<PAGE>
FORM 10-Q
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United States Securities and Exchange Commission
Washington, DC 20549
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarterly Period Ended June 30, 1998
Commission File Number 001-13405
ALLIANCE BANCORP OF NEW ENGLAND, INC.
Incorporated in the State of Delaware
IRS Employer Identification Number 06-1495617
Address and Telephone:
348 Hartford Turnpike, Vernon, Connecticut 06066, (860) 875-2500
Securities registered pursuant to Section 12(b) of the Act: Common Stock -- $.01
par value, which is registered on the American Stock Exchange.
Alliance Bancorp of New England (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 and (2) has been subject to such filing requirements for the
past 90 days.
As of August 10, 1998, Alliance Bancorp of New England had 2,492,552 shares of
common stock outstanding.
<TABLE>
<CAPTION>
TABLE OF CONTENTS Page
<S> <C> <C>
Table Consolidated Selected Financial Data..............................................2
Part I Financial Information
Item 1 Financial Statements
Consolidated Balance Sheets...................................................3
Consolidated Income Statements................................................4
Consolidated Statements of Changes in Shareholders' Equity....................5
Consolidated Statements of Cash Flows.........................................6
Notes to Consolidated Financial Statements....................................7
Item 2 Management's Discussion and Analysis
of Financial Condition and Results of Operations.............................10
Special Note Regarding Forward-Looking Statements............................10
Item 3 Quantitative and Qualitative Disclosures About Market Risk.......................15
Part II Other Information................................................................15
Table Average Balance Sheet and Interest Rates ........................................16
Signatures .............................................................................17
</TABLE>
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Alliance Bancorp of New England, Inc.
Consolidated Selected Financial Data
<TABLE>
<CAPTION>
As of and for the three months As of and for the six months ended
ended June 30, June 30,
-------------------------- -------------------------
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
For the Quarter (in thousands)
Net interest income $ 2,172 $ 2,008 $ 4,259 $ 3,968
Provision for loan losses 14 64 158 137
Service charges and fees 315 285 562 545
Net gain on securities 453 6 888 6
Net gain (loss) on assets - (41) - (41)
Non-interest expense 1,836 1,587 3,581 3,163
Income before income taxes 1,090 607 1,970 1,178
Income tax expense 464 126 742 247
Net income $ 626 $ 481 $ 1,228 $ 931
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Per Share
Basic earnings $ 0.25 $ 0.21 $ 0.49 $ 0.40
Diluted earnings 0.24 0.20 0.47 0.38
Dividends declared 0.03 0.02 0.07 0.05
Book value 7.90 7.07 7.90 7.07
Common stock price:
High 16.67 10.00 16.67 10.00
Low 14.00 6.87 10.92 5.75
Close 15.75 9.88 15.75 9.88
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At Quarter End (in millions)
Total assets $ 252.3 $ 238.2 $ 252.3 $ 238.2
Total loans 165.1 147.1 165.1 147.1
Other earning assets 75.3 79.7 75.3 79.7
Deposits 225.8 213.6 225.8 213.6
Borrowings 5.7 7.4 5.7 7.4
Shareholders' equity 19.7 16.5 19.7 16.5
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Operating Ratios (in percent)
Return on average assets 1.01% 0.84% 1.01% 0.82%
Return on average equity 13.01 11.83 12.97 11.59
Equity % total assets (period end) 7.81 6.94 7.81 6.94
Net interest spread (fully taxable equivalent) 3.35 3.42 3.30 3.42
Net interest margin (fully taxable equivalent) 3.94 3.90 3.89 3.90
Dividend payout ratio 13.27 12.19 13.53 12.59
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</TABLE>
2
<PAGE>
Alliance Bancorp of New England, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
(in thousands except share data) 1998 1997
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<S> <C> <C>
Assets
Cash and due from banks $ 6,499 $ 6,652
Short-term investments 12,454 14,765
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Total cash and cash equivalents 18,953 21,417
Securities available for sale (at fair value) 44,235 43,729
Securities held to maturity 18,616 19,949
Residential mortgage loans 46,683 39,319
Commercial mortgage loans 44,473 45,511
Other commercial loans 19,460 18,270
Consumer loans 31,711 29,504
Government guaranteed loans 22,774 24,846
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Total loans 165,101 157,450
Less: Allowance for loan losses (3,040) (3,000)
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Net loans 162,061 154,450
Premises and equipment, net 4,018 4,151
Foreclosed assets, net 723 617
Other assets 3,681 2,816
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Total assets $ 252,287 $ 247,129
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Liabilities and Shareholders' Equity
Demand deposits $ 22,995 $ 21,918
NOW deposits 21,557 22,260
Money market deposits 20,822 15,447
Savings deposits 35,655 34,677
Time deposits 124,777 127,431
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Total deposits 225,806 221,733
Borrowings 5,676 5,739
Other liabilities 1,109 854
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Total liabilities 232,591 228,326
Preferred stock, ( $.01 par value; 100,000 shares - -
authorized, none issued)
Common stock, ($.01 par value; authorized 4,000,000 25 16
shares; issued and outstanding 2,492,552 in 1998
and 1,636,269 in 1997 )
Additional paid-in capital 11,306 11,073
Retained earnings 8,124 7,071
Other comprehensive income, net 241 643
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Total shareholders' equity 19,696 18,803
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Total liabilities and shareholders' equity $ 252,287 $ 247,129
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</TABLE>
See accompanying notes to consolidated financial statements. 1998
results are unaudited.
3
<PAGE>
Alliance Bancorp of New England, Inc.
Consolidated Income Statements
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------- ---------------------
(in thousands except share data) 1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Interest Income
Loans $ 3,368 $ 2,999 $ 6,555 $ 5,939
Debt Securities 620 873 1,261 1,683
Dividends on equity securities 310 281 625 550
Other earning assets 161 7 370 39
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Total interest and dividend income 4,459 4,160 8,811 8,211
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Interest Expense
Deposits 2,226 2,087 4,432 4,099
Borrowings 61 65 120 144
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Total interest expense 2,287 2,152 4,552 4,243
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Net interest income 2,172 2,008 4,259 3,968
Provision For Loan Losses 14 64 158 137
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Net interest income after provision for loan losses 2,158 1,944 4,101 3,831
Non-Interest Income
Service charges and fees 315 285 562 545
Net gain on securities 453 6 888 6
Net loss on assets - (41) - (41)
- -------------------------------------------------------------------------------------------------------------------------
Total non-interest income 768 250 1,450 510
Non-Interest Expense
Compensation and benefits 833 804 1,711 1,675
Occupancy 147 138 300 297
Equipment 76 90 151 154
Data processing services 131 153 276 319
Office, FDIC, & Insurance 128 129 268 264
Problem asset related expense 80 37 146 7
Other 441 236 729 447
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Total non-interest expense 1,836 1,587 3,581 3,163
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Income before income taxes 1,090 607 1,970 1,178
Income tax expense 464 126 742 247
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Net Income $ 626 $ 481 $ 1,228 $ 931
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Per Share Data
Basic earnings per share $ 0.25 $ 0.21 $ 0.49 $ 0.40
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Diluted earnings per share $ 0.24 $ 0.20 $ 0.47 $ 0.38
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Average basic shares outstanding 2,492,552 2,344,664 2,491,617 2,344,664
Average additional dilutive shares 106,053 62,213 99,793 115,077
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Average diluted shares outstanding 2,598,605 2,406,877 2,591,410 2,459,741
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</TABLE>
See accompanying notes to consolidated financial statements. 1998
results are unaudited.
4
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Alliance Bancorp of New England, Inc.
Consolidated Statements of Changes in Shareholders' Equity
<TABLE>
<CAPTION>
Accumulated
Additional other Total
Six Months Ended June 30 Common paid-In Retained comprehensive shareholders'
(in thousands except share data) stock capital earnings income equity
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<S> <C> <C> <C> <C> <C>
1997
- ----
Balance, December 31, 1996 $ 1,173 $ 8,918 $ 5,731 $ (233) $ 15,589
Net Income - - 931 - 931
Dividends declared and paid - (120) - (120)
Four for three stock split 387 - (387) - -
effected as a stock dividend
Change in other comprehensive income, net - - - 143 143
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Balance, June 30, 1997 $ 1,560 $ 8,918 $ 6,155 $ (90) $ 16,543
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1998
- ----
Balance, December 31, 1997 $ 16 $ 11,073 $ 7,071 $ 643 $ 18,803
Net Income - - 1,228 - 1,228
Dividends declared and paid - - (166) - (166)
Three for two stock split
effected as a stock dividend 9 - (9) - -
Issuance of shares pursuant to exercise of stock
options - 233 - - 233
Change in other comprehensive income, net - - - (402) (402)
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Balance, June 30, 1998 $ 25 $ 11,306 $ 8,124 $ 241 $ 19,696
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</TABLE>
See accompanying notes to consolidated financial statements. 1998
results are unaudited.
5
<PAGE>
Alliance Bancorp of New England, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six months ended June 30,
--------------------------------
(in thousands) 1998 1997
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<S> <C> <C>
Operating Activities:
Net income $ 1,228 $ 931
Adjustments to reconcile net income to
net cash (used in) provided by operating activities:
Provision for loan losses 158 137
Depreciation and amortization 278 270
Net investment security gains (888) (6)
Net asset losses - 41
Increase in other liabilities 255 22
Decrease (increase) in loans held for sale (1,906) 283
Increase in other assets (689) (306)
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Net cash (used in) provided by operating activities (1,564) 1,372
Investing Activities:
Securities available for sale:
Proceeds from amortization and maturities 12,921 3,819
Proceeds from sales of securities 6,541 -
Purchases of securities (19,859) (7,873)
Securities held to maturity:
Proceeds from amortization and maturities 1,333 410
Proceeds from sales of securities - -
Purchases of securities - -
Net (increase) decrease in loans (5,745) 493
(Increase) decrease in foreclosed assets, net (106) 133
Purchases of premises and equipment (61) (14)
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Net cash used in investing activities (4,976) (3,032)
Financing Activities:
Net increase in interest-bearing deposits 2,996 5,871
Net increase in demand deposits 1,077 2,106
Net decrease in FHLB advances (64) (3,008)
Net increase (decrease) in other borrowings - -
Stock options exercised 233 -
Cash dividends paid (166) (120)
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Net cash provided by financing activities 4,076 4,849
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Net Change in cash and cash equivalents (2,464) 3,189
Cash and cash equivalents at beginning of the period 21,417 12,563
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Cash and cash equivalents at end of the period $ 18,953 $ 15,752
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Supplemental Information On Cash Payments
Interest expense $ 4,439 $ 4,245
Income taxes 797 264
Supplemental Information On Non-cash Transactions
Net loans transferred to foreclosed assets 153 165
</TABLE>
See accompanying notes to consolidated financial statements. 1998
results are unaudited.
6
<PAGE>
Notes to Consolidated Financial Statements (unaudited)
Note 1. Basis of Presentation and Principles of Business and Consolidation
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.
Alliance Bancorp of New England, Inc. ("Alliance" or 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.
The quarterly financial statements are unaudited. However, in the opinion of
Management, all material adjustments, consisting primarily of normal recurring
accruals, necessary for a fair presentation of the financial statements have
been included. Operating results for any interim period are not necessarily
indicative of results for any other interim period or for the entire year.
Management's Discussion and Analysis of Financial Condition and Results of
Operations accompany these financial statements. These consolidated interim
financial statements and notes should be read in conjunction with the Company's
Annual Report on Form 10-K for the year ended December 31, 1997.
The Company is a one bank holding company, chartered in Delaware. Its bank
subsidiary is Tolland Bank, 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.
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.
On April 28, 1998, the Company declared a three-for-two common stock split
effected as a 50.0% stock dividend which was paid on May 26, 1998. The financial
statements as of June 30, 1998 include the effects of this split, and all per
share information has been retroactively adjusted to reflect this stock dividend
for all periods in the statements. The stock dividend was recorded based on the
$.01 par value of the common stock. After the stock split, common stock par
value totaled $25 thousand, an increase of $9 thousand from year-end 1997.
7
<PAGE>
Note 2. Securities
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
June 30, 1998 (in thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities available for sale
U.S. Government and agency $ 20,750 10 $ (167) $ 20,593
U.S. Agency mortgage-backed 2,981 16 (2) 2,995
Other debt securities 1,098 12 - 1,110
Marketable equity 17,879 802 (20) 18,661
FHLB stock 876 - - 876
- ------------------------------------------------------------------------------------------------------------------------
Total available for sale $ 43,584 $ 840 $ (189) $ 44,235
- ------------------------------------------------------------------------------------------------------------------------
Securities held to maturity
U.S. Government and agency $ 2,913 $ 47 $ (3) $ 2,957
U.S. Agency mortgage-backed 14,025 34 (34) 14,025
Other debt securities 1,678 29 (1) 1,706
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Total held to maturity $ 18,616 $ 110 $ (38) $ 18,688
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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
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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
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Total held to maturity $ 19,949 $ 118 $ (46) $ 20,021
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</TABLE>
Note 3. Nonperforming Loans
<TABLE>
<CAPTION>
June 30, December 31,
(in thousands) 1998 1997
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total nonaccruing loans $ 453 $ 2,133
Accruing loans past due 90 days or more 135 86
Impaired loans:
Impaired loans - valuation allowance required 415 1,607
Impaired loans - no valuation allowance required 902 1,576
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Total impaired loans $ 1,317 $ 3,183
Total valuation allowance on impaired loans 110 340
Restructured loans, all of which are performing 15 502
</TABLE>
8
<PAGE>
Note 4. Allowance for Loan Losses
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
(in thousands) 1998 1997
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Beginning balance $ 3,000 $ 2,850
Charge-offs:
Residential mortgages (93) (108)
Consumer (71) (366)
Commercial (12) (294)
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Total Charge-offs (176) (768)
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Recoveries:
Residential mortgages - 11
Consumer 36 45
Commercial 22 33
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Total Recoveries 58 89
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Net Charge-offs (118) (679)
Provision for losses 158 829
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Ending balance $ 3,040 $ 3,000
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</TABLE>
Note 5. Comprehensive Income
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") 130, Reporting Comprehensive Income, as of January 1, 1998.
SFAS 130 establishes standards for the reporting and display of comprehensive
income and its components (such as changes in unrealized investment gains and
losses). Comprehensive income includes net income and any changes in equity from
non-owner sources that are not included in the income statement. The purpose of
reporting comprehensive income is to report a measure of all changes in equity
of an enterprise that result from recognized transactions and other economic
events of the period other than transactions with owners in their capacity as
owners. Application of SFAS 130 has not impacted the amounts previously reported
for net income or effected the comparability of previously issued financial
statements.
The following table summarizes comprehensive income:
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------
(in thousands) 1998 1997
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<S> <C> <C>
Net income $ 1,228 $ 931
Other comprehensive income, net of tax:
Unrealized gains on investments
Unrealized holding gain arising during the period 122 147
net of income tax expense of $81 and $102 for 1998 and 1997,
respectively
Less reclassification adjustment for gains included (524) (4)
in net income net of income tax expense of
$364 and $2 for 1998 and 1997, respectively
--------------------------------------------------------------------------------------------------------------------
Other comprehensive income (402) 143
--------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 826 $ 1,074
--------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 6. Subsequent Event
On July 1, 1998 the Company purchased 200,599 common shares from an
institutional shareholder in a privately negotiated transaction totaling $3.1
million. The shares are being held as treasury stock.
9
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS
OF OPERATIONS
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 changes 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.
SUMMARY
Alliance reported a 30% increase in net income to $626 thousand for the second
quarter ended June 30, 1998 compared to net income of $481 thousand in last
year's second quarter ($.24 vs. $.20 per share on a diluted basis). Net income
for the first half of 1998 totaled $1.23 million compared to $931 thousand for
the first half of 1997 ($.47 vs. $.38 per share on a diluted basis).
Also, the directors maintained the quarterly dividend at five cents per share,
representing a 50% increase over the preceding quarter after taking into account
the recent three for two stock split. The dividend will be payable on August 25,
1998 to shareholders of record at the close of business August 11, 1998.
During the most recent quarter, total loans grew at a 17% rate and total
deposits grew at a 9% rate, on an annualized basis. The most successful new
product offering was the free refinance mortgage which allows individuals to
quickly and easily lower their monthly payments based on current attractive
fixed rate levels. During the quarter, the Company also announced the planned
relocation of one of its Tolland offices to a larger and more convenient
facility.
Higher earnings in 1998 are attributable both to higher net interest income and
to higher non-interest income. Net interest income increased by 8.2% during the
second quarter and by 7.3% for the first half, compared to the same periods in
1997. These gains resulted both from growth in earning assets and from an
improvement in the net interest margin to 3.94% in the most recent quarter,
compared to 3.90% in the second quarter of 1997. Growth in non-interest income
included higher fee income and gains on securities, reflecting an ongoing
process of active investment portfolio management, including realizing the
benefits of the strongly improving market valuations.
During the second quarter, the Company substantially resolved its three largest
problem loan situations. As a result, total nonperforming assets decreased to
$1.2 million from $3.0 million at the beginning of the quarter. At June 30,
1998, the ratio of nonperforming assets to total assets measured 0.47%, compared
to 1.64% a year earlier. Net loan charge-offs totaled $118 thousand for the
first half of 1998, and as of quarter end the allowance for loan losses totaled
$3.04 million, measuring 1.84% of total loans on that date.
Non-interest expense remained relatively unchanged in most major categories, due
to ongoing cost containment. Total expense increased from 1997 due to problem
asset related expenses and to expenses related to expansion programs currently
underway. Higher income tax expense included a charge related to an increase in
the deferred tax asset valuation allowance as a result of tax planning changes
anticipated for 1999.
10
<PAGE>
At June 30, the Company had total assets of $252.3 million, $14.1 million (5.9%)
higher than a year ago. Total loans were $165.1 million, up $18.0 million
(12.2%) from a year earlier, while deposits were 225.8 million, up $12.2 million
(5.7%) over the same period. Shareholders' equity increased 19.1% from a year
earlier to $19.7 million, representing a book value of $7.90 per share. The
Company had announced on July 2, 1998 the purchase of 200,599 shares of treasury
stock. Net of this repurchase, shareholders' equity totaled $16.6 million, or
$7.24 per share, as of July 1, 1998. The Company's capital remains in excess of
all regulatory requirements.
RESULTS OF OPERATIONS
Net Interest Income: Net interest income increased by $164 thousand (8.2%) in
the second quarter and $291 thousand (7.3%) in the first six months of 1998
compared to the same period of 1997. This is primarily due to increases of 11.7%
and 9.8% in average loans over the same periods. Loan growth has primarily been
in residential mortgages and consumer loans, reflecting active loan promotions
in the Company's primary markets.
The fully taxable equivalent (FTE) net interest margin of 3.89% for the first
half of 1998 was little changed from 3.90% for the comparable period of 1997.
The net interest margin had declined to 3.83% in the first quarter of 1998 and
then increased to 3.94% in the second quarter of 1998. For the first half, the
net interest spread declined to 3.30% in 1998 compared to 3.42% in 1997. This is
due both to a decline in the yield on earning assets (to 7.78% from 7.82%) and
to an increase in the cost of interest bearing liabilities (to 4.48% from
4.40%). The yield on assets decreased due to the higher amount of short term
investments held in 1998. The cost of interest bearing liabilities increased due
to successful promotions of money market accounts to fund loan growth.
Provision for Loan Losses: The provision is made to maintain the allowance for
loan losses at a level deemed adequate by management. The provision was
increased by $21 thousand (15.3%) for the first six months of 1998, compared to
1997. The allowance was set at $3.04 million at June 30, 1998. Net charge-offs
totaled $118 thousand for the first six months of 1998, compared to $237
thousand for the same period of 1997.
Non-Interest Income: Service charge and fee income increased by $30 thousand
(10.5%) and by $17 thousand (3.1%) in the second quarter and first half of 1998,
compared to the same periods of 1997. This increase was due to higher commercial
loan fees. 1998 non-interest income also included net gains on the sale of
securities totaling $453 thousand for the second quarter and $888 thousand for
the first six months of the year. Investment gains reflected an ongoing process
of active investment portfolio management, including realizing the benefits of
the strongly improving market valuations.
Non-Interest Expense: Total non-interest expense increased by $249 thousand
(15.7%) for the second quarter and by $418 thousand (13.2%) for the first six
months of 1998, compared to the same periods in 1997. While most major expense
categories were relatively unchanged, the major increases were in problem asset
related expense and other expense. The increase in problem asset related expense
was mostly due to collection expense recoveries in 1997 related to two
commercial loan situations, which did not repeat in 1998. The increase in other
expense was primarily due to costs related to expansion programs, including loan
originations costs related to new loan products, legal costs and leasehold
expense charges related to the planned move and expansion of a Tolland branch
office, and consulting and director fees.
Income Tax Expense: Income tax expense in the second quarter of 1998 included a
charge of approximately $105 thousand related to an increase in the deferred tax
asset valuation allowance as a result of tax planning changes anticipated for
1999. Net of this charge, the effective tax rate measured 32.9% and 32.3% in the
second quarter and first half of 1998, compared to 20.7% and 21.0% in the same
periods of 1997. The increase in the effective tax rate was due to a lower
percentage of income eligible for the dividend received deduction because most
asset growth was in loan accounts. Additionally, 1997 results included a
reduction in the valuation allowance on the deferred tax asset totaling $85
thousand in the first half of the year, which did not repeat in 1998.
11
<PAGE>
Comprehensive Income: The notes to the financial statements include a discussion
of comprehensive income in accordance with SFAS 130. For the first half of 1998,
comprehensive income was $826 thousand, compared to $1.07 million in the first
half of 1997. In addition to net income recorded in the Income Statement,
comprehensive income includes the net effect of unrealized gains on securities
available for sale during the second quarter and first six months of 1998.
FINANCIAL CONDITION
Cash and Cash Equivalents: Short term investments decreased by $2.3 million in
1998 due to loan growth in the second quarter. The $12.5 million balance at June
30, 1998 was being held in anticipation of further loan growth.
Investment Securities: Total investment securities at June 30, 1998 were little
changed from the total at December 31, 1997. During the first quarter of the
year, available for sale (AFS) securities had decreased by $4.6 million due
primarily to a decrease in U.S. Agency securities, which were called at par due
to the effect of the decline in interest rates. These securities were generally
replaced with other U.S. Agency securities during the second quarter. During the
first half of 1998, the total book value of securities sold was $5.7 million,
consisting of equity securities. The FTE yield on AFS securities increased from
7.74% to 7.77% from the first half of 1997 to the second half of 1998. The
holding gains on AFS securities totaled $109 thousand (.25% of fair value)
during the first half of 1998. Total gains of $888 thousand were realized
through the sale of securities. The net unrealized gain on securities component
of shareholders' equity decreased by $402 thousand to $241 thousand during the
first half of 1998.
Total Loans: Total loans increased by $7.7 million (4.9%) during the first half
of 1998. The increases were primarily in residential mortgages and consumer
loans, reflecting active loan promotions in the Company's primary markets. These
promotions included mortgage promotions, home equity line promotions, and
promotions of the Company's new free refinance mortgage product. Loan growth
also included an increase in the balance of residential mortgage loans held for
sale. The balance of commercial mortgages and loans, and of government
guaranteed loans, was affected by higher amounts of prepayments in the low
interest rate environment that developed in 1998.
Nonperforming Assets: Total nonperforming assets decreased to $1.2 million from
$3.0 million at the beginning of the quarter. At June 30, 1998, the ratio of
nonperforming assets to total assets measured 0.48%, compared to 1.11% at
year-end 1997. The decrease was due to the collection of the Company's three
largest nonaccruing loans. Nonaccruing loans totaled $453 thousand at June 30,
1998. Restructured loans totaled $15 thousand at June 30, 1998.
Allowance for Loan Losses: The allowance for loan losses totaled $3.04 million
(1.84% of total loans) at June 30, 1998, compared to $3.0 million (1.91% of
total loans) at the previous year-end. The allowance measured 671% of
nonaccruing loans at the most recent quarter end, compared to 141% at year-end
1997. Annualized net loan charge-offs measured 0.15% of average loans for the
first half of 1998, compared to 0.46% for the year 1997.
Deposits and Borrowings: Total deposits increased by $4.1 million (1.8%) during
the first half of 1998, reflecting continued growth in money market deposit
accounts as a result of ongoing promotions of this competitive product. Total
borrowings were approximately unchanged at June 30, 1998 compared to the
previous year-end.
Interest Rate Sensitivity: The Company's one year interest rate sensitivity gap
was $(4) million as of June 30, 1998. This gap was previously a positive gap and
has changed to a negative gap due to the higher level of fixed rate loan
originations and the shorter term of new time account maturities in the low
interest rate market that has developed in 1998. The negative gap means that
interest sensitive liabilities exceed interest sensitive assets within the one
year time horizon. The gap measured 1.7% of total earning assets at June 30,
1998, which was near break-even in accordance with the Company's general
targets. The Company had a positive one year gap during most of
12
<PAGE>
the first half of 1998, which had a downward influence on net interest income
due to the decline in interest rates during this period. This contributed to the
narrower interest spread discussed previously.
Liquidity and Cash Flows: For the first half of 1998, the primary source of
funds for Tolland Bank was growth in money market deposits and the primary use
of funds was growth in residential mortgages and consumer loans. Borrowings,
time deposits, and money market accounts are the primary sources of liquidity
for additional balance sheet growth. Short term investments, securities
available for sale, and government guaranteed loan certificates provide
additional sources of liquidity. The Company's primary source of funds is
dividends from the Bank and its primary use of funds is dividends to
shareholders.
Capital Resources: During the first half of 1998, shareholders' equity increased
by $893 thousand (4.7%) to $19.7 million, representing a book value per share of
$7.90. In addition to retained earnings of $1.1 million, an additional source of
growth was stock option exercises ($233 thousand), which was offset by a $402
thousand decrease in net unrealized securities gains, to $241 thousand at period
end. Equity increased to 7.81% of total assets from 7.61% at year-end 1997. The
Company's capital remained in excess of all regulatory requirements. At June 30,
1998, Tolland Bank reported Tier 1 Capital totaling $18.6 million, a Tier 1
Capital Ratio of 7.6%, and a Risk Based Capital Ratio of 13.1%.
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 who 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 five step approach required by its
regulators: Awareness, Assessment, Modification, Verification, and
Implementation. 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, as well
as remediation and business resumption contingency plans. 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.
Additional information about the Company's Year 2000 status at June 30, 1998 was
as follows:
Readiness: The Company's plans include both information technology ("IT") and
non-IT systems. Most of the Company's primary Year 2000 exposures relate to IT
systems, primarily to the vendor of its account processing systems. This is a
large national banking systems vendor; as of June 30, 1998 the vendor reported
that it had completed the remediation and implementation steps on the account
processing systems used by the Company. This vendor is initiating internal
testing in the next quarter, and the Company is scheduled to perform its own
tests early in the fourth quarter.
Costs: The Company has not incurred material costs related to its Year 2000
program. The Company is being charged approximately $25 thousand by its account
processing vendor for testing arrangements, which is being billed over twelve
months. The Company has accelerated certain capital expenditure plans, totaling
approximately $150 thousand, related to computer upgrades, which are planned for
the second half of 1998.
Risks: The most significant risk anticipated by the Company is the possibility
of interruptions to its account processing systems. Due to the progress
described above, the Company does not presently foresee any material
interruptions to these systems. The next most significant risk relates to
interruptions in the payment processing systems, which are integrated with the
Company's account processing systems. The Company is working with its
13
<PAGE>
payment processing vendors, the most significant of which are reported to be
making satisfactory progress in complying with federal regulatory guidelines for
Year 2000 readiness. These guidelines include the completion of remediation and
the initiation of testing in 1998.
Contingency Plans: The Company has taken actions to comply with federal
regulatory requirements for Year 2000 contingency planning. The Company has
established a contingency planning committee representing all of its major
functional areas. The Company has established a contingency plan timetable and
is currently developing risk analyses for its high priority business functions.
Recently Issued Accounting Standards:
In June 1997, the FASB issued SFAS No. 131, "Financial Reporting for Segments of
a Business Enterprise." SFAS No. 131 was developed jointly by the FASB and the
Accounting Standards Board of the Canadian Institute of Chartered Accountants in
response to requests from financial statement users for additional and better
segment information. This statement is effective for periods beginning after
December 15, 1997. In the initial year of application, comparative information
for earlier years is to be restated, unless it is impractical to do so. The
Company does not anticipate that SFAS No. 131 will significantly impact the
composition of its current operating statements which are consistent with the
management approach.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that companies record all derivatives as either assets or liabilities
in the statement of condition and measure those instruments at fair value. The
manner in which the companies are to record gains and losses resulting from
changes in the values of those derivatives depends on the use of the derivative
and whether it qualifies for hedge accounting. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999 with earlier
adoption permitted. Upon initial application, hedging relationships must be
designated anew and documented pursuant to the provisions of the statement.
Management has not yet evaluated the impact of the implementation of SFAS No.
133.
14
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See discussion and analysis of quantitative and qualitative disclosures about
market risk provided in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997 filed March 27, 1998. There have been no material
changes in reported market risks faced by the Company since the end of 1997.
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
-----------------
The Company is not involved in any material legal proceedings
other than ordinary routine litigation incidental to its business
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
-----------------------------------------
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The annual meeting of stockholders of Alliance Bancorp of New
England, Inc. was held on April 8, 1998, for the purposes of
considering and voting upon the following matters: (i) the
election of three directors of the Company for three year terms
and (ii) approval and adjournment of the annual meeting, if
necessary, to permit solicitations of proxies in the event there
are not sufficient votes at the time of the annual meeting to
approve matter (i). The following table sets forth the results as
to each matter voted upon.
<TABLE>
<CAPTION>
% Broker
Proposal For Against Abstain Approved Non-votes
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
No. 1
Boardman 1,524,711 9,410 - 99.4% -
Dowty 1,524,506 9,615 - 99.4 -
Peterson 1,524,883 9,238 - 99.4 -
No. 2 1,495,945 22,561 15,615 97.5 -
</TABLE>
Item 5. OTHER INFORMATION
-----------------
None.
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) 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.
27 Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter ended June 30,
1998.
On May 21, 1998, the Company filed a report on Form 8-K. The
report disclosed under Item 5 - Other Events the approval by
the Board of Directors of a 3-for-2 split of the common stock
of the Company to be effected as a stock dividend payable on
May 26, 1998, to shareholders of record as of May 12, 1998.
15
<PAGE>
Average Balance Sheet and Interest Rates - Fully Taxable Equivalent (FTE)
<TABLE>
<CAPTION>
(dollars in thousands) Average Balance Rate (FTE Basis)
- -----------------------------------------------------------------------------------------------------
Quarters ended June 30 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans $ 163,392 $ 146,215 8.25% 8.19%
Securities available for sale 42,466 51,082 7.63 7.71
Securities held to maturity 19,020 20,440 5.88 5.96
Other earning assets 12,132 1,875 5.89 5.22
- -----------------------------------------------------------------------------------------------------
Total earning assets 237,010 219,612 7.81 7.83
Other assets 9,821 10,782
- -----------------------------------------------------------------------------------------------------
Total assets $ 246,831 $ 230,394
- -----------------------------------------------------------------------------------------------------
Interest bearing deposits $ 202,019 $ 191,634 4.42 4.37
Borrowings 3,708 4,194 6.58 6.24
- -----------------------------------------------------------------------------------------------------
Interest bearing liabilities 205,727 195,828 4.46 4.41
Other Liabilities 21,791 18,880
Shareholder's equity 19,313 15,686
- -----------------------------------------------------------------------------------------------------
Total liabilities and equity $ 246,831 $ 230,394
- -----------------------------------------------------------------------------------------------------
Net Interest Spread 3.35% 3.42%
Net Interest Margin 3.94% 3.90%
(dollars in thousands) Average Balance Rate (FTE Basis)
- -----------------------------------------------------------------------------------------------------
Six months ended June 30 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------
Loans $ 160,280 $ 145,958 8.21% 8.14%
Securities available for sale 42,251 49,005 7.77 7.74
Securities held to maturity 19,337 20,521 5.90 5.95
Other earning assets 13,925 2,011 5.85 4.26
- -----------------------------------------------------------------------------------------------------
Total earning assets 235,793 217,495 7.78 7.82
Other assets 9,698 10,748
- -----------------------------------------------------------------------------------------------------
Total assets $ 245,691 $ 228,243
- -----------------------------------------------------------------------------------------------------
Interest bearing deposits $ 201,521 $ 189,619 4.43 4.46
Borrowings 3,736 4,692 6.49 6.19
- -----------------------------------------------------------------------------------------------------
Interest bearing liabilities 205,257 194,311 4.48 4.40
Other Liabilities 21,322 18,431
Shareholder's equity 19,112 15,501
- -----------------------------------------------------------------------------------------------------
Total liabilities and equity $ 245,691 $ 228,243
- -----------------------------------------------------------------------------------------------------
Net Interest Spread 3.30% 3.42%
Net Interest Margin 3.89% 3.90%
</TABLE>
16
<PAGE>
Signatures
Pursuant to the requirements to Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
ALLIANCE BANCORP OF NEW ENGLAND, INC.
Date: August 12, 1998 /s/ Joseph H. Rossi
-------------------
Joseph H. Rossi
President/CEO
Date: August 12, 1998 /s/ David H. Gonci
------------------
David H. Gonci
Vice President/CFO/Treasurer
17
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001046002
<NAME> ALLIANCE BANCORP OF NEW ENGLAND, INC.
<MULTIPLIER> 1000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 6,499
<INT-BEARING-DEPOSITS> 4
<FED-FUNDS-SOLD> 12,450
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 44,235
<INVESTMENTS-CARRYING> 18,616
<INVESTMENTS-MARKET> 18,688
<LOANS> 165,101
<ALLOWANCE> 3,040
<TOTAL-ASSETS> 252,287
<DEPOSITS> 225,806
<SHORT-TERM> 2,000
<LIABILITIES-OTHER> 1,109
<LONG-TERM> 3,676
0
0
<COMMON> 25
<OTHER-SE> 19,671
<TOTAL-LIABILITIES-AND-EQUITY> 252,287
<INTEREST-LOAN> 3,368
<INTEREST-INVEST> 930
<INTEREST-OTHER> 161
<INTEREST-TOTAL> 4,459
<INTEREST-DEPOSIT> 2,226
<INTEREST-EXPENSE> 2,287
<INTEREST-INCOME-NET> 2,172
<LOAN-LOSSES> 14
<SECURITIES-GAINS> 453
<EXPENSE-OTHER> 1,836
<INCOME-PRETAX> 1,090
<INCOME-PRE-EXTRAORDINARY> 1,090
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 626
<EPS-PRIMARY> 0
<EPS-DILUTED> 0.24
<YIELD-ACTUAL> 3.94
<LOANS-NON> 453
<LOANS-PAST> 135
<LOANS-TROUBLED> 15
<LOANS-PROBLEM> 1,200
<ALLOWANCE-OPEN> 3,040
<CHARGE-OFFS> 176
<RECOVERIES> 58
<ALLOWANCE-CLOSE> 3,040
<ALLOWANCE-DOMESTIC> 3,040
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,387
</TABLE>
