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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, 1999
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 9, 1999, Alliance Bancorp of New England had 2,295,286 shares of
common stock outstanding.
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TABLE OF CONTENTS Page
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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.......................16
Part II Other Information................................................................16
Table Average Balance Sheet and Interest Rates ........................................17
Signatures .............................................................................18
</TABLE>
1
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Alliance Bancorp of New England, Inc.
Consolidated Selected Financial Data (Unaudited)
<TABLE>
<CAPTION>
As of and for the three months As of and for the six months
ended June 30, ended June 30,
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1999 1998 1999 1998
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<S> <C> <C> <C> <C>
For the Quarter (in thousands)
Net interest income $ 2,521 $ 2,172 $ 4,907 $ 4,259
Provision for loan losses 11 14 136 158
Service charges and fees 461 315 883 562
Net gain on securities - 453 104 888
Net gain on assets - - 50 -
Non-interest expense 1,961 1,836 3,840 3,581
Income before income taxes 1,010 1,090 1,968 1,970
Income tax expense 279 464 537 742
Net income $ 731 $ 626 $ 1,431 $ 1,228
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Per Share
Basic earnings $ 0.32 $ 0.25 $ 0.62 $ 0.49
Diluted earnings 0.31 0.24 0.60 0.47
Dividends declared 0.06 0.03 0.11 0.07
Book value 6.98 7.90 6.98 7.90
Common stock price:
High 12.38 16.67 12.38 16.67
Low 9.13 14.00 9.13 10.92
Close 12.31 15.75 12.31 15.75
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At Quarter End (in millions)
Total assets $ 307.6 $ 252.3 $ 307.6 $ 252.3
Total loans 188.6 165.1 188.6 165.1
Other earning assets 105.2 75.3 105.2 75.3
Deposits 249.0 225.8 249.0 225.8
Borrowings 39.5 5.7 39.5 5.7
Shareholders' equity 16.0 19.7 16.0 19.7
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Operating Ratios (in percent)
Return on average assets 1.02% 1.01% 1.02% 1.01%
Return on average equity 17.74 13.01 16.62 12.97
Equity % total assets (period end) 5.21 7.81 5.21 7.81
Net interest spread (fully taxable equivalent) 3.40 3.35 3.34 3.30
Net interest margin (fully taxable equivalent) 3.86 3.94 3.82 3.89
Dividend payout ratio 18.84 13.27 17.64 13.53
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</TABLE>
2
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Alliance Bancorp of New England, Inc.
Consolidated Balance Sheets (Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
(in thousands except share data) 1999 1998
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<S> <C> <C>
Assets
Cash and due from banks $ 7,242 $ 6,760
Short-term investments 20,354 13,456
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Total cash and cash equivalents 27,596 20,216
Securities available for sale (at fair value) 73,533 58,556
Securities held to maturity 11,317 15,431
Residential mortgage loans 54,628 57,555
Commercial mortgage loans 53,012 46,724
Other commercial loans 26,916 25,105
Consumer loans 34,311 32,515
Government guaranteed loans 19,691 22,827
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Total loans 188,558 184,726
Less: Allowance for loan losses (3,200) (3,060)
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Net loans 185,358 181,666
Premises and equipment, net 4,385 4,276
Foreclosed assets, net 80 80
Other assets 5,298 3,356
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Total assets $ 307,567 $ 283,581
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Liabilities and Shareholders' Equity
Demand deposits $ 25,430 $ 25,328
NOW deposits 24,304 25,155
Money market deposits 32,209 29,585
Savings deposits 41,705 37,238
Time deposits 125,358 122,679
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Total deposits 249,006 239,985
Borrowings 39,541 23,610
Other liabilities 2,991 1,790
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Total liabilities 291,538 265,385
Preferred stock, ( $.01 par value; 100,000 shares
authorized, none issued) - -
Common stock, ($.01 par value; authorized 4,000,000
shares; issued 2,495,885 in 1999
and 2,492,552 in 1998; outstanding 2,295,286 in 1999
and 2,291,953 in 1998) 25 25
Additional paid-in capital 11,330 11,306
Retained earnings 10,403 9,223
Accumulated other comprehensive income (loss), net (2,620) 751
Treasury stock (200,599 shares) (3,109) (3,109)
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Total shareholders' equity 16,029 18,196
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Total liabilities and shareholders' equity $ 307,567 $ 283,581
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</TABLE>
3
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Alliance Bancorp of New England, Inc.
Consolidated Income Statements (Unaudited)
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<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
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(in thousands except share data) 1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Interest Income
Loans $ 3,569 $ 3,368 $ 7,112 $ 6,555
Debt securities 1,074 620 2,011 1,261
Dividends on equity securities 299 310 588 625
Other earning assets 132 161 224 370
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Total interest and dividend income 5,074 4,459 9,935 8,811
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Interest Expense
Deposits 2,197 2,226 4,372 4,432
Borrowings 356 61 656 120
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Total interest expense 2,553 2,287 5,028 4,552
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Net interest income 2,521 2,172 4,907 4,259
Provision For Loan Losses 11 14 136 158
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Net interest income after provision for loan losses 2,510 2,158 4,771 4,101
Non-Interest Income
Service charges and fees 461 315 883 562
Net gain on securities - 453 104 888
Net gain on assets - - 50 -
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Total non-interest income 461 768 1,037 1,450
Non-Interest Expense
Compensation and benefits 968 833 1,982 1,711
Occupancy 176 147 356 300
Equipment 73 76 141 151
Data processing services 150 131 318 276
Office, FDIC, & Insurance 124 128 247 268
Problem asset related expense 17 80 46 146
Other 453 441 750 729
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Total non-interest expense 1,961 1,836 3,840 3,581
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Income before income taxes 1,010 1,090 1,968 1,970
Income tax expense 279 464 537 742
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Net Income $ 731 $ 626 $ 1,431 $ 1,228
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Per Share Data
Basic earnings per share $ 0.32 $ 0.25 $ 0.62 $ 0.49
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Diluted earnings per share $ 0.31 $ 0.24 $ 0.60 $ 0.47
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Average basic shares outstanding 2,295,286 2,492,552 2,294,699 2,491,617
Average additional dilutive shares 72,326 106,053 74,536 99,793
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Average diluted shares outstanding 2,367,612 2,598,605 2,369,235 2,591,410
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</TABLE>
4
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Alliance Bancorp of New England, Inc.
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
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<CAPTION>
Accumulated
Additional other Total
Six Months ended June 30 Common paid-In Retained comprehensive Treasury shareholders'
(in thousands except share data) stock capital earnings income Stock equity
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<S> <C> <C> <C> <C> <C> <C>
1998
- ----
Balance, December 31, 1997 $ 16 $ 11,073 $ 7,071 $ 643 $ 18,803
Comprehensive income
Net income 1,228 1,228
Unrealized gain on securities,
net of reclassification adjustment (402) (402)
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
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Balance, June 30, 1998 $ 25 $ 11,306 $ 8,124 $ 241 $ 19,696
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1999
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Balance, December 31, 1998 $ 25 $ 11,306 $ 9,223 $ 751 $ (3,109) $ 18,196
Comprehensive income
Net income 1,431 1,431
Unrealized gain on securities,
net of reclassification adjustment (3,371) (3,371)
Dividends declared and paid (251) (251)
Issuance of shares pursuant to exercise
of stock options 24 24
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Balance, June 30, 1999 $ 25 $ 11,330 $ 10,403 $ (2,620) $ (3,109) $ 16,029
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Disclosure of reclassification amount
Six months ended June 30 (in thousands) 1999 1998
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Unrealized holding gain (loss) arising during
the period net of income tax benefit (expense)
of $1,697 and $81, respectively $ (3,295) $ 122
Less reclassification adjustment for
gains included in net income net of income
tax expense of $28 and $364, respectively (76) (524)
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Net unrealized gains on securities $ (3,371) $ (402)
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</TABLE>
5
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Alliance Bancorp of New England, Inc.
Consolidated Statements of Cash Flows (Unaudited)
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<CAPTION>
Six months ended June 30,
------------------------------------------------
(in thousands) 1999 1998
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<S> <C> <C>
Operating Activities:
Net income $ 1,431 $ 1,228
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Provision for loan losses 136 158
Depreciation and amortization 256 278
Net investment security gains (104) (888)
Net asset gains (50) -
Increase in other liabilities 1,151 255
Decrease (increase) in loans held for sale 4,286 (1,906)
Increase in other assets (363) (689)
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Net cash provided by (used in) operating activities 6,743 (1,564)
Investing Activities:
Securities available for sale:
Proceeds from amortization and maturities 7,281 12,921
Proceeds from sales of securities 4,852 6,541
Purchases of securities (32,274) (19,859)
Securities held to maturity:
Proceeds from amortization and maturities 4,114 1,333
Net increase in loans (8,142) (5,745)
Increase in foreclosed assets, net - (106)
Proceeds from the sale of premises and equipment 464 -
Purchases of premises and equipment (383) (61)
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Net cash provided by investing activities (24,088) (4,976)
Financing Activities:
Net increase in interest-bearing deposits 9,872 2,996
(Decrease) increase in demand deposits (851) 1,077
Increase (decrease) in FHLB advances 12,431 (64)
Net increase in other borrowings 3,500 -
Stock options exercised 24 233
Cash dividends paid (251) (166)
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Net cash provided by financing activities 24,725 4,076
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Net Change in cash and cash equivalents 7,380 (2,464)
Cash and cash equivalents at beginning of the period 20,216 21,417
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Cash and cash equivalents at end of the period $ 27,596 $ 18,953
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Supplemental Information On Cash Payments
Interest expense $ 4,926 $ 4,439
Income tax expense 890 797
Supplemental Information On Non-cash Transactions
Net loans transferred to foreclosed assets - 153
</TABLE>
6
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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, 1998.
The Company is a one bank holding company, chartered in Delaware. Its bank
subsidiary is Tolland Bank ("the 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 eight offices located in Tolland County, Connecticut. Tolland Bank
maintains a wholly owned passive investment subsidiary named Tolland Investment
Corporation, and maintains a wholly owned foreclosed asset liquidation
subsidiary named Asset Recovery Systems, Inc. ("ARS"). In the second quarter of
1999, the Company established Alliance Capital Trust I ("the Trust"), a Delaware
statutory business trust, in connection with its issuance of a capital trust
preferred security. The consolidated financial statements include the Company,
the Trust, the Bank, and the Bank's subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
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. All per share
information has been retroactively adjusted to reflect this stock dividend for
all periods in the statements.
7
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Note 2. Securities
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<CAPTION>
Amortized Unrealized Unrealized Fair
June 30, 1999 (in thousands) Cost Gains Losses Value
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<S> <C> <C> <C> <C>
Securities available for sale
U.S. Government and agency $ 6,752 $ 20 $ (46) $ 6,726
U.S. Agency mortgage-backed 1,342 1 (24) 1,319
Other debt securities 49,476 13 (3,199) 46,290
Marketable equity 17,868 316 (969) 17,215
Non-marketable equity 1,983 - - 1,983
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Total available for sale $ 77,421 $ 350 $ (4,238) $ 73,533
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Securities held to maturity
U.S. Government and agency $ 1,962 $ 30 $ - $ 1,992
U.S. Agency mortgage-backed 8,575 9 (58) 8,526
Other debt securities 780 22 - 802
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Total held to maturity $ 11,317 $ 61 $ (58) $ 11,320
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Amortized Unrealized Unrealized Fair
December 31, 1998 (in thousands) Cost Gains Losses Value
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Securities available for sale
U.S. Government and agency $ 16,694 $ 34 $ (82) $ 16,646
U.S. Agency mortgage-backed 2,312 22 (1) 2,333
Other debt securities 19,265 476 (26) 19,715
Marketable equity 17,724 1,107 (150) 18,681
Non-marketable equity 1,181 - - 1,181
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Total available for sale $ 57,176 $ 1,639 $ (259) $ 58,556
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Securities held to maturity
U.S. Government and agency $ 1,952 $ 65 $ - $ 2,017
U.S. Agency mortgage-backed 12,095 22 (28) 12,089
Other debt securities 1,384 29 - 1,413
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Total held to maturity $ 15,431 $ 116 $ (28) $ 15,519
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</TABLE>
Note 3. Nonperforming Loans
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<CAPTION>
June 30, December 31,
(in thousands) 1999 1998
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<S> <C> <C>
Total nonaccruing loans $ 1,041 $ 574
Accruing loans past due 90 days or more - -
Impaired loans:
Impaired loans - valuation allowance required 733 420
Impaired loans - no valuation allowance required 27 252
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Total impaired loans $ 760 $ 672
Total valuation allowance on impaired loans 205 110
Commitments to lend additional funds for impaired loans - -
</TABLE>
8
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Note 4. Allowance for Loan Losses
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
(in thousands) 1999 1998
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<S> <C> <C>
Beginning balance $ 3,060 $ 3,000
Charge-offs (24) (401)
Recoveries 28 282
Provision for losses 136 179
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Ending balance $ 3,200 $ 3,060
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</TABLE>
Note 5. New Accounting Standards
In June 1998, the FASB issued SFAS 133, Accounting for Derivative Instruments
and Hedging Activities. SFAS 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 on the balance
sheet 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. For qualifying hedges, the recognition of changes in the
value of both the hedge and the hedged item are recorded in earnings in the same
period. Changes in the fair value of derivatives that do not qualify for hedge
accounting are included in earnings in the period of the change. SFAS 133 also
allows a one-time reclassification of held to maturity securities. This
statement, as amended by SFAS 137, is effective for years beginning after June
15, 2000. The Company does not believe that the adoption of this statement will
have a material impact on its financial position or results of operations.
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
The Company reported a 16.8% increase in earnings for the second quarter ended
June 30, 1999, with net income totaling $731 thousand compared to $626 thousand
a year earlier. Quarterly earnings per share increased by 29.2% to $.31 compared
to $.24 a year earlier, on a diluted basis. Net income for the first half of
1999 totaled $1.43 million, a 17.2% increase over net income of $1.22 million in
the same period of 1998. Six month earnings per share increased in 1999 by 27.7%
to $.60 compared to $.47 a year earlier, on a diluted basis. During the second
quarter, the Company increased the quarterly cash dividend to six cents per
share from five cents per share.
Alliance continues to improve its market position, achieving growth in earning
assets, and increasing its base of retail and commercial customers. During the
second quarter, the Company began construction of its new South Windsor office,
which is expected to open for business by the end of the third quarter. Alliance
also announced plans for its new office which will serve the towns of Tolland
and Vernon. The Company introduced its new Equity Select home equity product
which combines the accessibility of the home equity line of credit and the
structure of the home equity loan. At the end of the quarter, the Company also
began a promotion of checking accounts, offering a special travel accommodation
package in conjunction with new account openings. Alliance has now surpassed
$300 million in assets. Due to its growth, Alliance has been able to replace
earnings contributed from securities gains in 1998 with interest and fee income
in 1999.
Net interest income increased by 16.1% in the second quarter and by 15.2% in the
first six months of 1999 compared to 1998. This growth was due to growth in
earning assets, including both loans and investments. Total regular loans
(excluding government guaranteed loans) increased at a 8.6% annualized rate
since year-end 1998. Alliance recorded a 3.86% net interest margin in the most
recent quarter, compared with 3.94% in the same quarter of 1998, and increasing
from 3.77% in the first quarter of 1999. Fee income growth was primarily due to
higher loan prepayment fees recorded in 1999. As noted above, these increases in
net interest and fee income, totaling $495 thousand in the most recent quarter,
more than offset securities gains totaling $453 thousand in the second quarter
of 1998 (no securities gains were recorded in the most recent quarter).
Non-interest expense growth measured 6.8% in the second quarter and 7.2% for the
first six months of 1999, compared to 1998. Expense growth was primarily due to
higher staff and occupancy related expenses related to growth and expansion of
the Bank. Total expenses benefited from a decrease in problem asset related
expenses, reflecting the resolution of most major problem assets in 1998. The
effective income tax rate measured 27.3% for the first six months of 1999,
compared to 37.7% for the first half of 1998. The tax rate in 1999 includes the
benefit of the formation of a passive investment corporation, together with the
ongoing federal income tax benefit of the dividends received deduction on
investment securities. The income tax rate in 1998 included a second quarter
charge related to an increase in the deferred tax asset valuation allowance due
to the corporation formation noted above.
10
<PAGE>
At June 30, 1999 Alliance had total assets of $307.6 million, $24.0 million
(8.5%) higher than at year-end 1998. Total loans were $188.6 million, up $3.8
million (2.1%), while deposits were $249.0 million, up $9.0 million (3.8%) over
the same period. Shareholders' equity totaled $16.0 million, representing a book
value per share of $6.98. Shareholders' equity decreased from year-end 1998 due
to a decrease in accumulated other comprehensive income, as a result of changes
in the market value of securities available for sale. A treasury stock purchase
in July, 1998 totaling $3.1 million also affected comparisons to 1998, including
earnings per share and book value per share.
On June 30, 1999, Alliance issued $3.5 million in 9.40% cumulative trust
preferred securities through its wholly owned Delaware business trust, which are
included in total borrowings. The securities were issued in a private placement
to certain qualified institutional buyers and accredited investors. Alliance
invested the majority of the proceeds into common stock of Tolland Bank, its
bank subsidiary. All of the proceeds qualify as Tier One capital under
regulatory guidelines. The Company's capital remains in excess of all regulatory
requirements. During the second quarter, the Bank also obtained $12.5 million in
additional medium term Federal Home Loan Bank advances which funded purchases of
investment securities.
RESULTS OF OPERATIONS
Net Interest Income: Net interest income increased by $349 thousand (16.1%) and
by $648 thousand (15.2%) in the second quarter and first six months of 1999,
compared to the same periods of 1998. This growth primarily resulted from growth
in loans and investment securities. While both deposit and borrowing increases
funded this growth, deposit interest expense declined in 1999 compared to 1998,
due to the promotion of lower cost deposits together with a shortening of time
account maturities which reflects consumers' liquidity preference in the
generally low interest rate environment that has prevailed.
Most of the loan growth took place in 1998, including growth in all major
categories of primary market loans. This growth resulted from the Company's
increased marketing activities, and it benefited from the improving economic
conditions in the Connecticut markets. Loan growth has continued at a slower
pace in 1999, and management has emphasized commercial loan growth in order to
maximize interest revenues and to improve market share in this important market.
Deposit growth has been significant in both years, and includes the benefit of
the new Hebron office, which opened near the beginning of the fourth quarter of
1998.
The net interest margin had improved throughout 1998, climbing over 4.0% in the
second half of the year. The margin declined to 3.77% in the first quarter of
1999, reflecting the impact of loan refinancings and securities calls which
accelerated in the second half of 1998 due to generally low prevailing interest
rates. The net interest margin partially rebounded in the second quarter of
1999, rising to 3.86%. For the first six months of 1999, the net interest margin
measured 3.82% compared to 3.89% in 1989. However, the net interest spread
increased in 1999, compared to 1998, reflecting the lower cost deposit mix which
the company achieved as noted above. Both earning asset yields and interest
bearing liability costs have decreased by more than 20 basis points in 1999
compared to 1998.
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 $136
thousand in the first six months of 1999, compared to $158 thousand in the first
half of 1998. Please see the later discussion on the Allowance for Loan Losses.
Non-Interest Income: Service charges and fees increased in 1999, with the
increase measuring $321 thousand (57.1%) for the first half of 1999 compared to
the first half of 1998. Of this amount, approximately $250 thousand represented
prepayment fees on two fixed rate commercial loans which refinanced to lower
rates. Residential mortgage secondary market fees also increased by $52 thousand
due to a decrease in the balance of loans held for sale since year-end 1998. Net
gains on securities decreased by $784 thousand to $104 thousand for the first
six months of 1999 compared to $888 thousand in the same period of 1998.
Investment gains reflect an ongoing process of active investment portfolio
management, including realizing the benefits of improving market valuations.
During 1999, market valuations decreased, which contributed to the decrease in
net gains realized. Please see the later discussion of comprehensive income. In
the first quarter of 1999, the Company also recorded a $50 thousand net gain on
the sale of assets.
11
<PAGE>
Non-Interest Expense and Tax Expense: Total expense increased by $125 thousand
(6.8%) in the second quarter and by $259 thousand (7.2%) in the first half of
1999 compared to 1998. Compensation and benefits increased by $135 thousand and
by $271 thousand during these periods. This reflected staff increases related to
the expansion of business activities, along with the effects of higher average
salaries. This increase was also the result of an $87 thousand decrease in
deferred loan originations costs due to lower loan originations in 1999.
Increases in other expense categories were generally due to business expansion,
while problem asset related expenses decreased due to the resolution of most
problem assets in 1998. The effect of the establishment of a passive investment
corporation was to eliminate consolidated state income tax expense, which is
expected to be an ongoing benefit.
Comprehensive Income: Comprehensive income includes changes (after tax) in the
market valuation of investment securities available for sale. Comprehensive
income was ($1.940) million in the first half of 1999, compared to $.826 million
in the first half of 1998. The results for 1999 include a ($3.371) million
reclassification adjustment for net unrealized gains on securities. Please see
the following discussion on investment securities.
FINANCIAL CONDITION
Cash and Cash Equivalents: Short term investments increased by $6.9 million
during the first half of 1999, due to increased borrowings, including $3.5
million in trust preferred securities which closed on June 30. The $20.4 million
balance at June 30, 1999 was being held in anticipation of further loan and
investment growth.
Investment Securities: Securities held to maturity (HTM) decreased by $4.1
million in the first half of 1999 due to amortization and maturities. Securities
available for sale (AFS) increased by $15.0 million. Total purchases of AFS
securities were $32.3 million, and total amortization, calls, and sales were
$12.1 million. Securities purchases were primarily publicly traded investment
grade corporate debt securities, including trust preferred securities of
insurance and financial companies, and bonds issued by real estate investment
trusts. A total of $10 million in government and agency securities matured or
were called during the period. Total AFS holding losses for the first half of
1999 were $5.0 million, or about 8.0% of the average fair value of the portfolio
during this period. These changes reflect an increase in long term interest
rates during 1999, along with changes in market valuations of utilities stocks.
At June 30, 1999, the total net unrealized loss on AFS securities was $3.9
million (5.0% of amortized cost), compared to a net unrealized gain of $1.4
million (2.4% of amortized cost) at year-end 1998. At that date, the fair value
of AFS securities included corporate debt securities totaling $45.7 million,
equity securities totalling $19.2 million, and government agency and mortgage
backed securities totaling $8.6 million. All corporate debt and marketable
equity securities were in the top four rating/ranking categories of major rating
agencies, except for one security which was subsequently liquidated at no
material loss. The average maturity of AFS debt securities at June 30, 1999 was
about 26 years. The average fully taxable equivalent yield on AFS securities
increased to 7.98% in the most recent quarter, compared to 7.63% in the same
quarter of 1998, and to 7.57% in the fourth quarter of 1998.
Total Loans: Total loans increased by $3.8 million (2.1%) to $188.6 million in
the first half of 1999. Total loans had decreased by $2.4 million in the first
quarter of 1999, and then increased by $6.2 million in the most recent quarter.
Excluding government guaranteed loans (purchased in the secondary market) and
residential mortgage loans held for sale, total loans increased by $11.2 million
in the first half of 1999, representing a 14.2% annualized rate of growth. This
growth was concentrated in commercial mortgages and other commercial loans.
These represent loans originated by the Company in the central Connecticut
market area. The Company also recorded growth in residential mortgages and
consumer loans. Mortgage growth was offset by a $4.3 million decrease in the
balance of loans held for sale since year-end 1998. The Company did not purchase
government guaranteed loans during the first half of 1999, and the balance of
these loans decreased by $3.1 million due to amortization and prepayments. The
yield on loans decreased to 7.80% in the most recent quarter, from 8.25% in the
same quarter of 1998. This change included the effect of a 75 basis point
decrease in the prime rate of interest in the second half of 1998, together with
the impact of lower fixed rates on new loan originations and on refinancings.
During 1999, the Company introduced its new Equity Select home equity line of
credit, which allows borrowers to establish fixed rate amortizing loans within
the line to finance specific purchases. This product is relatively new to the
marketplace, and it offers the convenience of instalment loans combined with the
flexibility and tax benefits associated with home equity lines.
12
<PAGE>
Nonperforming Loans: Nonaccruing loans increased to $1.041 million at June 30,
1999, from an unusually low $574 thousand at year-end 1998. The increase
included both residential mortgages and commercial loans. Total impaired loans
increased to $760 thousand from $672 thousand over this time. The balance of
foreclosed assets remained at $80 thousand. Total nonperforming assets measured
0.36% of total assets at June 30, 1999.
Allowance for Loan Losses: The allowance for loan losses increased to $3.20
million at June 30, 1999, compared to $3.06 million at year-end 1998. The
allowance included an increase in the valuation allowance on impaired loans to
$205 thousand from $110 thousand. Other factors contributing to the increase in
the allowance included growth in the loan portfolio and the previously mentioned
increase in nonaccruing loans. For the first six months of 1999, gross
chargeoffs totaled $24 thousand and gross recoveries totaled $28 thousand. The
allowance measured 1.70% of total loans at June 30, 1999, compared to 1.66% at
year-end 1998. For the same dates, the allowance covered nonaccruing loans by a
ratio of 308%, compared to 533% at year-end 1998.
Deposits and Borrowings: Total deposits increased by $9.0 million (3.8%) to
$249.0 million for the first half of 1999. Increases were recorded in money
market, savings, and time accounts. Money market growth reflects the continuing
demand for this tiered rate product. Savings growth includes balances from the
Company's new Hebron branch. Time deposit growth included the results of
promotions of accounts with 2-3 year maturities in the second quarter of 1999.
As previously noted, the Company began a promotion of transaction accounts near
the end of the most recent quarter. During the most recent quarter, the company
borrowed $12.5 million in medium term callable loans from the Federal Home Loan
Bank of Boston. These loans were priced at an interest rate of 5.84%, with a ten
year maturity and FHLBB call options in the 3-5 year range. Additionally, on
June 30, 1999, the Company closed on a $3.5 million capital trust preferred
security placement, priced at 9.40%, with a thirty year term and a ten year call
provision. While this security is included in total borrowings, this obligation
is classified as Tier One capital for Alliance, and $3.0 million in proceeds
were downstreamed as common equity into Tolland Bank, increasing the Tier One
capital of the Bank by that amount.
Interest Rate Sensitivity: The one year interest rate gap had been ($22) million
at year-end 1998, reflecting a liability sensitivity equal to 8% of earning
assets. This liability sensitivity increased, with a one year gap of ($39)
million (15% of earning assets) at March 31, 1999. The Company normally targets
a one year gap position which is near breakeven. Liability sensitivity was
allowed to increase due to customer demand and market related factors, along
with investment opportunities. During the second quarter, the company undertook
initiatives to reduce this liability sensitivity in case interest rates
increased, as they did near the end of the quarter. The one year gap was reduced
to ($16) million as of June 30, 1999. This reduction was in part due to the
borrowings and time account promotions noted previously. Additionally, the
Company entered into a $10 million two year interest rate swap with a
correspondent bank, paying a fixed rate and receiving a variable rate. This swap
is intended to offset some of the rate sensitivity of the Company's money market
accounts. Core deposit growth in new offices also provides an ongoing source of
incremental funds which are less rate sensitive. The Bank's one year interest
rate sensitivity analysis includes savings and NOW account balances totaling $29
million as interest sensitive; the rates on these accounts have been generally
stable for several years. The five year interest rate gap increased to $83
million at June 30, 1999 from $63 million at year-end 1998, as intermediate term
liabilities were used to fund an increase in loans and investments repricing
over five years.
Liquidity and Cash Flows: The primary use of funds in 1999 was growth in
investments and loans, and the primary sources of funds were growth in deposits
and borrowings. 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. The Company issued a $3.5 million capital trust
preferred security in the most recent quarter. These funds were primarily used
to provide $3.0 million in common equity to the Company's subsidiary, Tolland
Bank. Dividends from the Bank will provide funds for the semi-annual interest
payments due under this obligation.
13
<PAGE>
Capital Resources: During the first half of 1999, shareholder's equity decreased
by $2.2 million (11.9%) due to the change in accumulated other comprehensive
income discussed earlier. Retained earnings increased by $1.2 million (12.8%),
reflecting net income of $1.431 million less dividend payments of $251 thousand.
Shareholders' equity measured 5.21% of assets at June 30, 1999, and book value
per common share was $6.98 at that date. As previously noted, the trust
preferred security transaction resulted in a $3.5 million addition to Tier 1
regulatory capital for the Company, and an addition of $3.0 million of
regulatory capital for the Bank. The Tier 1 Leverage Capital Ratio stood at 7.1%
at June 30, 1999 and the Risk Based Capital Ratio stood at 10.7%. Capital ratios
for the Company and Tolland Bank were in excess of all applicable regulatory
requirements at June 30, 1999, and the Company met the requirements to be
classified as well capitalized in accordance with regulatory capital
requirements.
Year 2000 Considerations
All disclosure concerning Year 2000 Considerations should be considered "Year
2000 Readiness Disclosure" pursuant to the Year 2000 Information and Readiness
Disclosure Act. The Year 2000 modification information provided herein should be
read in connection with the Year 2000 Information and Readiness Disclosure Act
which, among other things, mandates that certain Year 2000 readiness disclosures
may not be used in litigation.
The Company has established a Year 2000 project plan to address systems and
facilities changes necessary to properly recognize dates after 1999, has
assigned implementation responsibilities and has established management and
Board reporting processes. All of the Company's significant information
technology systems are provided under contract with major national banking
systems providers who are progressing under their own Year 2000 plans. Most
significant systems changes by those providers have been reported to be
completed. The Company has not identified any mission critical vendors who
appear to be at material risk of not achieving Year 2000 requirements.
The Company's plan follows the five step approach required by its regulators:
Awareness, Assessment, Modification, Verification, and Implementation. As of
June 30, 1999, the Company believes that its progress under its plan was
satisfactory in accordance with plan objectives. The Company expects to complete
its plan in accordance with regulatory guidelines. The Company's project also
addresses its other suppliers, customers, and other constituents, as well as
remediation and business resumption contingency plans. In some cases, the
Company has placed substantial reliance on third parties for completion of the
five step readiness process, including verification and implementation. The
Company has not encountered any material issues or developments regarding the
Year 2000 readiness of mission critical systems, equipment, and functions in its
operating and financial environment.
The Company has arranged for temporary consulting help and has purchased
diagnostic software to assist with this project. The costs of the project, which
are not expected to be significant, and the dates in the Company's plans 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, 1999 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. The Company
contracts with one company for its core accounting, check processing, and
electronic funds transfer systems. This provider has provided Year 2000
readiness certification and documentation demonstrating compliance with the
regulatory readiness process for all mission critical functionality used by the
Company. The Company has substantially completed its own testing of all mission
critical systems. The Company currently anticipates that its major IT vendors
will comply with federal regulatory guidelines for Year 2000 readiness.
14
<PAGE>
Costs: The Company has not incurred material costs related to its Year 2000
program. The Company has been charged approximately $25 thousand by its account
processing vendor for testing arrangements. The Company has budgeted further
computer and equipment upgrades totaling up to $200 thousand in 1999, which
include expenditures related to the execution of the Company's Year 2000
program. Additionally, the Company will evaluate capital expenditures totaling
up to approximately $50 thousand related to general contingency capabilities.
Actual Year 2000 related capital expenditures through June 30, 1999 were about
$50 thousand.
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 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 substantial completion of
remediation of mission critical systems and testing of these systems. The
Company is also exposed to various non-IT systematic risks which it cannot fully
monitor and test, including the supply of electric power, telecommunications
services, and postal services. As a result of the risks and uncertainties
associated with the Year 2000 issue, particularly with respect to vendors and
service providers and other third parties, the Company is unable to predict the
extent of potential Year 2000 failures that could result, nor quantify the
potential impact such failures could have on the Company's results of operations
and financial condition.
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 which has been
approved by the Company's Board. In the third quarter of 1999, the Company will
be validating the contingency plan. The Company has taken steps to increase its
available staffing as necessary to respond to Year 2000 contingencies. The
Company has also taken other measures to increase the availability of key
operating resources, and has put in place plans to deal with potentially
increased liquidity and borrowing needs during the third and forth quarters of
1999.
15
<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, 1998 filed March 29, 1999. There have been no material
changes in reported market risks faced by the Company since the end of 1998. The
impact of changes in interest rates during 1999 on the values of investment
securities has been discussed in Item 2 and in Note 2 to the financial
statements. It is estimated that the fair value of loans, which had exceeded
carrying value at December 31, 1998 due to the decrease in rates, was less than
or equal to carrying value due to the increase in rates as of June 30, 1999.
Also, an estimate of the fair value of deposits was about $6 million in excess
of book value as of June 30, 1999.
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
None.
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,
1999.
i. On May 13, 1999, the Company filed a report on Form 8-K
reporting, under Item 5, a signed purchase and sale
agreement on a new branch office.
ii. On May 28, 1999, the Company filed a report on Form 8-K
reporting, under Item 5, the election of a new Chairman
and Vice Chairman to the Board of Directors.
16
<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 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans $ 183,624 $ 163,392 7.80% 8.25%
Securities available for sale 67,341 42,466 7.98 7.63
Securities held to maturity 12,281 19,020 5.54 5.88
Other earning assets 10,926 12,132 4.85 5.89
- ------------------------------------------------------------------------------------------------------------------------------
Total earning assets 274,172 237,010 7.60 7.81
Other assets 12,308 9,821
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $ 286,480 $ 246,831
- ------------------------------------------------------------------------------------------------------------------------------
Interest bearing deposits $ 217,535 $ 202,019 4.05 4.42
Borrowings 26,888 3,708 5.31 6.58
- ------------------------------------------------------------------------------------------------------------------------------
Interest bearing liabilities 244,423 205,727 4.20 4.46
Other liabilities 25,603 21,791
Shareholder's equity 16,454 19,313
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 286,480 $ 246,831
- ------------------------------------------------------------------------------------------------------------------------------
Net Interest Spread 3.40% 3.35%
Net Interest Margin 3.86% 3.94%
(dollars in thousands) Average Balance Rate (FTE Basis)
- ------------------------------------------------------------------------------------------------------------------------------
Six months ended June 30 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
Loans $ 183,111 $ 160,280 7.83% 8.21%
Securities available for sale 65,546 42,251 7.68 7.77
Securities held to maturity 13,303 19,337 5.52 5.90
Other earning assets 9,397 13,925 4.79 5.85
- ------------------------------------------------------------------------------------------------------------------------------
Total earning assets 271,357 235,793 7.55 7.78
Other assets 11,198 9,898
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $ 282,555 $ 245,691
- ------------------------------------------------------------------------------------------------------------------------------
Interest bearing deposits $ 215,446 $ 201,521 4.09 4.43
Borrowings 25,258 3,736 5.23 6.49
- ------------------------------------------------------------------------------------------------------------------------------
Interest bearing liabilities 240,704 205,257 4.21 4.48
Other liabilities 24,648 21,322
Shareholder's equity 17,203 19,112
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 282,555 $ 245,691
- ------------------------------------------------------------------------------------------------------------------------------
Net Interest Spread 3.34% 3.30%
Net Interest Margin 3.82% 3.89%
</TABLE>
17
<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 11, 1999 /s/ Joseph H. Rossi
-------------------
Joseph H. Rossi
President/CEO
Date: August 11, 1999 /s/ David H. Gonci
------------------
David H. Gonci
Senior Vice President/CFO
18
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001046002
<NAME> ALLIANCE BANCORP OF NEW ENGLAND, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 7,242
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<INVESTMENTS-HELD-FOR-SALE> 73,533
<INVESTMENTS-CARRYING> 11,317
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<LOANS> 188,558
<ALLOWANCE> 3,200
<TOTAL-ASSETS> 307,567
<DEPOSITS> 249,006
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0
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