Securities available for sale 22 10 12
Securities held to maturity 5 14 1
Other assets 15 - -
- ---------------------------------------------------------------------------------------------------------------------------
Total earning assets $ 141 $ 43 $ 52
===========================================================================================================================
Funds Supporting Earning Assets:
NOW deposits $ 15 $ 7 $ -
Savings & Money Market 26 25 -
Time deposits < $100,000 69 43 -
Time deposits > $100,000 9 6 -
Borrowings 2 4 -
Non-interest bearing funds - - 30
- ---------------------------------------------------------------------------------------------------------------------------
Total funds supporting earning assets $ 121 $ 85 $ 30
===========================================================================================================================
December 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------
Gap for period $ 20 $ (42) $ 22
Cumulative gap 20 (22) -
Cumulative gap as percent of total earning assets (9)% (11)% -
December 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------
Cumulative gap $ 16 $ (17) -
Cumulative gap as percent of total earning assets 7% (8)% -
</TABLE>
The Company's Asset Liability Committee (ALCO) meets weekly to manage net
interest income and its sensitivity to interest rates. ALCO reports are reviewed
by the Board monthly. ALCO monitors risk and establishes long term strategies.
ALCO also manages the interest rates and other pricing features of the Company's
products.
At December 31, 1997, the Company had a positive twelve month gap of $20
million, which was up from $16 million at the previous year-end. The gap
increased due to growth in time deposits with a maturity over one year. This
growth was invested in part in short term assets, in anticipation of further
growth in loans in 1998. Time deposit growth also was invested in common equity
securities which are included with assets maturing over five years. The Company
generally targets a one year gap that is near break-even or slightly positive.
This provides protection to net interest income in case interest rates increase.
With interest rates near record lows in recent years, the Company's priority has
been to protect against increases rather than decreases in interest rates. Due
to the positive one year gap, the Company benefited from the .25% increase in
the prime interest rate on March 27, 1997. Most of the Company's variable rate
loans are based on the prime rate. The prime rate remained at 8.50% for the rest
of 1997, despite a decrease in interest rates at year-end 1997 to levels below
those prevailing a year earlier. The cumulative five year gap at year-end 1997
was ($22) million compared to ($17) million a year earlier. This liability
sensitivity increased due to the previously mentioned growth in equity
investments funded by time deposit growth.
14
<PAGE>
Liquidity And Cash Flows
The Company's primary source of funds is dividends form the Bank and its primary
use of funds is dividends to shareholders. Dividends from the Bank are primarily
paid from current period cash earnings of the Bank, and secondarily from other
liquid assets of the Bank. Dividends from the Bank to the Company are subject to
restrictions as is further described in the Shareholder's Equity note to the
consolidated financial statements.
Liquidity is also needed by the Bank to fund loan originations and the use of
credit commitments, along with deposit withdrawals and maturing borrowings. The
Bank manages its day-to-day liquidity by maintaining short term investments
and/or utilizing short term borrowings. In addition to its FHLBB relationship,
the Bank maintains $8.8 million in credit facilities for short term borrowings
and repurchase agreements. Over the year, loan originations and asset purchases
are funded by amortization of loans and investments, as well as by deposit
growth and FHLBB borrowings. In 1997, the primary use of funds was the
origination of loans and the primary source of funds was growth in time and
money market deposits. In the event of additional funds needs, the Bank could
choose to liquidate short term investments or to obtain funds from the
investment portfolio either by selling securities available for sale or
obtaining loans backed by investment securities. Additionally, the portfolio of
Government guaranteed loan certificates represents a readily marketable pool of
assets.
Capital Resources
Capital ratios for the Company and the Bank were in excess of all applicable
regulatory requirements for all periods presented. Total shareholders' equity
increased by $3.2 million (20.6%) in 1997 due to improved earnings, to
unrealized gains on the market value of securities, and to the exercise of stock
options. The Company increased the quarterly cash dividend to four cents per
share from two cents per share in the first quarter of 1997, and then
effectively to five cents per share as a result of the stock split in the second
quarter.
Impact of New Accounting Standards
Certain new accounting standards apply to future period reporting, as is more
fully discussed in the Recent Accounting Developments section of the Summary of
Significant Accounting Policies in the notes to the Consolidated Financial
Statements.
15
<PAGE>
Year 2000 Considerations
The Company has established a Year 2000 project plan to address systems and
facilities changes necessary to properly recognize dates after 1999, and has
assigned implementation responsibilities and has established management and
Board reporting processes. All of the Company's significant financial accounting
systems are provided under contract with major national banking systems
providers which are progressing under their own Year 2000 plans. Most
significant systems changes are scheduled to be completed by December 31, 1998.
The Company's plan follows the following five step approach required by its
regulators: Assessment, Modification, Verification, Implementation, and Client
Testing. The Company has completed the Assessment phase and is currently working
with its vendors on the Modification phase. The Company has arranged for
temporary consulting help and has purchased diagnostic software to assist with
this project. The Company's project also addresses its other suppliers,
customers, and other constituents. The costs of the project, which are not
expected to be significant, and the date on which the Company plans to complete
the Year 2000 modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. The
primary uncertainty facing the Company is the ability of third party systems
providers to identify and modify software as planned. Specific factors that
might cause material differences from plans include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
COMPARISON OF 1996 AND 1995
The Company earned $1.44 million ($.92 per diluted share) for the year ended
December 31, 1996. This compared to a loss of $1.15 million ($.74 per diluted
share) in 1995, which reflected significant write-downs and reserves on problem
assets. The Company also made significant progress in reducing nonperforming
assets during 1996 to $4.4 million from $6.4 million, representing 1.9% of total
assets by year-end 1996.
The increased earnings in 1996 resulted largely from the Company's strategy of
increasing its asset size and its volume of business, while minimizing increases
in expenses. On a fully taxable equivalent (FTE) basis, 1996 earnings included
an 8.0% increase in net interest income and a 10.9% increase in service charge
and fee income, while non-interest expense increased by only 0.9%. Additionally,
the Company recognized an income tax benefit of $118 thousand for the year. This
benefit was primarily related to a reduction of $554 thousand in the valuation
allowance on the Company's deferred tax asset due to the restoration of
profitability, and to the resolution of problem assets.
In the fourth quarter of 1996, the Company reinstated a quarterly cash dividend,
which had been suspended in 1990. The Company declared a quarterly dividend of
three cents per share following the close of the third quarter of 1996. The
Company's capital increased by $2.3 million (17.4%) during the year, due to
retained earnings and a reduction in the unrealized loss on the market value of
securities. Year-end 1996 equity measured 6.7% of assets and the Company
exceeded all regulatory capital requirements. Book value per share increased to
$9.98 at December 31, 1996 from $8.60 at the previous year-end.
Total assets were $232.3 million at December 31, 1996, representing an 8.5%
increase from the previous year-end. Total loans decreased by 4.2% due primarily
to paydowns and to the resolution of problem assets. Total deposits increased by
6.3% due largely to growth in checking accounts and time deposits. Funds from
deposit growth and problem asset resolutions were primarily invested in
investment securities during the year.
Net loan charge-offs totaled $468 thousand in 1996, measuring about .31% of
total average loans. The loan loss allowance increased to $2.85 million at
December 31, 1996, measuring 1.95% of total loans, compared to $2.34 million at
year end 1995. The loan loss provision declined to $978 thousand in 1996,
compared to $1.975 million in the previous year. Additionally, the Company
realized a net gain on assets of $200 thousand in 1996, primarily from the sale
of foreclosed land. Total loans nonaccruing and/or delinquent ninety days or
more at year-end 1996 included $1.5 million which was paid off in January, 1997.
Net of this amount, these loans totaled $3.7 million, which was down from $4.5
million at the previous year-end.
Quarterly earnings comparisons improved in each successive quarter from $302
thousand in the first quarter to $420 thousand in the fourth quarter. During the
fourth quarter, the Company recognized an income tax net benefit of $451
thousand, related primarily to the reduction in the valuation allowance on the
deferred tax asset, discussed above. For the fourth quarter, before taxes, the
Company recorded a loss of $31 thousand. Contributing to this result was a
charge of $132 thousand on the writedown of foreclosed assets, problem asset
related expenses totaling $226 thousand, and a similar amount of one time
operating accruals.
16
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
A table of market risk sensitive instruments is included in the Supplementary
Financial Data section. For loans, securities and liabilities with contractual
maturities, this table presents projected principal cash flows and related
weighted-average interest rates by contractual maturities. Additionally
reflected is the Company's historical experience of the impact of interest rate
fluctuations on the prepayment of residential mortgages, consumer loans,
commercial loans and mortgage-backed securities. Projected principal cash flows
and prepayment assumptions utilized as a percentage of outstanding balances at
year-end 1997 were 15% for residential mortgages, 21% for consumer loans and 17%
for commercial loans. Principal cash flows for mortgage backed securities were
determined based on market prepayment speeds ("PSAs") at year-end 1997. Equity
securities are reported as variable rate instruments with maturities of greater
than five years, except for callable equities which are reported by the next
call date. Time deposits and borrowings are presented based on contractual
maturities and weighted-average interest rates. For core deposits (e.g.,
checking, savings and money market deposits) that have no contractual maturity,
the table presents principal cash flows and related weighted-average interest
rates based on the Company's historical experience and management's judgement
concerning expected customer withdrawal behavior. The Company utilized decay
rate assumptions of 9% for savings accounts, 2% for checking accounts and 7% for
money market deposit accounts in the one year or less category. Expectations
regarding originations, prepayments and customer behavior are reviewed during
the Company's budget preparation process and approved by the Asset/Liability
Committee and the Board.
The table shows that the total fair values of market sensitive assets and
liabilities at December 31, 1997 differed from book value by less than 1%.
Market risk sensitive assets are spread among several categories of loans and
investments; variable interest rate commercial loans were the largest category,
totaling $61 million (28.0% of total market risk sensitive assets). Market risk
sensitive liabilities were primarily concentrated in time deposits, which
totaled $127 million (55.9% of total market risk sensitive liabilities).
Qualitative Disclosures About Market Risk
On a quarterly basis, management analyzes the sensitivity of net income and net
worth to changes in interest rates and the Board reviews reports of the status
of this sensitivity in comparison to approved internal guidelines. Quarterly
reviews of market risk sensitivity are conducted in conjunction with reviews of
the interest rate repricing horizon as previously described. Management and the
Board manage market risk exposures based on an evaluation of changes in the
composition of assets and liabilities, and management's plans for originating
and promoting market risk sensitive instruments. Through weekly meetings of its
Asset/Liability Committee, management is constantly adjusting its products,
prices, and promotions to achieve all Asset/Liability objectives, including the
management of interest rate sensitivity. Strategies utilized include changing
the mix of new loan and deposit originations, establishing repricing targets for
assets and liabilities which are repricing or maturing, and adjusting the level
and mix of short term investments, securities available for sale, borrowings,
and the potential utilization of hedging instruments. Because most market
sensitive instruments are contracted with local customers in the context of
multiple service relationships, and recognizing the generally level volume of
annual sensitivity of existing instruments, management believes that it has the
flexibility and capability to consider and successfully implement a variety of
strategies in the normal course of business.
17
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY
---------------------------------------------------
DATA--SEE EXHIBIT 99
--------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------
Incorporated by reference from Alliance's Proxy Statement for the 1998 Annual
Meeting of the Shareholders to be filed with the Securities and Exchange
Commission.
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
Incorporated by reference from Alliance's Proxy Statement for the 1998 Annual
Meeting of the Shareholders to be filed with the Securities and Exchange
Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
Incorporated by reference from Alliance's Proxy Statement for the 1998 Annual
Meeting of the Shareholders to be filed with the Securities and Exchange
Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
Incorporated by reference from Alliance's Proxy Statement for the 1998 Annual
Meeting of the Shareholders to be filed with the Securities and Exchange
Commission.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- ------------------------------------------------------------------------
(a) All schedules have been omitted as the required information is either
included herein or in the Proxy Statement, or is inapplicable.
(b) Reports on Form 8-K
On December 5, 1997, the Company filed on Form 8-K, reporting, under Items
1 and 2, the Bank's Form F-4 filed with the FDIC.
(c) Exhibit Index
The exhibits listed below are included in this report or are incorporated herein
by reference to the identified document previously filed with the Securities and
Exchange Commission as set forth parenthetically.
3(i) Certificate of Incorporation of Registrant (Exhibit 99.1 to the
Registration Statement on Form 8-A filed September 23, 1997).
3(ii) Bylaws of Registrant (Exhibit 99.2 to the Registration Statement on
Form 8-A filed September 23, 1997).
10(i) Change in Control Agreement between Tolland Bank and Joseph H.
Rossi, dated January 5, 1996.
10(ii) 1997 Stock Incentive Plan for Directors, Officers and Key employees
(Exhibit 4.3 to the Registration Statement on Form S-8 filed
November 6, 1997).
10(iii)Supplemental Executive Retirement Plan and Agreement between
Tolland Bank and Joseph H. Rossi, dated December 16, 1996.
10(iv) Directors' Deferred Compensation Plan.
10(v) Tolland Bank 1997 Employee Stock Purchase Plan.
10(vi) Cash Bonus Plan.
21. Subsidiaries of Registrant.
23. Independent Auditors' Consent
27. Financial Data Schedule.
99. Consolidated Financial Statements of the Registrant.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on February 12, 1998.
ALLIANCE BANCORP OF NEW ENGLAND, INC.
by
/s/ Joseph H. Rossi
- ----------------------
Joseph H. Rossi
President/CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following directors and officers on behalf of the
Company on February 12, 1998:
/s/ Dr. Howard G. Abbott /s/ Thomas S. Moore
- ------------------------------ ------------------------------
Dr. Howard G. Abbott Thomas S. Moore
Director Director
/s/ Lawrence J. Becker /s/ Douglas J. Moser
- ------------------------------ ------------------------------
Lawrence J. Becker Douglas J. Moser
Director Director
/s/ Robert C. Boardman /s/ Kenneth R. Peterson
- ------------------------------ ------------------------------
Robert C. Boardman Kenneth R. Peterson
Director Director
/s/ Theresa L. Dansky
- ------------------------------
Theresa L. Dansky Francis J. Prichard
Director Chairman
/s/ William E. Dowty, Jr. /s/ Joseph H. Rossi
- ------------------------------ ------------------------------
William E. Dowty, Jr. Joseph H. Rossi
Director Director/President/CEO
/s/ D. Anthony Guglielmo /s/ David H. Gonci
- ------------------------------ ------------------------------
D. Anthony Guglielmo David H. Gonci
Vice Chairman Vice President/Chief Financial
Officer/Treasurer
19
<PAGE>
AGREEMENT
THIS AGREEMENT, made this 5th day of January, 1996, by and between
Tolland Bank, a state-chartered savings bank ("Bank"), and Joseph H. Rossi, an
individual ("Employee").
In consideration of the mutual agreements herein contained, the parties
hereto, intending to be legally bound, agree as follows:
1. Need for Agreement
(a) Because of the prospects of sweeping changes in the
industry (e.g., interstate banking, mergers, the continuing transition from
traditional savings bank powers to full commercial bank powers, etc.), and
(b) because of the need for the Employee to perform his job
without undue fear of (a) above, this Agreement sets forth the following:
2. Term of Agreement and Renewal Term
(a) This Agreement shall commence on January 1, 1996, and
shall continue in effect through December 31, 1997. The term of the agreement
shall automatically be extended for an additional period of one year ("Renewal
Term") upon each successive anniversary of January 1 if neither party hereto,
within not more than 60 days prior to the date two (2) years before the
expiration date of this agreement including any extensions hereof, has provided
the other with a written notice to terminate this agreement. Any such renewal
shall be upon the terms and conditions set forth herein unless the parties have
agreed in writing to different terms and conditions. It is provided, further,
that notwithstanding any such notice by the Bank not to extend, this Agreement
shall continue in effect for a period of 24 months beyond the term provided
herein if a "change in control of the Bank" or a "potential change in control of
the Bank", as defined in Section 3, below, shall have occurred during such term.
3. Change in Control
(a) No benefits shall be payable hereunder unless there shall
have been a change in control of the Bank, as set forth below, and the
Employee's employment by the Bank shall thereafter have been terminated in
accordance with Section 4. For purposes of this Agreement, a "change in control
of the Bank" shall mean a change in control of a nature that would be required
to be reported in response to Item 5(f) of Schedule 14A of Regulation 14a
promulgated under the Securities Exchange Act of 1934, as amended ("Exchange
Act"); provided that, without limitation, such a change in control shall be
deemed to have occurred if:
<PAGE>
(1) any "person" (as such term is used in Sections
13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act), directly or indirectly,
of securities of the Bank representing 25% or more of the combined voting power
of the Bank's then outstanding securities;
(2) during any period of twelve consecutive months,
individuals who at the beginning of such period constitute the Board cease for
any reason to constitute a majority thereof unless the election, or the
nomination for election by the Bank's shareowners, of each new director was
approved by a vote of at least two-thirds of the directors then still in office
who were directors at the beginning of the period.
(b) For purposes of this Agreement, a "potential change in
control of the Bank" shall be deemed to have occurred if:
(1) the Bank enters into an agreement, the
consummation of which would result in the occurrence of a change in control of
the Bank; or
(2) any person (including the Bank) publicly
announces an intention to take or to consider taking actions which if
consummated would constitute a change in control of the Bank; or
(3) any person becomes the beneficial owner,
directly or indirectly, of securities of the Bank representing 10% or more of
the combined voting power of the Bank's then outstanding securities; or
(4) the Board of Directors adopts a resolution to the
effect that a potential change in control of the Bank for purposes of this
Agreement has occurred.
4. Termination Following Change in Control
If any of the events described in Section 3 hereof
constituting a change in control of the Bank shall have occurred, the Employee
shall be entitled to benefits provided in Section 5, below, upon the subsequent
termination of his employment during the term of this Agreement:
(a) If the Employee becomes, in the business judgment of the
Board of Directors, physically, mentally, or otherwise disabled such that he is
unable to perform his duties under this Agreement for a period of six (6)
consecutive months; provided, however, such determination by the Board of
Directors shall be based on the unanimous opinion of a physician selected each
by the Employee and the Bank. If such physicians are not in agreement, the
Employee and the Bank shall select a third physician whose decision shall be
used by the Board of Directors for their determination.
(b) Without cause, provided, however, that:
(1) sixty (60) days prior written notice is delivered to
Employee, and
(2) notice of such termination has been delivered after,
simultaneously with, or is in any way connected with a "potential change in
control of the Bank" or a "change in control in the Bank" as defined in
Subsections (a) and (b) of Section 3, above.
(c) With cause: cause shall include personal dishonesty;
willful misconduct;
<PAGE>
breach of fiduciary duty involving personal profit; intentional failure to
perform stated duties (other than such failure resulting form the Employee's
incapacity due to physical or mental illness or any such actual or anticipated
failure resulting from the Employee's termination for "Good Reason" as defined
in Subsection (d) of this Section 4, below); willful violation of any law, rule,
regulation (other than traffic violations or similar offenses), or final cease
and desist order or the Federal Deposit Insurance Corporation, or material
breach of any provisions of this contract. For purposes of this Subsection, no
act, or failure to act, on the Employee's part shall be considered "willful"
unless done, or omitted to be done, by the Employee not in good faith and
without reasonable belief that the Employee's action or omission was in the best
interest of the Bank. Notwithstanding the foregoing, the Employee shall not be
deemed to have been terminated for Cause unless and until there shall have been
delivered to the Employee a copy of a resolution duly adopted by the affirmative
vote of not less than three-quarters of the entire membership of the Board at a
meeting of the Board called and held for that purpose (after reasonable notice
to the Employee and an opportunity for the Employee, together with his counsel,
to be heard before the Board), finding that in the good faith opinion of the
Board the Employee was guilty of conduct set forth above in this Subsection (c)
of this Section 4 and specifying the particulars thereof in detail:
(d) With Good Reason
The Employee shall be entitled to terminate his
employment for Good Reason. "Good Reason" shall mean:
(1) the assignment to the Employee of any duties
inconsistent with the Employee's status as a senior executive officer of the
Bank or any significant or inconsistent alteration in the nature or status of
the Employee's responsibilities from those in effect immediately prior to a
change in control of the Bank; or
(2) a reduction by the Bank in the Employee's annual
salary as in effect on the date hereof or as the same may be increased from
time to time; or a reduction in fringe benefits, unless such reduction is made
equitably or is applicable to other Bank employees on a non-discriminatory
basis; or
(3) the relocation of the Bank's principal executive
offices to a location outside the greater Hartford area or the Bank's requiring
the Employee to be based anywhere other than the Bank's principal executive
offices.
The Employee's right to terminate his employment pursuant to this
Subsection shall not be affected by his incapacity due to physical or mental
illness.
<PAGE>
5. Compensation Upon Termination or During Disability
(a) During any period that the Employee fails to perform his
duties under this Agreement as a result of incapacity due to physical or mental
illness, the Employee shall continue to receive his full salary at the rate then
in effect, including all compensation, for a period not to exceed 12 months or
until the Employee is eligible for Long Term Disability benefits, whichever
occurs first. Thereafter, the Employee's benefits shall be determined in
accordance with the Bank's insurance programs, pension plan, profit sharing and
retirement plan then in effect.
(b) If the Employee's employment shall be terminated for
"Cause" pursuant to Subsection (c) of Section 4 above, the Bank shall pay the
Employee his full salary through the Date of Termination at the rate in effect
at the time Notice of Termination is given and the Bank shall have no further
obligations to the Employee under this Agreement.
(c) If the Employee's employment shall be terminated "Without
Cause" pursuant to Subsection (b) of Section 4 above, or with "Good Reason"
pursuant to Subsection (d) of Section 4 above, the Employee shall be entitled to
the benefits provided below:
(1) The Bank shall pay the Employee his full
salary through the Date of Termination at the rate in effect at the time
Notice of Termination is given and any incentives earned prior to the Date of
Termination but as yet not paid, and
(2) the Bank shall pay $25,000 to the Employee at
the time of termination. Such sum shall be paid, at the Employee's election
either in a lump sum or on a salary continuation basis, and
(3) the Bank shall continue to pay to the Employee
his full salary at his rate of compensation until such payments, including the
payment made pursuant to paragraph 5 (c) (2) above, have reached 2.9 times the
sum of the Employee's average annual salary and bonuses for the preceding five
years and
(4) the Bank shall arrange to provide the Employee
with life, disability, accident and health insurance benefits equal to those
which the Employee was receiving immediately prior to the Notice of
Termination for two years, and
(5) the Employee shall not be required to mitigate
the amount of any payment provided for in this Section 5 by any compensation
earned by the Employee as the result of part-time or temporary employment
by another employer, and
(6) in addition to all other amounts payable to the
Employee under this Section 5, the Employee shall be entitled to receive all
benefits payable to the Employee under the Bank's vacation policy, pension plan,
profit sharing plan and any other plan or agreement relating to retirement
benefits.
<PAGE>
6. Notice of Termination
(a) Any purported termination by the Bank or by the Employee
communicated by written Notice of Termination to the other party hereto in
accordance with Subsection (b) of this Section 6 shall mean a notice which shall
indicate the specific termination provision in this Agreement relied upon and
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of the Employee's employment under the provision
so indicated.
(b) A notice, request, demand or other communication required
or permitted to be given under this Agreement shall be sufficient if in writing
and if delivered personally, or sent by certified or registered mail to the
address below or to other such addressee or address as shall be set forth in a
notice given in the same manner:
If to the Employee: Joseph H. Rossi
45 Washburn Rd.
Canton, CT 06019
If to the Bank (mail): Tolland Bank
Olde Tolland Common
P. O. Box 156
Tolland, CT 06084
If to the Bank (deliver): Tolland Bank
348 Hartford Tpke.
Vernon, CT 06066
7. Date of Termination
"Date of Termination" shall mean:
(a) if the Employee's employment is terminated for Disability,
thirty (30) days after Notice of Termination is given, provided that the
Employee shall not have returned to the performance of his duties on a full-time
basis during such thirty (30) day period, and
(b) if the Employee's employment is terminated "Without Cause"
pursuant to Subsection (b) of Section 4 or for "Good Reason" pursuant to
Subsection (d) of Section 4, above, sixty (60) days from the date shown Notice
of Termination is given, and
(c) if the Employee's employment is terminated for "Cause"
pursuant to Subsection (c) of Section 4, above, the date of the Notice of
Termination.
Notwithstanding Subsections (a), (b), and (c) of this Section 7, the
party receiving such Notice of Termination shall have thirty (30) days to notify
the other party that a dispute exists concerning the termination, and the Date
of Termination shall be the date finally determined, either by mutual written
agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected); and
provided further that the Date of Termination shall be
<PAGE>
extended by a notice of dispute only if such notice is given in good faith and
the party giving such notice pursues the resolution of such dispute with
reasonable diligence. Notwithstanding the pendency of any such dispute, the Bank
will continue to pay the Employee his full compensation in effect when the
notice giving rise to the dispute was given (including, but not limited to, base
salary) and continue the Employee as a participant in all compensation, benefit
and insurance plans in which the Employee was participating when the notice
giving rise to the dispute was given, until the dispute is finally resolved in
accordance with this subsection except if such Employee is terminated for
"Cause". Amounts paid under this Subsection are in addition to all other amounts
due under this Agreement and shall not be offset against or reduce any other
amounts due under this Agreement.
8. Successors; Binding Agreement
(a) The Bank will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Bank to expressly assume
and agree to perform this Agreement in the same manner and to the same extent
that the Bank would be required to perform it if no such succession had taken
place. Failure of the Bank to obtain such assumption and agreement prior to the
effectiveness of any such succession shall be a breach of this Agreement and
shall entitle the Employee to terms as the Employee would be entitled under this
Agreement if the Employee terminated his employment for Good Reason, except that
for purposes of implementing the foregoing, the date on which any such
succession becomes effective shall be deemed the Date of Termination. As used in
this Agreement, "Bank" shall mean the Bank as hereinbefore defined and any
successor to its business and/or assets as aforesaid which assumes and agrees to
perform this Agreement by operation of law, or otherwise.
(b) This Agreement shall inure to the benefit of and be
enforceable by the Employee's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If the
Employee should die while any amount would still be payable to the Employee
under this Agreement if the Employee had continued to live, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the terms of
this agreement to the Employee's devisee, legatee or other designee or if there
is no designee, to the Employee's estate.
9. Validity
If for any reason any provision hereof shall be determined to
be invalid or unenforceable, the validity and effect to the other provisions
hereof shall not be affected thereby.
<PAGE>
10. Waiver of Breach
The waiver by the Bank or by the Employee of a breach of any
provision of the Agreement by the other party shall not operate, or be
construed, as a waiver of any other breach of such other party.
11. Entire Agreement and Modification
This Agreement constitutes the entire agreement between the
parties and supersedes all other agreements, arrangements, representations, and
communications, oral or written, so that except for the provisions of this
agreement the employment relationship between the parties is an at-will
relationship which may be terminated at any time by either party. This Agreement
shall not be modified or amended except by written agreement of the parties
hereto.
12. Arbitration and Attorney Fees
Claims, disputes or other matters in question between the
parties to this Agreement arising out of or relating to this Agreement or breach
thereof, shall be subject to and decided by arbitration in accordance with the
appropriate rules of the American Arbitration Association currently in effect,
unless the parties mutually agree otherwise. The Employee seeking to enforce the
terms of this Agreement who prevails is entitled to reasonable attorney fees.
13. Applicable Law
The parties hereto agree that this Agreement shall be
construed and enforced pursuant to the laws of the State of Connecticut except
to the extent that such law may be preempted by applicable Federal Law,
including regulation, or orders duly issued by the FDIC ("Federal Law"), in
which event this Agreement shall be governed and be interpreted by Federal Law.
IN WITNESS WHEREOF, the parties hereto have set their hands as of the
day and year first above written.
EMPLOYEE: FOR THE BANK:
/s/ Joseph H. Rossi /s/ Francis J. Prichard
- ---------------------- --------------------------
Joseph H. Rossi Francis J. Prichard
President & CEO Its Chairman of the Board
/s/ Evi S. Connors
- ----------------------
Witness
/s/ Cynthia S. Harris CORPORATE SEAL:
- ----------------------
Witness
<PAGE>
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
AND
AGREEMENT
THIS AGREEMENT, made this 16th day of December, 1996, by and between
Tolland Bank, a state-chartered savings bank ("Bank"), and Joseph H. Rossi, an
individual ("Employee").
In consideration of the mutual agreements herein contained, the parties
hereto, intending to be legally bound, agree as follows:
1. Need for Agreement
(a) Because of the prospects of sweeping changes in the industry
(e.g., interstate banking, mergers, the continuing transition
from traditional savings bank powers to full commercial bank
powers, etc.), and
(b) because of the need for the Employee to perform his job
without undue fear of the loss of pension benefits this
Agreement sets forth the following:
2. Term of Agreement
(a) This Agreement shall commence on October 1, 1996, and shall
continue in effect until the time Employee is fully vested in
the Bank's Defined Benefit Plan and 401k Savings Plan.
3. Qualifying Termination of Employment
Benefits shall be payable under this Agreement only if the Employee's
employment is terminated prior to the expiration of this Agreement
under one of the following circumstances:
(a) Employee shall have been involuntarily terminated from
employment without cause.
(i) Cause shall include personal dishonesty; willful
misconduct; breach of fiduciary duty involving personal
profit; intentional failure to perform stated duties
(other than such failure resulting from the Employee's
incapacity due to physical or mental illness or any such
actual or anticipated failure resulting from the
Employee's termination for "Good Reason" as defined in
Subsection (b) of this Section below); willful
<PAGE>
violation of any law, rule, regulation (other than traffic
violations or similar offenses), or final cease and desist
order of the Federal Deposit Insurance Corporation.
(ii) For purposes of this Subsection, no act, or failure to
act, on the Employee's part shall be considered "willful"
unless done, or omitted to be done, by the Employee not in
good faith and without reasonable belief that the
Employee's action or omission was in the best interest of
the Bank.
(iii) Notwithstanding the foregoing, the Employee shall not be
deemed to have been terminated for Cause unless and until
there shall have been delivered to the Employee a copy of
a resolution duly adopted by the affirmative vote of not
less than three-quarters of the entire membership of the
Board at a meeting of the Board called and held for that
purpose (after reasonable notice to the Employee and an
opportunity for the Employee, to be heard before the
Board), finding that in the good faith opinion of the
Board the Employee was guilty of conduct set forth above
and specifying the particulars thereof in detail.
(b) Employee terminates his employment with Good Reason.
(i) The Employee shall be entitled to terminate his employment
for Good Reason. "Good Reason" shall mean:
(1) the assignment to the Employee of any duties
inconsistent with the Employee's status as a senior
executive officer of the Bank or any significant
change in the Employee's responsibilities or duties
that negatively alters the nature and status of his
position.
(2) a reduction by the Bank in the Employee's annual
salary as in effect on the date hereof or as the
same may be increased from time to time; or a
reduction in fringe benefits, unless such reduction
is made equitably or is applicable to other Bank
employees on a non-discriminatory basis; or
(3) unless otherwise mutually agreed upon, the
relocation of the Bank's principal executive
offices to a location outside the greater Hartford
area or the Bank's requiring the Employee to be
based anywhere other than the Bank's principal
executive offices.
2
<PAGE>
(ii) The Employee's right to terminate his employment pursuant
to this Subsection shall not be affected by his incapacity
due to physical or mental illness.
(c) If the Employee becomes, in the business judgment of the Board
of Directors, physically, mentally, or otherwise disabled such
that he is unable to perform his duties for such a period of
time that his employment is terminated or he is replaced
without right of returning to his former position upon
becoming able to perform such duties.
(i) Such determination by the Board of Directors shall be
based on the unanimous opinion of two physicians, one
selected by the Employee and one by the Bank.
(ii) If such physicians are not in agreement, the Employee
and the Bank shall select a third physician whose
decision shall be used by the Board of Directors for
their determination.
4. Benefits Payable Following Qualifying Termination of Employment
In the event that the Employee's employment is terminated under one of
the circumstances described in this paragraph 3 above, the Bank shall
pay the Employee the amount described in paragraph 4 reduced by
applicable withholding taxes:
(a) In the event that the employee is not 100% vested in his
accrued benefits under the Defined Benefit Plan at the time of
termination, the Bank shall pay him a lump sum amount equal to
the excess, if any, of:
(i) the lump sum value of his vested and unvested accrued
benefit under the pension plan at the time of his
termination reduced by;
(ii) the lump sum value of his vested accrued benefit under the
Plan.
For purposes of this Agreement, the amount to be determined under this
Clause (a) will be calculated by applying the provisions of the pension
plan then in effect.
(b) In the event that the Employee is not 100% vested in his
account benefit under the 401k Savings Plan at the time of his
termination, the Bank shall make the lump sum payment to him
in an amount equal to the excess, if any, of:
3
<PAGE>
(i) the vested and unvested account balance determined as of
the most recent valuation date immediately preceding the
date of his termination of employment reduced by;
(ii) his vested account balance under the plan as of the most
recent valuation date immediately preceding the date of
his termination of employment.
(c) A lump sum in the amount of 18% of the sum of (a) and
(b) above.
5. Notice of Termination
(a) Any purported termination by the Bank or by the Employee
communicated by written Notice of Termination to the other
party hereto in accordance with Subsection (b) of this Section
6 shall mean a notice which shall indicate the specific
termination provision in this Agreement relied upon and shall
set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Employee's
employment under the provision so indicated.
(b) A notice, request, demand or other communication required or
permitted to be given under this Agreement shall be sufficient
if in writing and if delivered personally, or sent by
certified or registered mail to the address below or to other
such addressee or address as shall be set forth in a notice
given in the same manner:
If to the Employee: Joseph Rossi
45 Washburn Road
Canton, CT 06019
If to the Bank (mail): Tolland Bank
Olde Tolland Common
P. O. Box 156
Tolland, CT 06084
If to the Bank (deliver): Tolland Bank
348 Hartford Tpke.
Vernon, CT 06066
4
<PAGE>
6. Successors; Binding Agreement
(a) The Bank will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the
Bank to expressly assume and agree to perform this Agreement
in the same manner and to the same extent that the Bank would
be required to perform it if no such succession had taken
place. Failure of the Bank to obtain such assumption and
agreement prior to the effectiveness of any such succession
shall be a breach of this Agreement and shall entitle the
Employee to terms as the Employee would be entitled under this
Agreement if the Employee terminated his employment for Good
Reason, except that for purposes of implementing the
foregoing, the date on which any such succession becomes
effective shall be deemed the Date of Termination. As used in
this Agreement, "Bank" shall mean the Bank as hereinbefore
defined and any successor to its business and/or assets as
aforesaid which assumes and agrees to perform this Agreement
by operation of law, or otherwise.
(b) This Agreement shall inure to the benefit of and be
enforceable by the Employee's personal or legal
representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Employee should
die while any amount would still be payable to the Employee
under this Agreement if the Employee had continued to live,
all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this agreement to the
Employee's devisee, legatee or other designee or if there is
no designee, to the Employee's estate.
7. Validity
If for any reason any provision hereof shall be determined to be
invalid or unenforceable, the validity and effect to the other
provisions hereof shall not be affected thereby.
8. Waiver of Breach
The waiver by the Bank or by the Employee of a breach of any provision
of the Agreement by the other party shall not operate, or be construed,
as a waiver of any other breach of such other party.
9. Modification of Agreement
This Agreement shall not be modified or amended except by written
agreement of the parties hereto.
5
<PAGE>
10. Arbitration and Attorney Fees
Claims, disputes or other matters in question between the parties to
this Agreement arising out of or relating to this Agreement or breach
thereof, shall be subject to and decided by arbitration in accordance
with the appropriate rules of the American Arbitration Association
currently in effect, unless the parties mutually agree otherwise.
The Employee seeking to enforce the terms of this Agreement who
prevails is entitled to reasonable attorney fees.
11. Applicable Law
The parties hereto agree that this Agreement shall be construed and
enforced pursuant to the laws of the State of Connecticut except to the
extent that such law may be preempted by applicable Federal Law,
including regulation, or orders duly issued by the FDIC ("Federal
Law"), in which event this Agreement shall be governed and be
interpreted by Federal Law.
IN WITNESS WHEREOF, the parties hereto have set their hands as of the
day and year first above written.
EMPLOYEE: FOR THE BANK:
/s/ Joseph H. Rossi /s/ William Dowty, Jr.
Joseph Rossi William Dowty, Jr.
President & CEO Chairman of Personnel Committee,
Board of Directors
/s/ Patrick J. Logiudice
Witness
/s/ Cynthia S. Harris CORPORATE SEAL:
Witness
6
<PAGE>
TOLLAND BANK
DIRECTOR'S DEFERRED COMPENSATION PLAN
1. Purpose. The purpose of this Directors' Deferred Compensation Plan
("Plan") is twofold. First, the Plan enables directors of Tolland Bank to elect
to receive payment of their annual retainer fees in the form of stock of the
Bank in lieu of cash. Second, the Plan enables directors who elect payment in
the form of stock to elect to defer receipt and taxation of their annual
retainer fees that are payable in such form. To the extent possible, the Plan
shall be construed and administered in a manner consistent with the foregoing
purposes.
2. Definitions. Where the following words and phrases appear in this
Plan, they shall have the respective meanings set forth below, unless the
context clearly indicates to the contrary:
(a) Bank. Tolland Bank
(b) Beneficiary. The person or persons designated in
writing by a Participant to receive the balance
credited to the Participant's Deferred Compensation
Account upon his death. If no effective Beneficiary
designation is on file, the Participant's Beneficiary
shall be his estate.
(c) Board. The Board of Directors of the Bank.
(d) Committee. The Personnel Committee of the Board.
(e) Deferred Compensation Account or Account. The
separate bookkeeping account maintained by the
controller of the Bank to record each Participant's
interest in the Plan, consisting of deferred Retainer
Fees and any amounts credited thereon.
<PAGE>
(f) Director. A Director of the Bank.
(g) Participant. Any Director or former Director who has
elected to participate in the Plan, or who retains a
balance in his Deferred Compensation Account.
(h) Retainer Fee. The retainer payable to a Director with
respect to services to be rendered during the year,
which retainer is paid on the first business day of
the calendar quarter, in advance. A Retainer Fee
shall not include any fee or remuneration payable for
attending Board or committee meetings, or for any
other purpose.
(i) Stock. Common stock of Tolland Bank. In the event of
a stock dividend, split-up, combination or
reclassification of shares, recapitalization or other
similar capital change relating to the Stock, the
aggregate number and kind of shares or securities of
the Bank and the value of such shares, shall be
appropriately adjusted by the Committee (whose
determination shall be conclusive and binding upon
both the Bank and the participant) so that the
proportionate number of shares or securities shall be
maintained hereunder as before the occurrence of such
event
3. Eligibility and Participation. Effective January 1, 1997, any
Director whether elected or appointed is eligible to participate in the Plan and
to defer payment of his or her Retainer Fees in accordance with the terms of the
Plan. A Director may commence participation in the Plan at any time by filing a
written election form with the controller.
2
<PAGE>
4. Deferral Election. A Director may elect to receive payment of all of
the Director's Retainer Fees in Stock rather than cash; any change in such
election shall be effective only as of the January 1 next following filing of
the election change. In addition, a Director who elects to receive payment in
the form of Stock may elect to defer the payment of Retainer Fees payable to the
Participant in such form after the election has been filed. The Participant may
terminate the election to defer payment under the Plan at any time by delivery
to the controller of the Bank of a written termination notice, but such
termination notice shall be effective only with respect to Retainer Fees payable
after the controller's receipt thereof. Initial elections under the Plan shall
be effective January 1, 1997. Any subsequent election to receive payment in the
form of Stock rather than cash and any election to defer payment of Stock shall
be effective only as of the January 1 next following the delivery of the
election. Any Retainer Fees previously deferred while the election was in effect
shall remain in the Participant's Deferred Compensation Account subject to all
of the terms of the Plan.
5. Deferred Compensation Accounts. The Controller shall maintain
separate bookkeeping Deferred Compensation Accounts for each Participant to
which all of the Participant's deferred Retainer Fees shall be credited as of
the first business day of a calendar quarter. Any such deferred Retainer Fees
shall be credited as units (including fractional units) of common stock of
Tolland Bank, based on the average of the high and low values of such stock on
the date of crediting. Any such units shall be considered unissued stock, and
the Participant shall have no rights as a shareholder with respect to such units
until distributed as Stock. Cash shall be credited to the Participant's Account
equal to the amount of any cash dividends paid on Bank stock from time to time.
Upon distribution as provided in Section 7, the Deferred Compensation Account
shall be paid in kind as shares of stock, with cash representing dividends paid
since crediting and any fractional share. No interest shall accrue on the
balance in a Participant's Account attributable to cash dividends.
3
<PAGE>
6. Unfunded Plan. The Deferred Compensation Accounts provided for
herein are unfunded accounts established solely for internal bookkeeping
purposes, and neither the Participant nor any person claiming by, through or
under the Participant shall acquire any property interest in any specific assets
of the Bank. In the event the Bank segregates any particular assets to provide
the benefits payable under the Plan, said assets shall continue to be part of
the general assets of the Bank and shall remain subject to the claims of its
unsecured general creditors at all times. Nothing contained herein shall require
the Bank to segregate any of its assets for the purpose of providing benefits
hereunder.
7. Benefit Payments. The balance in a Participant's Account shall be
paid or commence to be paid in a lump sum within sixty (60) days after the
Participant ceases to be a Director for any reason. In the event of the
Participant's death before complete distribution of the Account, any remaining
Account balance shall be paid to the Participant's Beneficiary in a lump sum as
soon as administratively practical after his death.
8. Committee. The Plan shall be administered by the Committee, whose
determinations of all administrative matters hereunder and interpretations of
terms hereunder shall be final and conclusive on all parties.
9. Withholding. The Bank shall have the right to withhold from payment
of benefits hereunder or from other amounts payable to a participant such amount
of income, payroll, and other taxes as the Bank determines is appropriate.
4
<PAGE>
10. Amendment and Termination. The Plan may be amended at any time and
from time to time, or terminated in whole or in part, by action of the Board;
provided, however, that no such amendment or termination shall divest a
Participant of any amount credited to his Account under the Plan.
11. Assignment of Benefits. The interest of a Participant in his
Deferred Compensation Account shall not be subject to execution, attachment or
other similar process, and a Participant's interest in his Account may not be
assigned, transferred, pledged or encumbered except by will or by the laws of
descent and distribution. Any attempted assignment, alienation, levy or similar
process shall be null and void.
12. Applicable Law. The Plan shall be administered, construed and
interpreted in accordance with the laws of the State of Connecticut.
IN WITNESS WHEREOF, the Bank has caused this Plan to be executed by its
officers thereunto duly authorized this 20th day of December, 1996.
TOLLAND BANK
By /s/ Joseph H. Rossi
-------------------------
Title President & CEO
5
<PAGE>
TOLLAND BANK
1997 EMPLOYEE STOCK PURCHASE PLAN
Purpose of the Plan
The purpose of this Plan is to provide eligible employees of Tolland Bank (the
"Bank") with an opportunity to become stockholders of the Bank through the
purchase of shares of Common Stock, par value $1.00 per share, of the Bank
("Common Stock") at full fair market value. Except as otherwise provided herein,
the Bank will absorb the cost of fee and brokerage charges in connection with
the administration of and purchases made pursuant to the Plan. Participation in
the Plan is entirely voluntary.
Effective Date
This Plan shall be effective as of May 1, 1997.
Eligibility
All employees of the Bank are eligible to participate in the Plan at their
election except for
i. Any person who owns (either individually or through attribution
from siblings, spouse, ancestors and lineal descendants, or from a
corporation, partnership, estate or trust of which the person is
shareholder, partner, or beneficiary) 5% or more of the total
combined voting power of the Bank or of any parent or subsidiary
corporation;
ii. Employees who have been employed fewer than 30 days;
iii. Employees whose customary employment is fewer than 20 hours per
week or for not more than 5 months in any calendar year;
The right to purchase stock under this Plan may not be transferred by an
eligible employee; it may be exercised only by the employee.
Method of Operation
The Bank shall designate a brokerage or other financial services firm (the
"Broker") to open and maintain an account in the name of each participant in the
Plan. Nothing in the Plan shall restrict the substitution by the Bank in its
discretion of a firm other than the one originally named as the Broker under the
Plan, or the right of any such Broker to terminate its services as the Broker
under the Plan.
<PAGE>
The Bank will deduct funds from each participant's pay as authorized by the
participant in accordance with the Plan and shall, as promptly as practicable
following the end of each calendar month, forward to the Broker the amounts
deducted for all participants during such month, a list of such participants and
the amount allocable to the account of each such participant. No interest will
be paid on payroll deductions.
The Bank will pay the Broker's administrative charges for maintaining accounts
of participants in the Plan, and, as shares of Common Stock for such accounts
are purchased by the Broker, all brokerage commissions on such purchases of
shares of Common Stock.
Payroll Deductions
Payroll deductions may be authorized by eligible employees in specified amounts
not less than $5 per pay period and not greater than the lesser of $300 per pay
period or $1,000 per month. Such payroll deduction authorization will remain
effective until terminated in writing by a participant. The option to purchase
lapses with each pay period; a failure to participate in payroll deduction in a
particular pay period shall not increase the limit for any subsequent period.
A payroll deduction may be revised or terminated at any time by a participant's
written request submitted to the Bank; provided, however, that a participant may
not recommence a payroll deduction for a period of six months after the
participant has terminated such deduction, nor may a participant make more than
two revisions of a payroll deduction authorization in any twelve month period.
Commencement, revision or termination of deductions will become effective as
soon as practicable after a participant's written request is received by the
Bank.
Amendment or Termination
The Bank reserves the right to discontinue use of its payroll deduction
facilities for the purposes of the Plan at any time such action is deemed
advisable in its judgment, and it also reserves the right to amend or terminate
the Plan at any time. In any event the Plan shall terminate no later than April
30, 2007. Any such amendment or termination will not result in the forfeiture of
any funds deducted from the salary of any participant effective before the
effective date of amendment or termination of the Plan.
Participant's Account with the Broker
A participant's account will consist of the shares of Common Stock purchased by
the Broker and allocated to the account.
Within five (5) business days following receipt of cash funds from the Bank, the
Broker will purchase, as agent for the participants, as many shares of Common
Stock as such funds will permit. Such purchases shall be made on the open
market.
-2-
<PAGE>
The number of shares of Common Stock purchased by the Broker with funds provided
to it pursuant to the Plan will depend upon the market price of shares of Common
Stock at the time such purchases are made. Such purchases will be allocated by
the Broker, at the average cost thereof, to the individual accounts established
for participants, in proportion to the respective amount received for each
participant's account. Allocation will be made in full shares of Common Stock
and in fractional interests in shares of Common Stock.
All purchases will be made in accordance with any conditions imposed upon the
Broker by the Securities and Exchange Commission which are designed to guard
against undue impact on the market price of Common Stock by reason of purchases
made pursuant to the Plan.
Each participant will acquire full ownership of all full and any fractional
interest in shares of Common Stock allocated to the participant's account at the
time of such allocation. All such shares of Common Stock will be registered in
the name of the Broker or its nominee and will remain so registered until
delivery is requested by a participant. A participant may request that a
certificate for any or all of the participant's full shares be delivered to the
participant at any time; provided, however, that any fee or charge imposed by
the Broker in connection with the delivery of a certificate to a participant
shall be paid by such participant or charged to such participant's account.
A participant's account will be credited with all dividends paid in respect of
the full shares of Common Stock and of any fractional interest in shares of
Common Stock held in a participant's account. Cash dividends will be reinvested
in Common Stock as promptly as practicable following receipt thereof by the
Broker unless a participant instructs the Broker to reinvest no cash dividends.
Brokerage commissions on purchases made with reinvested dividends will be paid
by the Bank.
Any stock dividends or stock splits in respect of full and any fractional
interest in shares of Common Stock held in a participant's account will be
credited to the account without charge. Any distributions to holders of Common
Stock of other securities and rights to subscribe for additional shares will be
sold and the proceeds will be handled in the same manner as a cash dividend.
A participant may instruct the Broker at any time to sell any or all of the
participant's full shares of Common Stock and the fractional interest in any
share of Common Stock allocated to the participant's account. Upon such sale the
Broker will mail to the participant a check for the proceeds, less a brokerage
commission and any applicable transfer tax, each of which is payable by the
participant. Such instruction to the Broker will not affect a participant's
status under the Plan unless the participant also terminates the participant's
payroll deduction authorization.
-3-
<PAGE>
Each participant will receive a confirmation from the Broker of changes in the
number of shares of Common Stock held for the participant's account. The
relationship between the Broker and a participant is the normal relationship of
a broker and client, and the Bank assumes no responsibility in this respect. The
Broker may offer custodial services for certificates for share of Common Stock
transferred by a participant for shares not acquired through the Plan.
The Broker will deliver to each participant as promptly as practicable, by mail
or otherwise, all notices of meetings, proxy statements and other material
distributed by the Bank to its stockholders. There will be no charge to a
participant for the Broker's delivery of such notices, proxy statements or other
material. The full shares of Common Stock in each participant's account will be
voted in accordance with the participant's signed proxy instructions duly
delivered to the Broker.
Assignment; Sale
Although a participant may not assign, pledge or hypothecate an interest in the
Plan as such, shares of Common Stock allocated to a participant's account may be
sold, assigned, pledged, hypothecated or otherwise dealt with as would be the
case with respect to any other shares of Common Stock a participant might own.
Closing Participant's Account
A participant who terminates a payroll deduction authorization may request the
Broker to maintain or to close the participant's account. A participant may
direct that all full shares of Common Stock and any fractional interest in
shares of Common Stock in the participant's account be sold and the net proceeds
remitted to the participant, or the participant may request that the full shares
in the account be delivered to the participant along with a check representing
the net proceeds of the sale of the fractional interest in shares, less a
brokerage commission, any applicable transfer tax, and any fee or charge imposed
by the Broker in connection with the delivery of a certificate for such shares,
each of which is payable by the participant. An employee may thereafter re-enter
the Plan by following the procedure described above under the caption "Payroll
Deductions". However, an employee many not recommence payroll deductions during
a period of six months after the employee has terminated such deductions.
-4-
<PAGE>
TOLLAND BANK
BONUS PLAN
The purpose of the Tolland Bank Bonus Plan is to provide incentive for
each officer and employee of Tolland Bank to be rewarded for contributions
toward the corporate objective of enhancing shareholder value through increased
market share, higher earnings, and controlled expenses.
The Bonus Plan will have three components:
1. Short Term Bonus
2. Long Term Bonus
3. Instant Reward
SHORT TERM BONUS
Under this plan, the bonus pool is determined annually by measurement
of the Bank's annual average return on assets (ROA). For the purposes of
calculating the Short Term Bonus pool, the following schedule will be used:
ROA of .80 through .99 = 80% payout
ROA of 1.00 through 1.19 = 100% payout
ROA of 1.20 and above = 120% payout
The 100% guideline will equal up to 12% of estimated net operating
income (net income before taxes, plus loan loss provision, plus net gains/losses
on securities and assets, minus net loan chargeoffs). The bonus pool amount will
be recommended by management to the Personnel Committee for its approval and
ratification by the Board of Directors.
It is not the intention of management to duplicate bonus payments which
may be made through other incentive arrangements. Therefore, employees will not
receive a bonus under this plan unless the amount from this plan is greater than
the incentive bonus payable for the same year under the other incentive
arrangement, in which case the difference will be paid under this plan. The
amount payable from other incentives will be deducted from the bonus pool for
this plan up to the bonus amount payable under this plan for each employee
involved.
For payment of bonuses once the bonus pool is determined, the following
guidelines of percentage of base salary will apply:
Senior Officers:
Level 10 0 - 30%
Level 09 & 08 0 - 25%
Level 07 0 - 20%
Level 06 0 - 15%
1
<PAGE>
All Other Officers:
All levels 0 - 10%
All Non-Officer Exempt Employees:*
All levels 0 - 10%
Non-Exempt Employees:*
All levels 0 - 5%, or a flat amount to be
determined by management
* These components of the short term bonus may be paid even if the
ROA target is not reached, upon recommendation of management and
approval of the Personnel Committee and ratification by the Board
of Directors.
Eligibility:
All classes of employees are eligible. Bonuses for part-time
employees will be adjusted to a portion of the full-time bonus as
determined by management. The employee must have been with the
Bank for the full year for which results are measured, and the
recipient must be in the Bank's employ at the time the bonus is
paid. Employees with a performance rating of 3 (does not meet
expectations) are not eligible to receive a bonus.
The Personnel Committee will recommend the bonus allotment for the
President/Chief Executive Officer. The percentage of base salary to be awarded
as a bonus to policy making officers other than the CEO will be based on the
recommendation of the CEO after evaluation of achievement of objective and
subjective goals established during the applicable calendar year. Bonus amounts
for other officers/employees will be approved by the CEO within the guidelines
established, and will be reported to the Personnel Committee.
The Personnel Committee may vote to amend or rescind the plan at any
time. Bonuses are awarded entirely at the discretion of management and the Board
and are not intended to be binding on the company and may be withdrawn at any
time.
2
<PAGE>
LONG TERM BONUS
Officers and key employees may receive long term bonus awards as
provided for by the 1997 Stock Incentive Plan for Directors, Officers and Key
Employees. This plan is intended to provide additional incentives to promote the
future success and growth of the Bank by providing participants with a direct
stake in the Bank and, in the case of officers and key executives, to encourage
qualified persons to seek and accept employment with the Bank.
INSTANT REWARD
The purpose of this plan is to reward an employee for an outstanding
accomplishment, upon recommendation by the employee's supervisor or another
manager, and upon approval by the senior officer in charge of the department and
the senior management team. Policy making officers are not eligible for the
instant reward bonus.
Instant Rewards may be made for the following:
1. Outstanding effort beyond normal job responsibilities. This
could be project related, or for coverage in the absence of
another employee.
2. A suggestion which, when implemented, will solve a problem,
save the Bank expense, or increase income.
3. A situation which is exposure related (e.g. check kiting
scheme, potential fraud, etc.).
4. Significant deposit or loan account relationship success.
5. Outstanding customer service.
6. Any act or effort deemed worthy of this reward by management.
Reward amounts may range in size from $50 to $500.
Management will recommend a flat amount to be set aside annually for
Instant Rewards as part of the budget process. Unused funds may be carried over
to the next calendar year.
3
<PAGE>
Exhibit 21
Subsidiaries of Registrant
Subsidiary of Alliance Bancorp of New England, Inc.:
Tolland Bank
Subsidiary of Tolland Bank:
Asset Recovery Systems, Inc.
<PAGE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Alliance Bancorp of New England, Inc.:
We consent to incorporation by reference in the Registration Statement No.
333-39645 on Form S-8 of Alliance Bancorp of New England, Inc. of our report
dated January 27, 1998, relating to the consolidated balance sheets of Alliance
Bancorp of New England, Inc. and subsidiaries as of December 31, 1997 and 1996,
and the related consolidated income statements, consolidated statements of
changes in shareholders' equity and consolidated statements of cash flows for
each of the years in the three-year period ended December 31, 1997, which report
is included herein.
/s/ KPMG PEAT MARWICK LLP
Hartford, Connecticut
March 23, 1998
<PAGE>
Independent Auditors' Report
To the Shareholders and Board of Directors of Alliance Bancorp of New England,
Inc.:
We have audited the accompanying consolidated balance sheets of Alliance Bancorp
of New England, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated income statements, consolidated statements of changes in
shareholders' equity, and consolidated statements of cash flows for each of the
years in the three-year period ended December 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Alliance Bancorp of
New England, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
- --------------------------
KPMG Peat Marwick LLP
Hartford, Connecticut
January 27, 1998
1
<PAGE>
Management's Report on the Financial Statements
The Management of Alliance Bancorp of New England, Inc. is responsible for the
accuracy and content of the consolidated financial statements and other
information in this annual report. The consolidated financial statements have
been prepared in conformity with generally accepted accounting principles
applied on a consistent basis in all material respects, and information
presented relies on Management's judgment where material estimates are required.
The consolidated financial statement disclosures include the fair values of
financial instruments, which include many assets and liabilities. They are not a
representation of the fair values or liquidation values of total assets and
liabilities, or the value of present and future business activities of the
Company.
The accounting systems which record, summarize, and report data are supported by
internal controls that are augmented by written policies, internal audits and
staff training programs. The Audit Committee of the Board of Directors is made
up solely of outside directors who are not employees of the Company. It directs
and reviews the activities of the internal audit function and meets at least
annually with representatives of KPMG Peat Marwick LLP, the Company's
independent auditors. KPMG Peat Marwick LLP, a firm of Certified Public
Accountants, has been appointed by the Audit Committee of the Board of Directors
to conduct an independent audit and to express an opinion as to the fairness of
the presentation of the consolidated financial statements of Alliance Bancorp of
New England, Inc., in accordance with generally accepted accounting principles.
2
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
<S> <C> <C>
December 31 (in thousands except share data) 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 6,652 $ 7,463
Short-term investments 14,765 5,100
- ------------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 21,417 12,563
Securities available for sale (at fair value) 43,729 45,386
Securities held to maturity 19,949 20,690
(fair value of $20,021 in 1997 and $20,649 in 1996)
Residential mortgage loans 39,319 41,669
Commercial mortgage loans 45,511 40,494
Other commercial loans 18,270 15,287
Consumer loans 29,504 26,118
Government guaranteed loans 24,846 24,263
- ------------------------------------------------------------------------------------------------------------------------------
Total loans 157,450 147,831
Less: Allowance for loan losses (3,000) (2,850)
- ------------------------------------------------------------------------------------------------------------------------------
Net loans 154,450 144,981
Premises and equipment, net 4,151 4,416
Foreclosed assets, net 617 980
Other assets 2,816 3,266
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $ 247,129 $ 232,282
- ------------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Demand deposits $ 21,918 $ 19,673
NOW deposits 22,260 20,522
Money market deposits 15,447 6,469
Savings deposits 34,677 38,102
Time deposits 127,431 120,842
- ------------------------------------------------------------------------------------------------------------------------------
Total deposits 221,733 205,608
Borrowings 5,739 10,406
Other liabilities 854 679
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 228,326 216,693
Commitments and contingencies (Note 16)
Preferred stock, ( $.01 par value; 100,000 shares - -
authorized, none issued)
Common stock, ($.01 par value; authorized 4,000,000
shares; issued and outstanding 1,636,269 in 1997
and 1,172,500 in 1996 ) 16 1,173
Additional paid-in capital 11,073 8,918
Retained earnings 7,071 5,731
Unrealized gain (loss) on securities, net 643 (233)
- ------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 18,803 15,589
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 247,129 $ 232,282
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
Consolidated Income Statements
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Years ended December 31
(dollars in thousands except share data) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
Interest Income
Loans $ 12,138 $ 12,347 $ 12,170
Debt Securities 3,233 2,780 2,714
Dividends on equity securities 1,047 601 57
Other earning assets 293 244 98
- -----------------------------------------------------------------------------------------------------------------------------
Total interest and dividend income 16,711 15,972 15,039
- -----------------------------------------------------------------------------------------------------------------------------
Interest Expense
Deposits 8,487 7,894 6,933
Borrowings 264 415 742
- -----------------------------------------------------------------------------------------------------------------------------
Total interest expense 8,751 8,309 7,675
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income 7,960 7,663 7,364
Provision For Loan Losses 829 978 1,975
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 7,131 6,685 5,389
Non-Interest Income
Service charges and fees 1,148 1,115 1,005
Net gain (loss) on securities 961 (40) 22
Net (loss ) gain on assets (148) 200 (967)
- -----------------------------------------------------------------------------------------------------------------------------
Total non-interest income 1,961 1,275 60
Non-Interest Expense
Compensation and benefits 3,199 3,253 3,444
Occupancy 586 597 576
Equipment 283 285 296
Data processing services 620 476 518
FDIC insurance 87 57 255
Office and other insurance 466 452 497
Problem asset related expense 88 549 279
Other 1,082 971 717
- -----------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 6,411 6,640 6,582
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 2,681 1,320 (1,133)
Income tax expense (benefit) 664 (118) 12
- -----------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 2,017 $ 1,438 $ (1,145)
- -----------------------------------------------------------------------------------------------------------------------------
Per Share Data
Basic earnings (loss) per share 1.27 .93 (0.74)
- -----------------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share $ 1.23 $ .92 $ (0.74)
- -----------------------------------------------------------------------------------------------------------------------------
Average basic shares outstanding 1,588,436 1,544,145 1,543,295
Average additional dilutive shares 51,391 21,197 33,848
- -----------------------------------------------------------------------------------------------------------------------------
Average diluted shares outstanding 1,639,827 1,565,342 1,577,143
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
Consolidated Statements of Changes in Shareholders' Equity
<TABLE>
<CAPTION>
Net
Additional unrealized Total
Years ended December 31 Common paid-In Retained gain (loss) on shareholders'
(in thousands except share data) stock capital earnings securities equity
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ 1,158 $ 8,795 $ 5,473 $ (2,224) $ 13,202
Net Loss - - (1,145) - (1,145)
Change in net unrealized gain (loss)
on securities - - - 1,224 1,224
- ----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 1,158 8,795 4,328 (1,000) 13,281
Net Income - - 1,438 - 1,438
Dividends declared and paid
($0.0225 per share) - (35) - (35)
Issuance of shares pursuant to exercise of stock
options 15 123 - - 138
Change in net unrealized gain (loss)
on securities - - - 767 767
- ----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $ 1,173 $ 8,918 $ 5,731 $ (233) $ 15,589
Net Income - - 2,017 - 2,017
Dividends declared and paid - - (278) - (278)
($0.175 per share)
Issuance of shares pursuant to exercise of stock
options 17 185 - - 202
Four for three stock split
effected as a stock dividend 399 - (399) - -
Conversion of par value
to $.01 per share from $1.00
due to formation of Alliance Bancorp (1,574) 1,574 - - -
Issuance of shares pursuant to exercise of stock
options 1 396 - - 397
Change in net unrealized gain (loss)
on securities - - - 876 876
- ----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $ 16 $ 11,073 $ 7,071 $ 643 $ 18,803
- -------------------------------------------------- -------------- -------------- -------------- ------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31 (in thousands) 1997 1996 1995
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net income (loss) $ 2,017 $ 1,438 $ (1,145)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Provision for loan losses 829 978 1,975
Depreciation and amortization 500 513 509
Net investment security (gains) losses (961) 40 (22)
Net asset losses (gains) 148 (200) 967
Loans originated for sale (14,741) (17,719) (15,253)
Proceeds from loans sold 15,962 18,230 13,419
Increase (decrease) in other liabilities 175 207 (109)
Decrease (Increase) in other assets 348 (803) 17
----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,277 2,684 358
Investing Activities:
Securities available for sale:
Proceeds from amortization and maturities 9,940 2,447 214
Proceeds from sales of securities 16,732 3,759 3,461
Purchases of securities (23,585) (28,422) (3,067)
Securities held to maturity:
Proceeds from amortization and maturities 741 2,060 3,681
Proceeds from sales of securities - 806 -
Purchases of securities - - (959)
Net (increase) decrease in loans (12,963) 5,517 (23,312)
Proceeds from sales of foreclosed assets 2,021 1,530 2,620
(Increase) decrease in foreclosed assets - - (151)
Purchases of premises and equipment (88) (157) (232)
Proceeds from sales of premises and equipment - 102 -
----------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (7,202) (12,358) (17,745)
Financing Activities:
Net increase in interest-bearing deposits 13,880 10,177 11,415
Net increase in demand deposits 2,245 1,993 1,622
Proceeds from issuance of FHLB advances 6,052 12,203 41,710
Principal repayments of FHLB advances (9,719) (11,572) (41,827)
Net increase (decrease) in other borrowings (1,000) 2,890 110
Stock options exercised 599 138 -
Cash dividends paid (278) (35) -
----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 11,779 15,794 13,030
----------------------------------------------------------------------------------------------------------------------------
Net Change in cash and cash equivalents 8,854 6,120 (4,357)
Cash and cash equivalents at beginning of the year 12,563 6,443 10,800
----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of the year $ 21,417 $ 12,563 $ 6,443
----------------------------------------------------------------------------------------------------------------------------
Supplemental Information On Cash Payments
Interest expense $8,737 $ 8,309 $ 7,577
Income taxes 494 460 37
Supplemental Information On Non-cash Transactions
Net loans transferred to foreclosed assets 2,128 369 93
Securities transferred from available for sale
to held to maturity, net - - 5,942
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
Notes to Consolidated Financial Statements
1. Summary Of Significant Accounting Policies
Formation of Bank Holding Company. On October 3, 1997, Alliance Bancorp of New
England, Inc. (the "Company") acquired all of the outstanding common stock of
Tolland Bank (the "Bank") on a one-for-one basis, in accordance with an
Agreement and Plan of Reorganization. The accompanying consolidated financial
statements give effect to the Company's reorganization and the exchange of
stock, which have been accounted for in a manner similar to a
pooling-of-interests transaction.
Principles of Business and Consolidation. The Company is a one bank holding
company, chartered in Delaware. The Bank is a Connecticut chartered savings bank
with deposits insured up to applicable limits by the Federal Deposit Insurance
Corporation ("FDIC"). The Bank provides consumer and commercial banking services
from its seven offices located in Tolland County, Connecticut. Tolland Bank
maintains a wholly owned forclosed asset liquidation subsidiary named Asset
Recovery Systems, Inc. ("ARS"). The consolidated financial statements include
the Company, the Bank, and ARS. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Basis of Preparation and Presentation. The consolidated financial statements
have been prepared and presented in conformity with generally accepted
accounting principles. Unless otherwise noted, all dollar amounts presented in
the financial statements and note tables are rounded to the nearest thousand
dollars, except share data. Certain prior period amounts have been reclassified
to conform with current financial statement presentation.
The Company uses the accrual method of accounting for all material items of
income and expense. The Company is required to make certain estimates and
assumptions in preparing these statements. The most significant estimates are
those necessary in determining the allowance for loan losses, the valuation of
foreclosed assets, and the determination of fair values of financial
instruments. Factors affecting these estimates include national economic
conditions, the level and trend of interest rates, local market conditions, and
real estate trends and values.
Securities. Debt securities that the Company has the positive intent and ability
to hold to maturity are classified as held to maturity securities and reported
at amortized cost. Trading securities, if any, will consist of securities bought
principally for the purpose of selling them in the near term. Unrealized gains
and losses on trading securities are included in earnings. Securities not
classified as either held to maturity securities or trading securities are
classified as available for sale securities and reported at fair value, with
<PAGE>
unrealized net gains or losses excluded from earnings and reported in a separate
component of shareholders' equity net of applicable income taxes. Any decline in
the value of a security below its cost considered to be other than temporary is
reflected as a realized loss in the Consolidated Income Statements. Realized
gains or losses on the sale of securities are generally computed on a specific
identified cost basis and reported as Net Gains (Losses) on Securities in the
Consolidated Income Statement. Premiums and discounts are recognized as an
adjustment of yield by the interest method.
Loans. Total loans are reported at the principal amount outstanding, and
adjusted for the net amount of deferred fees and costs, premiums and discounts,
except for charged-off loans as discussed below. Net loans are total loans less
the amount of the allowance for loan losses. Residential mortgage loans held for
sale, included in residential mortages on the balance sheet, are stated at the
lower of amortized cost or market value. Gains or losses are determined using
the specific identification method.
Premiums and discounts are recognized as an adjustment of yield by the interest
method based on the contractual terms of the loan. Commitment fees are
considered to be an adjustment to the loan yield. Loan origination fees and
certain direct costs of loan origination are also deferred and accounted for as
an adjustment to yield. The unamortized balance of deferred fees and costs is
credited or charged to the income statement at the time a loan repays.
Interest income receivable is included in Other Assets on the Consolidated
Balance Sheet. Most of the Company's loans require interest payments monthly in
arrears. The Company generally places loans on nonaccrual when a payment becomes
more than three months past due. The Company may also place a loan on nonaccrual
sooner if a concern develops as to the ultimate collection of principal or
interest. The Company may grant a waiver from nonaccrual status on certain
commercial loans which are well secured and in the process of collection.
Generally, when a commercial loan is placed on nonaccrual status, any interest
receivable over 90 days is charged-off; interest receivable on all other loans
is charged off entirely. Payments received on nonaccruing loans are normally
applied first against unpaid interest.
The Company recognizes as separate assets, rights to service mortgage loans for
others, regardless of how those servicing rights are acquired. Mortgage
servicing rights are assessed for impairment based on the fair value of those
rights, and any impairment is recognized through a valuation allowance. Mortgage
servicing rights are amortized in proportion to and over the period of,
estimated net servicing income. All related amortization and impairment
valuations are charged to mortgage servicing income.
7
<PAGE>
Allowance for Loan Losses and Provision for Loan Losses. The allowance for loan
losses is maintained at a level estimated by the Company to be adequate to
absorb estimated credit losses associated with the loan portfolio, including all
binding commitments to lend. The Company's estimation of the adequacy of the
allowance is based on an evaluation of the portfolio, past loan loss and
recovery experience, current economic conditions, the age and composition of the
portfolio, loan loss experience at peer group competitors and other relevant
factors. The provision for loan losses is a charge to current period income
necessary to establish the loan loss allowance at the level estimated to be
adequate by the Company.
A loan is considered impaired when it is probable that the Company will not be
able to collect all amounts due according to the contractual terms of the
agreement. Management excludes large groups of smaller balance homogeneous
loans, including residential mortgages and consumer loans, which are evaluated
collectively for impairment. The amount of impairment for all impaired loans is
determined by the difference between the present value of the expected cash
flows related to the loan, using the original contractual interest rate, and its
recorded value, or as a practical expedient, for collateral dependent loans, the
difference between the appraised value of the collateral and the recorded amount
of the loan. When foreclosure is probable, impairment is measured based on the
fair value of the collateral. The Company's method of recognition of interest
income on impaired loans is consistent with the method of recognition of
interest on all loans.
The Company's estimates of the collectibility of principal and interest rely in
many cases on estimates of future borrower cash flows and market conditions and
expectations. In addition, federal and state regulatory agencies, as an integral
part of their examination process, periodically review the Company's allowance
for losses on loans. Based on information available to them at the time of their
examination, and on regulatory guidelines then in effect, such agencies may
require the Company to recognize additions to the allowance for loan losses.
Accordingly, current estimates of loan losses may vary from future estimates and
from ultimate loan loss experience.
Loan Charge-offs. Most nonaccruing consumer loans are automatically charged-off
once they become 150-180 days past due depending on the circumstances,
regardless of how well secured they are. Other nonaccruing loans are charged off
in whole or in part when it has been determined that there has been a loss of
principal. For real estate secured loans, this determination is normally made in
conjunction
<PAGE>
with a current appraisal analysis and the transfer of the loan to foreclosed
assets. Charge-offs and recoveries are booked to the allowance for loan losses.
Initial write-downs on recently acquired foreclosed assets are also booked to
the allowance for loan losses.
Foreclosed Assets. Foreclosed assets include foreclosed real estate, real estate
deeded to the Company, and personal property repossessed by the Company, net of
a valuation allowance for specific properties. Foreclosed assets are transferred
from loans at the lower of cost or fair value less selling costs, with any
necessary write down from carrying value being charged against the allowance for
loan losses.
The Company periodically obtains and analyzes appraisals of foreclosed real
estate. If the fair value less selling costs is less than the carrying value of
these assets, these assets are written down to that value by increasing the
amount of the valuation allowance. Additionally, the Company may recognize a
gain or loss on the ultimate disposition of foreclosed assets. The net amount of
these gains and provisions to increase the valuation allowance are shown as Net
Gain (Loss) on Assets in the Consolidated Income Statements. The carrying value
of foreclosed real estate is subject, in general, to the same uncertainties
discussed above regarding the Allowance for Loan Losses. Net receipts and
disbursements related to the operations of foreclosed real estate are included
in Problem Asset Related Expense in the Consolidated Income Statements.
Premises and Equipment. Property and equipment are stated at cost less
accumulated depreciation. Depreciation is charged to operations on a
straight-line basis over the estimated useful lives of the related assets.
Intangible Assets. Intangible assets related to branch acquisitions are being
amortized on a straight line basis over 10-15 years. On a periodic basis,
the Company reviews the intangible assets for events or changes in circumstances
that may indicate the carrying value of the assets may not be recoverable.
Income Taxes. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss carry-forwards. Deferred tax assets are
reduced by a valuation allowance when it is more likely than not that such
deferred tax assets will not be realized. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
8
<PAGE>
Stock Options. The Company measures the compensation cost for its stock option
plans using the intrinsic value method prescribed by Accounting Principles Board
(APB) Opinion 25, Accounting for Stock Issued to Employees. No compensation cost
is recognized if, at the grant date, the exercise price of the options is equal
to the fair market value of the Company's common stock. In the notes to its
consolidated financial statements, the Company makes pro forma disclosures of
net income and earnings per share as if the fair value method of accounting in
Statement of Financial Accounting Standards (SFAS), Accounting for Stock-Based
Compensation (SFAS 123), has been applied. Under this method, compensation cost
of stock options is measured at the grant date based on the fair market value of
the award and is recognized over the service period.
Disclosures of Fair Values of Financial Instruments. Fair value estimates are
made at a specific point in time, based on relevant market information and
information about the financial instrument. These estimates do not reflect any
premium or discount that could result from offering for sale, at one time, the
Company's entire holdings of a particular financial instrument. Because no
market exists for a portion of the Company's financial instruments, fair value
estimates were based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and, therefore, cannot
be determined with precision. Changes in assumptions could effect the estimates
significantly. Fair value estimates were based on existing on and off-balance
sheet financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that are not
considered financial instruments. In addition, the tax ramifications relating to
the realization of the unrealized gains and losses may have a significant effect
on fair value estimates and have not been considered in the estimates. Fair
value methods and assumptions are set forth below for the Company's financial
instruments.
The carrying amounts reported in the balance sheets for cash and short-term
instruments approximate those assets' fair values. Fair values of investment
securities were based on quoted market prices where available. If quoted market
prices were not available, fair values were based on quoted market prices of
comparable instruments. The carrying values, reduced by estimated inherent
credit losses, of variable-rate loans and other loans with short-term
characteristics were considered fair values. The fair value of residential
mortgages was based on quoted market prices of similar loans sold in conjunction
with securitization transactions, adjusted for differences in loan
characteristics and credit losses inherent in the portfolio. For other loans,
the fair market values were calculated by discounting scheduled future cash
flows using current interest rates offered on loans with similar terms adjusted
to reflect the
<PAGE>
estimated credit losses inherent in the portfolio. The carrying amounts of
accrued interest receivable approximates fair values.
The fair values of deposits with no stated maturity, was, by definition, equal
to their carrying value. The fair value of time deposits was based on the
discounted value of contractual cash flows, calculated using the discount rates
that equaled the interest rates offered at the valuation date for deposits of
similar remaining maturities. The carrying amounts of short-term borrowings
approximated their fair values. Rates currently available for debt with similar
terms and remaining maturities were used to estimate fair value of long-term
borrowings. The carrying amount of accrued interest payable approximates fair
value. The fair value of off balance sheet instruments is based on fees
currently charged for such instruments.
Cash Flow Reporting. The Company uses the indirect method to report cash flows
from operating activities. Under this method, net income is adjusted to
reconcile it to net cash flow from operating activities. Net reporting of cash
transactions affecting balance sheet items has been used where permitted. The
Company considers due from banks and short-term investments to be cash
equivalents.
Earnings Per Share (EPS). In February 1997, the Financial Accounting Standards
Board (FASB) issued SFAS 128, Earnings Per Share. SFAS 128 is effective for
periods ending after December 15, 1997, and requires restatement of all prior
period EPS data. Under SFAS 128, basic EPS is calculated by dividing net income
by the average number of common shares outstanding. The calculation of diluted
EPS includes common stock equivalents in the average number of common shares
outstanding. All prior period EPS data has been restated to comply with SFAS
128.
Recent Accounting Developments. In June 1997, the FASB issued SFAS 130,
Reporting Comprehensive Income, and SFAS 131, Disclosures About Segments of an
Enterprise and Related Information. These standards establish new reporting
rules and are effective for periods beginning after December 15, 1997. SFAS 130
establishes standards for reporting and displaying comprehensive income, which
is defined as all changes to equity except investments by and distributions to
shareholders. Net income is a component of comprehensive income, with all other
components referred to in the aggregate as other comprehensive income. SFAS 131
establishes standards for reporting information about operating segments. This
state-ment requires a company to disclose certain income statement and balance
sheet information by operating segment. An operating segment is a revenue
producing component of a business for which separate financial information is
produced and evaluated internally by the chief operating decision maker in
allocating resources to segments.
9
<PAGE>
2. Cash And Cash Equivalents
<TABLE>
<CAPTION>
<S> <C> <C>
Short-term investments at December 31 (in thousands) 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
Federal funds sold $ 14,760 $ 4,000
Money market preferred stock - 1,000
Interest bearing deposits due from other banks - 100
FHLBB Ideal Way account 5 -
- ----------------------------------------------------------------------------------------------------------------------------
Total short-term investments $ 14,765 $ 5,100
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company is required to maintain certain average vault cash and cash reserve
balances with the Federal Reserve Bank of Boston. Cash and due from banks
included amounts so required of $714,000 and $677,000 at December 31, 1997 and
December 31, 1996, respectively.
3. Securities
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Amortized Unrealized Unrealized Fair
December 31, 1997 (in thousands) Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------------------
Securities available for sale
U.S. Government and agency $ 18,081 27 $ (217) $ 17,891
U.S. Agency mortgage-backed 5,366 27 (2) 5,391
Other debt securities 1,312 9 - 1,321
Marketable equity 16,710 1,586 - 18,296
FHLBB stock 830 - - 830
- ----------------------------------------------------------------------------------------------------------------------------
Total available for sale $ 42,299 $ 1,649 $ (219) $ 43,729
- ----------------------------------------------------------------------------------------------------------------------------
Securities held to maturity
U.S. Government and agency $ 2,901 $ 45 $ (5) $ 2,941
U.S. Agency mortgage-backed 15,214 48 (38) 15,224
Other debt securities 1,834 25 (3) 1,856
- ----------------------------------------------------------------------------------------------------------------------------
Total held to maturity $ 19,949 $ 118 $ (46) $ 20,021
- ----------------------------------------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Fair
December 31, 1996 (in thousands) Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------------------
Securities available for sale
U.S. Government and agency $ 25,314 $ 34 $ (366) $ 24,982
U.S. Agency mortgage-backed 3,375 20 (5) 3,390
Other debt securities 1,745 - (11) 1,734
Marketable equity 13,989 598 (27) 14,560
FHLBB stock 720 - - 720
- ----------------------------------------------------------------------------------------------------------------------------
Total available for sale $ 45,143 $ 652 $ (409) $ 45,386
- ----------------------------------------------------------------------------------------------------------------------------
Securities held to maturity
U.S. Government and agency $ 2,876 $ 19 $ - $ 2,895
U.S. Agency mortgage-backed 15,757 - (47) 15,710
Other debt securities 2,057 - (13) 2,044
- ----------------------------------------------------------------------------------------------------------------------------
Total held to maturity $ 20,690 $ 19 $ (60) $ 20,649
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost, estimated fair value and average yield of debt securities
are shown below by contractual maturity, except for mortgage-backed (including
collateralized mortgage obligations) and asset-backed instruments, which are
classified based on their expected average lives. The expected average lives
have been determined based on prepayment and related assumptions. Accordingly,
the expected average lives may differ from actual lives.
10
<PAGE>
<TABLE>
<CAPTION>
Amortized Fair Average
December 31, 1997 (in thousands) Cost Value Yield
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Securities available for sale
Due in 1 year or less $ 6,479 $ 6,477 5.86%
Due after 1 to 5 years 12,358 12,173 5.85
Due after 5 to 10 years 2,595 2,614 6.84
Due after 10 years 3,327 3,339 7.70
- -----------------------------------------------------------------------------------------------------------------------------
Total available for sale $ 24,759 $24,603 6.20%
- -----------------------------------------------------------------------------------------------------------------------------
Securities held to maturity
Due in 1 year or less $ 2,855 $ 2,838 5.49%
Due after 1 to 5 years 15,154 15,198 6.03
Due after 5 to 10 years 1,940 1,985 5.81
- -----------------------------------------------------------------------------------------------------------------------------
Total held to maturity $ 19,949 $ 20,021 5.93%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
As of December 31, 1997, securities having an amortized cost of $1,782,000 were
pledged to secure treasury, tax and loan and other deposits, and securities with
an amortized cost of $4,516,000 were pledged to secure federal funds borrowings.
Two held to maturity securities with an amortized cost totaling $856,000 were
sold in 1996 at a total loss of $50 thousand. These two securities evidenced
significant deterioration in the issuer's creditworthiness through the
downgrading by a credit agency and other relevant factors. Under state statutes
the Company was required to evaluate these securities for sale, and the Company
made a determination that they be sold due to uncertainties about their credit
quality. All securities sold in 1997 and all other securities sold in 1996 were
securities available for sale. The book value of debt and equity securities
sold, together with gross gains and gross losses, were as follows:
<TABLE>
<CAPTION>
Years ended December 31 (in thousands)
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Debt securities sold
Book value at sale $ 2,216 $4,267 $ 3,439
Gross gains 7 11 31
Gross losses - (52) (9)
Equity securities sold
Book value at sale $ 13,555 $338 -
Gross gains 954 1 -
Gross losses - - -
</TABLE>
4. Total Loans
<TABLE>
<CAPTION>
<S> <C> <C>
December 31 (in thousands) 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Residential mortgage loans $ 39,319 $ 41,669
Commercial mortgage loans 45,511 40,494
Other commercial loans:
Construction 4,642 3,827
Other commercial real estate secured 5,645 3,004
Other commercial, not real estate secured 7,983 8,456
- ---------------------------------------------------------------------------------------------------------------------------
Total other commercial loans 18,270 15,287
Consumer loans:
Installment 11,133 10,736
Home equity loan 16,569 13,828
Other consumer loans 1,802 1,554
- ---------------------------------------------------------------------------------------------------------------------------
Total consumer loans 29,504 26,118
- ---------------------------------------------------------------------------------------------------------------------------
Total regular loans 132,604 123,568
Purchased SBA guaranteed loan certificates 24,846 24,263
- ---------------------------------------------------------------------------------------------------------------------------
Total loans $ 157,450 $ 147,831
- ---------------------------------------------------------------------------------------------------------------------------
Net deferred costs included in total loans $ 401 $ 290
</TABLE>
11
<PAGE>
The majority of the Company's loans are secured by real estate located within
Tolland County or surrounding communities. Real estate loan activities are
governed by the Company's loan policies, and loan to value ratios are based on
an analysis of the collateral backing each loan. Following is additional
information about the Company's nonaccruing loans, delinquent loans, impaired
loans, and loans restructured prior to January 1, 1995. At December 31, 1997 and
1996 residential mortgage loans held for sale totaled $102,000 and $1,323,000,
respectively.
<TABLE>
<CAPTION>
<S> <C> <C>
December 31 (in thousands) 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
Total nonaccruing loans $ 2,133 $ 3,381
Accruing loans past due 90 days or more 86 1,857
Impaired loans:
Impaired loans - valuation allowance required 1,607 1,856
Impaired loans - no valuation allowance required 1,576 2,859
- ----------------------------------------------------------------------------------------------------------------------------
Total Impaired Loans $ 3,183 $ 4,715
Total valuation allowance on impaired loans 340 186
Commitments to lend additional funds for impaired loans - -
Restructured loans, all of which are performing:
Loans restructured prior to January 1, 1995 502 531
Commitments to lend additional funds for restructured loans - -
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Years ended December 31 (in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
Additional interest income that would have been earned on year-end loans if
they had been accruing based on originals terms:
Nonaccruing loans $ 310 $ 198 $ 55
Loans restructured prior to January 1, 1995 17 23 34
Total income recognized on impaired loans 111 311 366
Average recorded investment in impaired loans 3,949 5,779 3,517
</TABLE>
In the ordinary course of business, the Company makes loans to its directors and
officers and their related interests for substantially the same terms prevailing
at the time of origination for comparable transactions with others. As of
December 31, 1997, and 1996, loans to related parties totaled $616,000 and
$639,000 respectively. During 1997 originations of related party loans totaled
$130,000 and payments on related party loans totaled $244,000. Loans serviced
for others totaled $7,248,000 and $4,110,000 at December 31, 1997 and 1996,
respectively.
<PAGE>
5. Allowance For Loan Losses
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Years ended December 31 (in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
Balance at beginning of year $ 2,850 $ 2,340 $ 2,090
Charge-offs (768) (567) (1,792)
Recoveries 89 99 67
Provision for loan losses 829 978 1,975
- -----------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 3,000 $ 2,850 $ 2,340
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
6. Premises and Equipment, Net
<TABLE>
<CAPTION>
<S> <C> <C>
December 31 (in thousands) 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
Land $ 1,195 $ 1,195
Buildings 4,292 4,292
Furniture, fixtures, and equipment 3,089 3,013
- ----------------------------------------------------------------------------------------------------------------------------
Total property and equipment 8,576 8,500
Less: accumulated depreciation and amortization (4,425) (4,084)
- ----------------------------------------------------------------------------------------------------------------------------
Property and equipment, net $ 4,151 $ 4,416
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
7. Foreclosed Assets, Net
<TABLE>
<CAPTION>
<S> <C> <C>
December 31 (in thousands) 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
Foreclosed and repossessed assets $ 977 $ 1,202
Foreclosed asset valuation allowance (360) (222)
- ----------------------------------------------------------------------------------------------------------------------------
Net foreclosed assets $ 617 $ 980
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Transactions in the valuation allowance for foreclosed assets, and gains and
losses included in net gains (loss) on assets in the Consolidated Income
Statements, were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Years ended December 31 (in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
Transactions in the valuation allowance:
Balance at beginning of year $ 222 $341 $ 582
Write-downs, net - (188) (1,208)
Provision for losses, net 138 69 967
- ----------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 360 $ 222 $ 341
- ----------------------------------------------------------------------------------------------------------------------------
Gains and losses included in net gain (loss) on assets in the statements of
income:
Gross gains $ 31 $ 270 $ 92
Gross losses (179) (141) (1,059)
- ----------------------------------------------------------------------------------------------------------------------------
Net gain (loss) $ (148) $ 129 $ (967)
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
8. Other Assets
<TABLE>
<CAPTION>
<S> <C> <C>
December 31 (in thousands) 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
Accrued loan interest receivable $ 1,190 $ 1,132
Other accrued interest and dividends receivable 434 538
Purchased deposit premium, net 220 330
Goodwill, net 169 199
Mortgage servicing rights 56 17
Deferred tax asset, net 73 496
Income tax receivable 305 305
All other assets 369 249
- ----------------------------------------------------------------------------------------------------------------------------
Total other assets $ 2,816 $ 3,266
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
9. Deposits
<TABLE>
<CAPTION>
December 31 (dollars in thousands) 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
Amount Avg. Rate Amount Avg. Rate
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Demand deposits $ 21,918 0.00% $ 19,673 0.00%
NOW deposits 22,260 1.80 20,522 1.80
Money market deposits 15,447 4.03 6,469 2.58
Savings deposits 34,677 2.30 38,102 2.31
- ----------------------------------------------------------------------------------------------------------------------------
Total non-time deposits 94,302 1.93 84,766 1.67
Time deposits, by remaining
period to maturity:
Within 1 year 78,770 5.26 83,299 5.27
After 1, but within 2 years 31,943 5.88 19,511 5.60
After 2, but within 3 years 10,369 6.02 6,606 6.13
After 3 years 6,349 6.17 11,426 6.16
- ----------------------------------------------------------------------------------------------------------------------------
Total time deposits 127,431 5.52 120,842 5.45
- ----------------------------------------------------------------------------------------------------------------------------
Total deposits $ 221,733 3.99 $ 205,608 3.89%
- ----------------------------------------------------------------------------------------------------------------------------
Time deposits of $100,000 or more $ 15,210 5.55% $ 15,444 5.49%
</TABLE>
13
<PAGE>
Interest expense and interest paid on deposits is summarized as follows:
<TABLE>
<CAPTION>
Years ended December 31 (in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Expense
NOW deposits $ 361 $ 342 $ 332
Money market deposits 285 143 149
Savings deposits 850 880 919
Time deposits 6,991 6,529 5,533
- -----------------------------------------------------------------------------------------------------------------------------
Total interest expense $ 8,487 $7,894 $ 6,933
=============================================================================================================================
Interest Paid
Time deposits of $100,000 or more $ 773 $ 915 $ 801
Total deposit interest paid 8,470 7,883 6,898
10. Borrowings
December 31 (dollars in thousands) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
Due Date Amount Rate Amount Rate
- -----------------------------------------------------------------------------------------------------------------------------
FHLB advances by remaining period to maturity:
Within 1 year $ - -% $ 3,545 7.25%
After 1, but within 2 years 239 6.95 - -
After 2, but within 3 years 3,500 6.11 361 6.94
After 3 years - - 3,500 6.11
- -----------------------------------------------------------------------------------------------------------------------------
Total FHLB advances 3,739 6.16 7,406 6.70
- -----------------------------------------------------------------------------------------------------------------------------
Federal funds purchased 2,000 6.05 3,000 6.65
- -----------------------------------------------------------------------------------------------------------------------------
Total Borrowings $ 5,739 6.12% $10,406 6.68%
=============================================================================================================================
</TABLE>
The Company has a line of credit equal to 2% of total assets with the Federal
Home Loan Bank of Boston (FHLBB). The Company may borrow additional funds from
the FHLBB subject to certain limitations. To secure advances from the FHLBB, the
Company has pledged certain qualifying assets, as defined in the FHLBB Statement
of Credit Policy. To obtain additional loan advances, the Company may be
required to invest in additional amounts of FHLBB stock, per FHLBB guidelines.
At December 31, 1997, the Company had a $5,000,000 facility for repurchase
agreements, a $3,000,000 line of credit for secured federal funds borrowings and
a $750,000 line of credit for unsecured federal funds borrowings. The Company
maintains compensating balances of $30,000 related to the secured line of
credit. The Company paid $267,000, $426,000, and $679,000, in interest on
borrowings during the years ended December 31, 1997, 1996, and 1995,
respectively.
<PAGE>
11. Shareholders' Equity
Net Unrealized Gain (Loss) on Securities
<TABLE>
<CAPTION>
December 31 (dollars in thousands) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net gain (loss) on securities available for sale $ 1,430 $ 243
Net unamortized loss on securities held to maturity (215) (376)
Income tax effect (572) (100)
- -----------------------------------------------------------------------------------------------------------------------------
Total Net Unrealized Gain (Loss) $ 643 $ (233)
=============================================================================================================================
</TABLE>
The net unamortized loss on securities held to maturity relates to securities
transferred in 1994 from securities available for sale to securities held to
maturity.
Dividends
The Company's principal asset is its investment in its bank subsidiary. As such,
the Company's ability to pay dividends to its shareholders is largely dependent
on the ability of the Bank to pay dividends to the Company. The declaration of
cash dividends is dependent on a number of factors, including regulatory
limitations, and the Bank's operating results and financial conditions. The
shareholders of the Company will be entitled to dividends only when, and if,
declared by the Company's Board of Directors out of funds legally available
therefore. The declaration of future dividends will be subject to favorable
operating results, financial conditions, tax considerations and other factors.
14
<PAGE>
The Federal Deposit Insurance Corporation regulations require banks to maintain
certain capital ratios as noted below which may otherwise restrict the ability
of the Bank to pay dividends to the Company.
On June 17, 1997, the Company declared a four-for-three common stock split
effected as a 33.33% stock dividend which was paid on July 17, 1997. All per
share information has been retroactively adjusted to reflect this stock
dividend. Additionally, as of October 3, 1997, the Company restated Common Stock
and Additional Paid-In Capital to reflect a change in the par value of common
stock from $1.00 to $.01 in conjunction with the completion of the formation of
Alliance Bancorp of New England, Inc. as the holding company for Tolland Bank.
Regulatory Capital Requirements
The Company and Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory-and possibly, additional
discretionary- actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and Bank must meet specific capital guidelines that involve quantitative
measures of the Company's and Bank's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Company's and Bank's capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and Bank to maintain minimum amounts and ratios (set forth
in the table below) of total and Tier I capital (as defined in the regulations)
to risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Whereas the regulatory requirement for Tier I
Capital to Average Assets is a minimum ratio of 4.0%, a minimum ratio of 6.0% is
shown in the table based on the Bank's Board Resolution at December 31, 1997 and
1996. Management believes, as of December 31, 1997, that the Company and Bank
meet all capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the FDIC categorized
the Bank as Well Capitalized under the regulatory framework for prompt
corrective action. To be categorized as Well Capitalized, the Bank must maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set
forth in the table. There are no conditions or events that management believes
have changed the institution's category. The Company's and Bank's actual capital
amounts and ratios are also presented in the table.
<PAGE>
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
(dollars in thousands ) Actual Adequacy Purposes Action Provisions
- -----------------------------------------------------------------------------------------------------------------------------
Amount Ratio => Amount => Ratio => Amount => Ratio
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Consolidated, December 31, 1997:
Risk-based Total Capital $ 19,734 13.2% $ 11,970 8.0% $ 14,962 10.0%
Risk-based Tier I Capital 17,850 11.9 5,985 4.0 8,977 6.0
Tier I Leverage Capital 17,850 7.2 9,868 4.0 12,335 5.0
Tolland Bank, December 31, 1997:
Risk-based Total Capital $ 19,432 13.1% $ 11,837 8.0% $ 14,796 10.0%
Risk-based Tier I Capital 17,569 11.8 5,918 4.0 8,877 6.0
Tier I Leverage Capital 17,569 7.1 14,790 6.0 12,325 5.0
Tolland Bank, December 31, 1996:
Risk-based Total Capital $ 17,044 12.3% $11,118 8.0% $13,898 10.0%
Risk-based Tier I Capital 15,293 11.0 5,559 4.0 8,339 6.0
Tier I Leverage Capital 15,293 6.8 13,592 6.0 11,327 5.0
</TABLE>
Stock Options
At December 31, 1997, the Company had two stock option plans, which are
described below. As permitted by SFAS 123, the Company applies APB Opinion No.
25 and related Interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its stock option plans. Had
compensation cost for the Company's stock options been determined consistent
with the fair value method in SFAS 123, the Company's net income and earnings
per share would have been reduced to the pro forma amounts indicated below.
There were no stock options granted in 1995. The fair value of each option grant
is estimated on the date of grant using the Black-Scholes option-pricing model
in accordance with the weighted-average assumptions indicated as follows:
15
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31 (in thousands except share data ) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income As Reported $ 2,017 $ 1,438
Pro forma 1,822 1,392
Diluted earnings per share As Reported 1.23 .92
Pro forma 1.11 .89
Basic earnings per share As Reported 1.27 .93
Pro forma 1.15 .90
Assumptions used as of December 31, 1997 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
Expected dividend yield 1.15% 2.00%
Expected volatility 27.00% 27.00%
Risk free interest rate 5.75% 5.91%
Expected life (years) 10.00 10.00
</TABLE>
The Company maintains a Stock Option Incentive Plan for the benefit of officers
and other employees of the Company. Under the terms of this Plan, 199,995 shares
may be issued or transferred pursuant to the exercise of options to purchase
shares of common stock and stock appreciation rights (SARs) and awards of
restricted stock. The exercise price of the option is equal to the market price
of the common stock on the date of grant. Options granted to officers and other
full-time salaried employees may be accompanied by SARs and awards of restricted
stock. No SARs or awards of restricted stock have been granted as of December
31, 1997. Total shares reserved for future grants were 148,001 at December 31,
1997.
The Company also maintains a Stock Option Plan for Non-Employee Directors. The
exercise price of the option is equal to the market price of the common stock on
the date of grant. Under this plan, up to 133,330 shares of common stock may be
issued or transferred to members of the Company's Board of Directors who are not
employees of the Company on the date the options are exercised. This plan
expires on February 15, 1998. Total shares reserved for future grants were
66,670 as of December 31, 1997.
Under the Company's 1986 Stock Option Plan for the benefit of officers and other
employees, 133,330 shares were reserved for issuance. As of December 31, 1996,
this plan had expired. All 133,330 of the options for which shares had been
reserved had been granted. No SARs or restricted stock awards were granted under
the plan.
A summary of the status of the Company's stock option plans and changes in them
is presented below.
<PAGE>
<TABLE>
<CAPTION>
Years ended December 31 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Weighted-Avg. Weighted-Avg. Weighted-Avg.
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 163,314 $ 7.58 162,755 $ 7.59 171,421 $ 7.57
Granted 58,660 12.88 27,225 7.47 - -
Exercised (73,160) 8.24 (20,000) 6.90 - -
Forfeited - - (6,666) 9.37 (8,666) 7.12
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 148,814 $ 9.34 163,314 $ 7.58 162,755 $ 7.59
===========================================================================================================================
Options exercisable at year-end 142,148 $ 9.28 163,314 $ 7.58 160,534 $ 7.62
===========================================================================================================================
Weighted-average fair value of options granted $ 3.34 $3.78 -
===========================================================================================================================
Shares reserved for future grants 214,671 - 73,315 - 100,540 -
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Range of Number Weighted-Avg. Weighted-Avg. Number Weighted-Avg.
Exercise Outstanding Remaining Exercise Outstanding Exercise
Prices at 12/31/97 Contractual Life Price at 12/31/97 Price
- ---------------------------------------------------------------------------------------------------------------------------
$ 2 to 6 20,365 3.8 years $ 4.50 20,365 $ 4.50
6 to 9 49,791 5.9 7.34 49,791 7.34
9 to 12 58,658 6.2 10.07 51,992 9.99
Over $12 20,000 9.9 17.13 20,000 17.13
- ---------------------------------------------------------------------------------------------------------------------------
Total 148,814 6.3 years $ 9.34 142,148 $ 9.28
===========================================================================================================================
</TABLE>
16
<PAGE>
12. Financial Instruments With Off-Balance Sheet Risk
<TABLE>
<CAPTION>
December 31 ( in thousands) 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commitments to extend credit:
Commitments to originate new loans $ 8,204 $ 5,385
Unadvanced construction lines of credit 1,667 2,380
Unadvanced home equity credit lines 15,847 9,995
Unadvanced commercial lines of credit 5,942 4,951
Unadvanced reserve credit lines 405 427
Standby letters of credit 461 1,462
Commitments to purchase Government guaranteed loans 1,043 1,492
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Since many
of the commitments are expected to expire without being drawn on, the total
commitment amounts do not necessarily represent future cash requirements or
credit risk. Standby letters of credit are commitments issued by the Company to
guarantee the performance of a customer to a third party. Those guarantees are
generally payable only if the customer fails to perform some specified
contractual obligation. Standby letters of credit are generally unconditional
and irrevocable, and are generally not expected to be drawn upon. For the above
types of financial instruments, the Company evaluates each customer's
creditworthiness on a case-by-case basis, and collateral is obtained, if deemed
necessary, based on the Company's credit evaluation. In general, the Company
uses the same credit policies in providing these financial instruments as it
does in making funded loans.
13. Fair Values Of Financial Instruments
<TABLE>
<CAPTION>
Years ended December 31 (in thousands) 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 21,417 $ 21,417 $ 12,563 $ 12,563
Securities available for sale 43,729 43,729 45,386 45,386
Securities held to maturity 19,949 20,021 20,690 20,649
Net loans 154,450 155,997 144,981 143,974
Accrued interest receivable 1,624 1,624 1,670 1,670
Financial liabilities:
Deposits with no stated maturity 94,302 94,302 84,766 84,766
Time deposits 127,431 128,176 120,842 120,844
Borrowings 5,739 5,750 10,406 10,413
Accrued interest payable 96 96 82 82
Off balance sheet financial instruments - 189 - 192
</TABLE>
14. Retirement Plans
The Company sponsors a noncontributory defined benefit pension plan covering all
employees who meet certain eligibility requirements. Benefits are based on
length of service and qualifying compensation. The Company's policy is to fund
the plan in accordance with the requirements of applicable regulations. Plan
assets are invested in stock, bond, and money market mutual funds. The plan
valuation date is October 1. The pension plan's funded status and amounts
recognized in the Company's financial statements are as follows:
17
<PAGE>
<TABLE>
<CAPTION>
December 31 ( in thousands) 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated benefit obligation
Vested benefits $ 1,890 $ 1,423
Non-vested benefits 32 70
- ---------------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation $ 1,922 $ 1,493
Effect of projected future compensation levels 404 295
- ---------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation for services rendered to date $ 2,326 $ 1,788
Plan assets at fair value 2,564 2,085
- ---------------------------------------------------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation 238 297
Unrecognized net asset being recognized over 15 years (90) (108)
Unrecognized net loss (gain) 59 (62)
Unrecognized past service liability (88) (105)
- ---------------------------------------------------------------------------------------------------------------------------
Accrued pension cost 119 22
===========================================================================================================================
Assumptions used as of October 1:
Assumed discount rate 7.25% 7.75%
Assumed rate of increase in compensation 5.00% 5.00%
Expected long-term rate of return on assets 9.25% 9.25%
Components of net pension expense cost (excluding administrative cost):
Years ended December 31 (in thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Service costs earned during the year $ 98 $ 98 $ 85
Interest cost on projected benefit obligation 151 124 115
Actual return on plan assets (398) (238) (272)
Net amortization and deferral 176 39 109
- ---------------------------------------------------------------------------------------------------------------------------
Net periodic pension expense $ 27 $ 23 $ 37
===========================================================================================================================
</TABLE>
The Company also sponsors a defined contribution 401(k) savings plan. This plan
includes a discretionary matching contribution by the Company which was 35% of
the employees' contribution up to 6% for the years 1997, 1996, and 1995.
Additionally, the Company offers retirees participation in its medical insurance
benefit program. The cost of offering this participation is not material to the
financial condition or results of operations of the Company.
15. Income Tax Expense (Benefit)
Charges (credits) for income taxes (benefits) in the Consolidated Income
Statements are composed of the following:
<TABLE>
<CAPTION>
Years ended December 31 ( in thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 575 $ 246 $ (230)
State 131 9 12
- ---------------------------------------------------------------------------------------------------------------------------
Total current 706 255 (218)
Deferred:
Federal 57 (9) (121)
State 51 190 ( 90)
- ---------------------------------------------------------------------------------------------------------------------------
Total deferred 108 181 (211)
Change in valuation allowance for the gross
deferred tax asset (150) (554) 441
- ---------------------------------------------------------------------------------------------------------------------------
Total income tax expense $ 664 $ (118) $ 12
===========================================================================================================================
</TABLE>
The actual income tax expense (benefit) differs from the "expected" income tax
expense (benefit), (computed by applying the statutory U.S. Federal corporate
tax rate of 34%) in 1997, 1996 and 1995 to income (loss) before income taxes, as
follows:
18
<PAGE>
<TABLE>
<CAPTION>
Years ended December 31 ( in thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected income tax expense (benefit) at statutory rate $ 912 $ 449 $ (385)
Increase (decrease) in income tax resulting from:
Connecticut state tax 120 131 (51)
Purchase premium not deductible for tax purposes 10 10 10
Dividend received deduction (237) (132) -
Change in valuation allowance for deferred tax assets (150) (554) 441
Other, net 9 (22) (3)
- ---------------------------------------------------------------------------------------------------------------------------
Total income tax expense (benefit) $ 664 $ (118) $ 12
===========================================================================================================================
</TABLE>
The Company made income tax payments of $494,000, $460,000 and $37,000 during
the years ended December 31, 1997, 1996, and 1995, respectively. The tax effects
of temporary differences that give rise to significant portions of the deferred
tax assets and deferred tax liabilities are presented below:
<TABLE>
<CAPTION>
Years ended December 31 ( in thousands) 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax asset:
Allowance for loan losses $ 706 $ 754
State NOL carry forward - 10
Foreclosed assets 143 128
Depreciation expense 19 -
Unrealized loss on securities 85 54
Other, net 112 101
- ---------------------------------------------------------------------------------------------------------------------------
Total gross deferred tax asset 1,065 1,047
Less: valuation allowance (85) (305)
Gross asset, net of valuation allowance 980 742
Less: deferred tax liability
Unrealized gain on securities (572) -
Depreciation expense - (3)
Core deposit amortization (78) (77)
Other (257) (166)
- ---------------------------------------------------------------------------------------------------------------------------
Total gross deferred tax liability (907) (246)
- ---------------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 73 $ 496
===========================================================================================================================
</TABLE>
The valuation allowance decreased by $220,000 in 1997, which was comprised of a
decrease of $70,000 relating to the decrease in net unrealized losses on
securities held to maturity, and a $150,000 decrease due to Management's
assessment of the realizability of deferred tax assets.
In assessing the realizability of deferred tax assets, Management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. In making the assessment, Management considers the
estimated reversal of deferred tax liabilities, projected future taxable, income
taxes paid in prior years that are recoverable, and tax planning strategies.
Based on the level of historical taxable income, and projections for future
taxable income over the periods in which the deferred tax assets are deductible,
Management believes it is more likely than not that the Company will realize the
benefits of the deductible temporary difference, net of the existing valuation
allowance at December 31, 1997.
16. Commitments and Contingencies
Future minimum rental payments required under operating leases that have
remaining noncancellable lease terms in excess of one year as of December 31,
1997 total $283,000, due by years ending December 31 as follows: 1998 - $68,000;
1999 - $69,000; 2000 - $27,000; 2001 - $25,000; 2002 - $25,000; and $92,000
thereafter. Total rental expense under these leases and prior leases was
$70,000, $77,000, and $64,000 for the years ended December 31, 1997, 1996 and
1995 respectively.
In 1995, the Company entered into an employment agreement with its former
President. During 1996 and 1995, the Company charged $272,000 and $14,000,
respectively, to operations in connection with this agreement, nothing was
charged to operations in 1997. Included in other liabilities at December 31,
1997, was approximately $116,000 representing total future amounts due under
this agreement.
19
<PAGE>
There are various legal proceedings against the Company arising out of its
business. Although the outcome of these cases is uncertain, in the opinion of
Management, based on discussions with legal counsel, these matters are not
expected to result in a material adverse effect on the financial position or
future operating results of the Company.
17. Condensed Financial Statements of Alliance Bancorp of New England, Inc.
(Parent Company)
On October 3, 1997, Alliance Bancorp of New England, Inc. acquired all of the
outstanding common stock of Tolland Bank on a one-for-one basis, concluding the
formation of a bank holding company. The Income Statement and Statement of Cash
Flows are for the quarter ended December 31, 1997.
<TABLE>
<CAPTION>
Balance Sheet
December 31 (in thousands except share data) 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Assets
Cash and cash equivalents $ 65
Investment in subsidiary 18,601
Other assets 150
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $ 18,816
===========================================================================================================================
Liabilities and Shareholders' Equity
Liabilities:
Accrued expenses 13
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 13
Total shareholders' equity 18,803
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 18,816
===========================================================================================================================
Income Statement
Quarter ended December 31
(in thousands except share data) 1997
- ---------------------------------------------------------------------------------------------------------------------------
Dividends from bank subsidiary $ 256
- ---------------------------------------------------------------------------------------------------------------------------
Total operating income 256
- ---------------------------------------------------------------------------------------------------------------------------
Non-interest expenses 44
Income before income tax benefit and
equity in net income of subsidiary 212
- ---------------------------------------------------------------------------------------------------------------------------
Income tax benefit 22
- ---------------------------------------------------------------------------------------------------------------------------
Income before equity in net income of subsidiary 234
Equity in undistributed income of subsidiary 329
- ---------------------------------------------------------------------------------------------------------------------------
Net Income $ 563
===========================================================================================================================
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Statement of Cash Flows
Quarter ended December 31 (in thousands) 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Operating Activities:
Net income $ 563
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed net income of subsidiary (329)
(Increase) in other assets (148)
Increase in other liabilities 13
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 99
Investing Activities:
Net cash used by investing activities -
Financing Activities:
Stock options exercised 55
Dividends paid to stockholders (89)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (34)
- ---------------------------------------------------------------------------------------------------------------------------
Net Change in Cash and Cash Equivalents 65
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents beginning of quarter -
===========================================================================================================================
Cash and cash equivalents end of quarter $ 65
===========================================================================================================================
</TABLE>
21
<PAGE>
Consolidated Supplementary Financial Data (unaudited)
Selected Quarterly Financial Data
<TABLE>
<CAPTION>
1997 1996
(in thousands except share data) 4 3 2 1 4 3 2 1
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income $ 2,011 $ 1,980 $ 2,008 $ 1,961 $ 1,982 $ 1,943 $ 1,872 $ 1,866
Provision for loan losses 312 379 64 74 165 493 134 186
Non-interest income 758 693 250 260 140 603 225 307
Non-interest expense 1,663 1,584 1,587 1,577 1,988 1,570 1,531 1,551
Income tax expense (benefit) 231 187 126 120 (451) 109 90 134
----------------------------------------------------------------------------------------------------------------------------
Net income $ 563 $ 523 $ 481 $ 450 $ 420 $ 374 $ 342 $ 302
============================================================================================================================
Per Share Data:
Diluted earnings per share $ 0.33 $ 0.31 $ 0.30 $ 0.28 $ 0.26 $ 0.24 $ 0.22 $ 0.20
Basic earnings per share .35 .33 .31 .29 .27 .24 .22 .20
Cash dividends declared .05 .05 .04 .04 .02 - - -
Common stock price:
High 18.00 18.25 15.00 12.09 10.03 9.28 7.78 7.88
Low 16.38 13.03 10.31 8.63 8.25 7.22 7.13 6.94
Close 16.50 16.75 14.81 10.69 9.00 8.81 7.50 7.50
</TABLE>
The increase in the loan loss provision in the second half of 1997 was related
to one impaired commercial loan and to higher estimates of losses on consumer
loans based on a revised assessment of collateral values. Non-interest income
increased in the second half of 1997 due to securities gains resulting from the
initiation of an investment restructuring process at mid-year to lengthen the
duration and increase the diversification of the investment portfolio. Income
tax expense increased in the second half of 1997 due to the reduction in
adjustments to the valuation allowance on the deferred tax asset.
Volume and Rate Analysis - FTE Basis
<TABLE>
<CAPTION>
1997 versus 1996 Change due to 1996 versus 1995 Change due to
- ------------------------------------------------------------------------------------------------------------------------------
(in thousands) Volume Rate Total Volume Rate Total
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income
Loans $ (166) $ (43) $ (209) $ 166 $ 11 $ 177
Securities available for sale 1,145 36 1,181 1,064 405 1,469
Securities held to maturity (91) 26 (65) (521) (67) (588)
Other earning assets 42 13 55 162 5 167
- ------------------------------------------------------------------------------------------------------------------------------
Total Change 930 32 962 871 354 1,225
- ------------------------------------------------------------------------------------------------------------------------------
Interest expense
Deposits 481 112 593 520 441 961
Borrowings (171) 20 (151) (290) (37) (327)
- ------------------------------------------------------------------------------------------------------------------------------
Total Change 310 132 442 230 404 634
- ------------------------------------------------------------------------------------------------------------------------------
Net Change $ 620 $ (100) $ 520 $ 641 $ (50) $ 591
==============================================================================================================================
</TABLE>
Note: Changes attributable jointly to volume and rate have been allocated
proportionately.
22
<PAGE>
Construction and Commercial Loans
<TABLE>
<CAPTION>
1 Year 1-5 Over 5
December 31, 1997 (in millions) or Less Years Years Total
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Contractual maturity:
Construction loans:
Commercial $ 1.1 $ 2.4 $ 1.1 $ 4.6
Commercial loans 4.8 5.7 3.3 13.8
--------------------------------------------------------------------------------------------------------------------------
Total $ 5.9 $ 8.1 $ 4.4 $ 18.4
==========================================================================================================================
Interest rate sensitivity:
Predetermined rates $ .9 $ 4.1 $ 2.4 $ 7.4
Variable rates 5.0 4.0 2.0 11.0
--------------------------------------------------------------------------------------------------------------------------
Total $ 5.9 $ 8.1 $ 4.4 $ 18.4
==========================================================================================================================
</TABLE>
Securities Cost and Fair Value
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair Amortized Fair
December 31, (in thousands) Cost Value Cost Value Cost Value
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Available for sale
U.S. Government and agency $ 18,081 $ 17,891 $ 25,314 $ 24,982 $ 15,561 $ 15,088
U.S. Agency mortgage-backed 5,366 5,391 3,375 3,390 4,166 4,187
Other debt securities 1,312 1,321 1,745 1,734 2,255 2,304
Marketable equity 16,710 18,296 13,989 14,560 - -
FHLBB stock 830 830 720 720 943 943
--------------------------------------------------------------------------------------------------------------------------
Total available for sale $ 42,299 $ 43,729 $ 45,143 $ 45,386 $ 22,925 $ 22,522
==========================================================================================================================
Held to maturity
U.S. Government and agency $ 2,901 $ 2,941 $ 2,876 $ 2,895 $ 2,851 $ 2,940
U.S. Agency mortgage-backed 15,214 15,224 15,757 15,710 17,026 17,153
Other debt securities 1,834 1,856 2,057 2,044 3,500 3,480
--------------------------------------------------------------------------------------------------------------------------
Total held to maturity $ 19,949 $ 20,021 $ 20,690 $ 20,649 $ 23,377 $ 23,573
==========================================================================================================================
</TABLE>
23
<PAGE>
Table of Market Risk Sensitive Instruments
<TABLE>
<CAPTION>
Expected Maturity Date at December 31, There- Fair Value
1997 (dollars in millions) 1998 1999 2000 2001 2002 after Total 12/31/97
- ---------------------------------------- --------- ---------- --------- ---------- --------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Sensitive Assets:
Loans:
Fixed interest rate
Residential mortgages $ 3 $ 2 $ 2 $ 2 $ 2 $ 9 $ 20 $ 21
Average interest rate 7.82% 7.76% 7.76% 7.78% 7.78% 7.84% 7.81%
Variable interest rate
Residential mortgages 3 2 2 2 2 8 19 19
Average interest rate 8.55% 8.56% 8.57% 8.57% 8.62% 8.56% 8.57%
Fixed interest rate
Consumer loans 2 2 1 2 2 1 10 10
Average interest rate 9.42% 9.59% 9.56% 8.62% 8.50% 9.85% 9.19%
Variable interest rate
Consumer loans 4 2 2 2 2 7 19 18
Average interest rate 8.50% 8.56% 8.58% 8.64% 8.63% 8.34% 8.48%
Fixed interest rate
Commercial loans 9 5 3 3 3 5 28 27
Average interest rate 7.92% 8.55% 8.54% 8.52% 8.52% 8.31% 8.30%
Variable interest rate
Commercial loans 18 8 9 8 7 11 61 61
Average interest rate 9.17% 8.99% 8.91% 8.35% 8.60% 8.81% 8.87%
Fixed interest rate
Securities 14 7 6 4 1 2 34 34
Average interest rate 6.67% 6.36% 6.24% 6.25% 6.29% 6.23% 6.44%
Variable interest rate
Securities 6 2 9 1 - 12 30 30
Average interest rate 5.49% 6.13% 5.96% 6.90% - 6.21% 5.98%
- ----------------------------------------------------------------------------------------------------------------------------
Total interest sensitive assets $ 59 $ 30 $ 34 $ 24 $ 19 $ 55 $ 221 $ 220
============================================================================================================================
Interest Sensitive Liabilities:
Deposits:
Checking $ 1 $ 1 $ 1 $ 1 $ 1 $ 39 $ 44 $ 44
Average interest rate 0.91% 0.91% 0.91% 0.91% 0.91% 0.91% 0.91%
Savings 3 2 1 1 1 27 35 35
Average interest rate 2.30% 2.30% 2.30% 2.30% 2.30% 2.30% 2.30%
Money market 1 1 1 1 1 10 15 15
Average interest rate 4.03% 4.03% 4.03% 4.03% 4.03% 4.03% 4.03%
Time deposits 79 31 10 3 4 - 127 128
Average interest rate 5.26% 5.95% 6.06% 6.07% 6.23% - 5.54%
Borrowings:
FHLBB - - 4 - - - 4 4
Average interest rate - - 6.11% - - - 6.11%
Other 2 - - - - - 2 2
Average interest rate 6.05% - - - - - 6.05%
- ----------------------------------------------------------------------------------------------------------------------------
Total interest sensitive liabilities $ 86 $ 35 $ 17 $ 6 $ 7 $ 76 $ 227 $ 228
============================================================================================================================
</TABLE>
Note: The amounts above reflect principal cash amounts only. The table includes
non-trading instruments only; the Company had no trading instruments at December
31, 1997. For more information, see Quantitative Disclosures about Market Risk
in Management's Discussion and Analysis of Financial Condition and Results of
Operations. The base interest rate for variable rate instruments is equal to the
rate in effect at year-end 1997. The table excludes off balance sheet financial
instruments (e.g., commitments to extend credit, standby letters of credit and
commitments to purchase Government guaranteed loans) with a fair value totaling
$189 thousand which are sensitive to changes in interest rates and have an
expected maturity date within 1998.
24
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<NAME> ALLIANCE BANCORP OF NEW ENGLAND, INC.
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