<PAGE>
FORM 10-K
United States Securities and Exchange Commission
Washington, DC 20549
Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of
1934 For the fiscal year ended December 31, 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.
There were no delinquent filers subject to disclosure pursuant to Item 405 of
Regulation S-K as contained in the definitive Proxy Statement incorporated by
reference in Part III of this Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the closing sale price of February 14, 2000, as reported by
American Stock Exchange, was approximately $20,784,000.
The number of shares outstanding of common stock was 2,309,283 as of February
14, 2000.
Documents Incorporated by Reference
The Alliance Bancorp of New England, Inc. Proxy Statement for the Annual Meeting
of Stockholders to be held on April 12, 2000 is incorporated by reference into
Part III of this Form 10-K.
Table of Contents
<TABLE>
<CAPTION>
<S> <C> <C>
PAGE
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PART I Item 1 - Business 2
Item 2 - Properties 6
Item 3 - Legal Proceedings 6
Item 4 - Submission of Matters to a Vote of Security Holders 6
PART II Item 5 - Market for Registrants Common Equity and Related Shareholder Matters 6
Item 6 - Selected Consolidated Financial Data 7
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Item 7A- Quantitative and Qualitative Disclosures about Market Risk 21
Item 8 - Consolidated Financial Statements and Supplementary Data 22
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 22
PART III Item 10 - Directors And Executive Officers Of The Registrant 22
Item 11 - Executive Compensation 22
Item 12 - Security Ownership Of Certain Beneficial Owners And Management 22
Item 13 - Certain Relationships And Related Transactions 22
PART IV Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K 23
</TABLE>
1
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PART I
Special Note Regarding Forward-Looking Statements
This report contains certain "forward-looking statements." These forward-looking
statements, which are included in Management's Discussion and Analysis, describe
future plans or strategies and include the Company's expectations of future
financial results. The words "believe," "expect," "anticipate," "estimate,"
"project" and similar expressions identify forward-looking statements. The
Company's ability to predict results or the effect of future plans or strategies
or qualitative or quantitative changes based on market risk exposure is
inherently uncertain. Factors which could affect actual results include but are
not limited to change in general market interest rates, general economic
conditions, legislative/regulatory changes, fluctuations of interest rates,
changes in the quality or composition of the Company's loan and investment
portfolios, deposit flows, competition, demand for financial services in the
Company's markets, and changes in the accounting principles, policies, and
guidelines. These factors should be considered in evaluating the forward-looking
statements, and undue reliance should not be placed on such statements.
ITEM 1. BUSINESS
--------
General. Alliance Bancorp of New England, Inc. ("Alliance" or the "Company") is
a Delaware corporation that was organized in 1997. Alliance's primary activity
is to act as the holding company for Tolland Bank (the "Bank"), which is its
sole subsidiary and principal asset.
The Bank is a Connecticut chartered savings bank which was founded in 1841 and
is headquartered in Vernon, as is Alliance. In 1986, Tolland Bank converted from
mutual to stock form. The Bank's deposits are insured up to applicable limits by
the Federal Deposit Insurance Corporation ("FDIC").
The Bank operates nine offices in Tolland County, Connecticut, and provides
retail and commercial banking products and services in Tolland County and
surrounding towns. Retail activities consist of branch deposit services, home
mortgage and consumer lending, and mortgage banking. Commercial activities
include merchant deposit services, business cash management, and construction
mortgages, permanent mortgages, and working capital and equipment loans. Through
third party relationships, the Bank also provides investment products, insurance
products, and electronic payment services to retail and commercial customers.
At December 31, 1999, Tolland Bank had total deposits of $251.4 million, total
loans of $191.6 million, and total assets of $306.9 million. There are no
material concentrations of loans or deposits with one customer, a group of
related customers, or in a single industry.
Market Area. The Bank's market area is centered in Tolland County, Connecticut,
a suburban and rural area east of Hartford. The Bank operates nine offices and
its wider market area extends throughout much of northeastern Connecticut and
into Massachusetts. Much of the market is part of the Greater Hartford
metropolitan area.
Lending Activities. The Bank actively solicits retail and commercial loans in
and around its market area. Retail lending consists primarily of the origination
of residential first mortgages and home equity lines of credit, which are
generally secured by second mortgages. Commercial lending focuses primarily on
owner occupied first mortgage loans, along with general commercial and
industrial loans and subdivision development and construction loans.
Additionally, the Bank has a portfolio of 100% Government guaranteed loans
purchased in the secondary market to supplement local loan originations. The
Bank's business strategy is to cross-sell other loan and deposit products to
build multiple sales to its customer base.
Most of the Bank's residential mortgage originations are underwritten to
secondary market standards and are sold on a non-recourse, servicing released
basis. The Bank offers an extensive list of mortgage types, including FHA and VA
loans, land loans, and subprime loans (which are also sold to investors).
Consumer loans primarily consist of home equity lines and loans and are normally
secured by second mortgages. These loans are subject to the same general
underwriting standards as residential mortgage loans, and the bank retains
ownership and servicing of all home equity lines and loans that it originates.
Consumer loans also include secured installment loans, which are primarily well
seasoned mobile home loans and indirect loans.
Commercial mortgages are primarily first mortgage loans on a variety of owner
occupied commercial properties. The Bank also provides commercial mortgages on
investor owned properties, including retail, office, and light manufacturing.
Commercial mortgages normally amortize over 15 - 20 years and typically mature
in 5-10 years. Commercial mortgages are normally guaranteed by the principals
and by owner occupant businesses. Other commercial loans include commercial and
industrial loans, and real estate secured loans, as well as subdivision
development and construction loans.
2
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Government guaranteed loans are purchased in the secondary market and are 100%
guaranteed by either the Small Business Administration (SBA) or the U.S.
Department of Agriculture (USDA). These are business term loans and mortgages,
and are primarily loan certificates registered with and serviced by a national
service corporation.
All loan originations are governed by a Board approved credit policy, which
requires that all policy exceptions be reported to the Board. Loan approval
limits are based on loan and relationship size, and most commercial loans are
approved either by the Chief Lending Officer, the Company's Credit Committee,
and/or the Board. The loan policy sets certain limits on concentrations of
credit related to one borrower. The Bank's policy is to assign a risk rating to
all commercial loans. The Bank conducts an ongoing program of commercial loan
reviews and quality control sample inspections of residential and consumer loan
originations.
The loan loss allowance is determined based on a methodology described in the
Company's policies. This methodology evaluates commercial loans based on their
risk ratings, and residential mortgages and consumer loans are evaluated in
aggregate pools. Allowance percentages are applied to loan pools to calculate
allocations of the allowance. These factors are evaluated at least annually
based on trends in the Company's credit experience, and on peer group and other
industry information. The unallocated portion of the loan loss allowance is
based on management's assessment of the overall level of the allowance, of
trends in the growth of the portfolio, of long term objectives for loan
portfolio coverage, and of subjective considerations of economic and credit
conditions and outlooks. The Company does not prepare formal projections of loan
losses. The allowance is evaluated quarterly by management and the Board and
changes are compared to prior period and historic data. The assessment of the
allowance also includes an analysis of the coverage ratios of loan outstandings,
non-performing loans, and annualized charge-offs. The detailed methodology and a
summary narrative analysis are approved by the Credit Committee and the Board.
The narrative analysis includes consideration of trends in the performance and
mix of the components of the loan portfolio. At least annually an analysis is
made of the charge-off and allowance trends with peer group comparison. Adverse
developments in credit performance in the Company's markets can develop quickly,
and the determination of the allowance is based on management's assessment of
both short and long term risk factors.
Total real estate secured loans were $155.5 million (81.1% of total loans) at
year-end 1999. Aided by favorable interest rates and a modest recovery in the
Connecticut economy, real estate markets and prices have improved in most
sectors over the last three years. The Bank conducts an overall review of real
estate market trends periodically, and real estate lending activities are
governed by real estate lending and appraisal policies. New construction has
remained active in certain residential markets, along with commercial retail,
medical office, and lodging properties.
Investment Activities. Securities investments are a source of interest and
dividend income, provide for diversification, are a tool for asset/liability
management, and are a source of liquidity. The Company's investment portfolio
consists of high grade investment securities, and is primarily composed of
publicly traded U.S. corporate securities. Investment activities are governed by
a Board approved investment policy, and the Board reviews all investment
activities on a monthly basis. Alliance uses the services of an investment
advisor in managing its portfolio. In 1999, Alliance established an Investment
Committee of the Board. This committee meets quarterly to review detailed
information on the ratings, yields and values of securities, as well as
Management's plans for investment security transactions.
Deposits and Other Sources of Funds. The Banks' major sources of funds are
deposits, borrowings, principal payments on loans and securities, and maturities
of investments. Borrowings are generally used to fund long-term assets and
short-term liquidity requirements or to manage interest rate risk. The Bank is a
member of the Federal Home Loan Bank of Boston ("FHLBB") and may borrow from the
FHLBB subject to certain limitations. The Bank also has available lines of
credit for federal funds purchases and reverse repurchase agreements, and is
also eligible for short term borrowings from the Federal Reserve Bank of Boston.
Competition. The Company's market area is highly competitive with a wide range
of financial institutions including commercial banks, both mutual and stock
owned savings banks, savings and loan associations, and credit unions. The Bank
also competes with insurance and finance companies, investment companies, and
brokers. Factors affecting competition include ongoing mergers and acquisitions
(including expansion of regional and national banks), the introduction of new
product types and rate structures, and the development of new delivery channels
(including supermarket banking and internet banking). The Bank competes through
pricing, product development, focused marketing, and providing more convenience
through technology and business hours. The Bank strives to provide the personal
service advantage of a community bank and to take advantage of potential market
changes following consolidations by the large regional banks. During the last
two years, several local competitors merged with or announced mergers with
larger institutions. Also, during 1999, Fleet and Bank Boston merged,
consolidating the two largest banks in New England. Additionally, two local
mutual competitors announced conversions to stock ownership. In these changing
competitive markets, loan and deposit pricing spreads have tightened. Also,
several competitors have announced plans to expand their branch networks.
3
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Technology. The development of internet e-commerce has been prominent throughout
the economy, including the banking industry. Most of the Company's competitors
offer some level of internet and electronic banking services. While the local
demand for these technologies has been modest, the level of demand is increasing
rapidly. The most significant impact has been in offerings from non-bank
competitors. Alliance has a goal to be an active user of proven new
technologies, both in its product offerings and in its purchases of processing
and related services. A significant effect of technological change has been to
enable community banks to more easily access emerging technologies previously
available principally to larger competitors.
Employees. As of year-end 1999, the Company had 98.5 full-time equivalent
employees. None of the employees are represented by a collective bargaining
group, and manage-ment considers relations with its employees to be good.
Estimated average full-time equivalent staff increased by about 6% from 89.4
persons in 1998 to 94.7 persons in 1999.
Regulation and Supervision. The Company and the Bank are heavily regulated. As a
bank holding company, Alliance is supervised by the Board of Governors of the
Federal Reserve System ("FRB") and it is also subject to the jurisdiction of the
Connecticut Department of Banking. As a Connecticut-chartered savings bank, the
Bank is subject to regulation and supervision by the FDIC and the Connecticut
Department of Banking.
The FDIC insures the Bank's deposit accounts to the $100,000 maximum per
separately insured account. The Bank is subject to regulation, examination, and
supervision by the FDIC and to reporting requirements of the FDIC. The FDIC has
adopted requirements setting minimum standards for capital adequacy and imposing
minimum leverage capital ratios. The Company and Bank exceeded all applicable
requirements at December 31, 1999. Connecticut statutes and regulations govern,
among other things, investment powers, lending powers, deposit activities,
maintenance of surplus and reserve accounts, the distribution of earnings, the
payments of dividends, issuance of capital stock, branching, acquisitions and
mergers and consolidations. Connecticut banks that do not operate in accordance
with the regulations, policies and directives of the Banking Commissioner may be
subject to sanctions for noncompliance. The Commissioner may, under certain
circumstances, suspend or remove officers or directors who have violated the
law, conducted the Bank's business in a manner which is unsafe, unsound or
contrary to the depositor's interest, or been negligent in the performance of
their duties.
Year 2000 Considerations. The Company uses computer systems extensively in its
operations. The Company established a Year 2000 project plan to address systems
and facilities changes necessary to properly recognize dates after 1999. The
Company's Year 2000 Considerations are discussed in Management's Discussion and
Analysis of Financial Condition and Results of Operation.
Interstate Banking. In general, subject to certain limitations, nationwide
interstate acquisitions are now permissible. In 1999, Fleet Boston was required
to divest of many Bank Boston branches, and Sovereign Bank (headquartered in
Pennsylvania) plans to acquire those offices in 2000. Other regional Northeast
banks have also acquired smaller banks in Connecticut in the last two years.
Financial Modernization. In 1999, Congress enacted the Financial Modernization
Act, which fundamentally removes barriers between banking, insurance and
securities brokerage which have existed since the Glass Stegall Act in the
1930's. It is anticipated that there will be increased consolidation in these
industries among national competitors. At the community bank level, banks have
already been combining the distribution of these products through joint ventures
and acquisitions of insurance agencies.
4
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Supplementary Information
- -------------------------
The following supplementary information, some of which is required under Guide 3
(Statistical Disclosure by Bank Holding Companies) of the regulations
promulgated pursuant to the Securities Act of 1933, as amended, is found in this
report on the pages indicated below, and should be read in conjunction with the
related financial statements and notes thereto.
Selected Consolidated Financial Data 7
Average Balance Sheet, Net Interest Income
and Interest Rates 9
Loan Portfolio 13
Nonaccruing Loans 14
Provision and Allowance for Loan Losses 14
Interest Rate Sensitivity 14
Maturity of Securities Exhibit 99
Foreclosed Properties Exhibit 99
Time Deposits of $100 Thousand or More Exhibit 99
Deposits Exhibit 99
Short-term Borrowings Exhibit 99
Volume and Rate Analysis-FTE Basis Exhibit 99
Selected Quarterly Financial Data Exhibit 99
Construction and Commercial Loans Exhibit 99
Securities Cost and Fair Value Exhibit 99
5
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ITEM 2. PROPERTIES
----------
The premises of Alliance are located in Connecticut as follows (see the notes
"Premises and Equipment, Net" and "Commitments and Contingencies" in Item 8 for
additional information about the Company's premises):
Year Lease
Location - Town (Street) Owned / Leased Expires
- --------------------------------------------------------------------------
o Tolland - (215 Merrow Road) Leased 2023
o Vernon - (348 Hartford Turnpike) Owned
o Vernon - (62 Hyde Avenue) Owned
o Coventry - (Routes 31 and 44) Owned
o Ellington - (287 Somers Road) Owned
o Stafford Springs - (34 West Stafford Road) Leased 1999
o Willington - (Routes 74 and 32) Leased 2005
o Hebron - (31 Main Street) Leased 2003
o South Windsor - (1665 Ellington Road) Owned
o A commercial property leased to a child care operation adjacent to the
Company's former office on Olde Tolland Common in Tolland.
o Approximately 10 acres of land adjacent to the Company's office in Coventry,
Connecticut.
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company is not involved in any material legal proceedings other than
ordinary routine litigation incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY & RELATED SHAREHOLDER MATTERS
- ---------------------------------------------------------------------------
The Company's common stock is listed on the American Stock Exchange (AMEX) under
the symbol "ANE." A total of 804,900 shares of the Company's stock, or 34.9% of
year-end outstanding shares, were traded on AMEX in 1999. As of February 14,
2000, the Company had 499 holders of record of its common stock. This does not
reflect the number of persons or entities who hold their stock in nominee or
"street" name. The closing sale price of the stock on February 14, 2000 was
$9.00. Dividends declared and paid in 1999 and 1998 totaled $0.23 and $0.17 per
share, respectively. Dividends are subject to the restrictions of applicable
regulations. See the "Shareholders' Equity" note in Item 8 for additional
information. See also the information contained in Item 6. The following table
presents quarterly information on the range of high and low prices for the past
two years, together with dividends declared per share.
<TABLE>
<CAPTION>
Quarter Ended High Low Dividends Declared Per Share
- ------------------------------------------------ --------------------- -------------------- -----------------------------------
<S> <C> <C> <C>
March 31, 1998 14.25 10.92 .03
June 30, 1998 16.67 14.00 .03
September 30, 1998 15.75 9.75 .05
December 31, 1998 13.00 9.00 .05
March 31, 1999 12.38 9.62 .05
June 30, 1999 12.38 9.13 .06
September 30, 1999 12.75 9.50 .06
December 31, 1999 10.00 8.75 .06
</TABLE>
6
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
------------------------------------
<TABLE>
<CAPTION>
December 31 1999 1998 1997 1996 1995
- ------------------------------------------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
For the Year (in thousands)
Net interest income $ 10,346 $ 9,028 $ 7,960 $ 7,663 $ 7,364
Provision for loan losses 237 179 829 978 1,975
Service charges and fees 1,492 1,226 1,148 1,115 1,005
Net gain (loss) on securities and other assets 190 1,193 813 160 (945)
Non-interest expense 7,765 7,347 6,411 6,640 6,582
Income (loss) before income taxes 4,026 3,921 2,681 1,320 (1,133)
Income tax expense (benefit) 1,104 1,363 664 (118) 12
Net income (loss) $ 2,922 $ 2,558 $ 2,017 $ 1,438 $(1,145)
- ------------------------------------------------- -------------- -------------- -------------- -------------- --------------
Per Share
Basic earnings (loss) $ 1.27 $ 1.07 $ 0.85 $ .62 $ (.49)
Diluted earnings (loss) 1.23 1.03 0.82 .61 (.49)
Dividends declared 0.23 0.17 .12 .01 -
Book value 6.21 7.94 7.66 6.65 5.73
Common stock price:
High 12.75 16.67 12.17 6.69 5.19
Low 8.75 9.00 5.75 4.63 3.50
Close 8.88 11.75 11.00 6.00 4.75
- ------------------------------------------------- -------------- -------------- -------------- -------------- --------------
At Year End (in millions)
Total assets $ 306.9 $ 283.6 $ 247.1 $ 232.3 $ 214.1
Total loans 191.6 184.7 157.5 147.8 152.9
Other earning assets 85.0 87.4 78.4 71.2 47.8
Deposits 251.4 240.0 221.7 205.6 193.4
Borrowings 39.6 23.6 5.7 10.4 6.9
Shareholders' equity (a) 14.3 18.2 18.8 15.6 13.3
- ------------------------------------------------- -------------- -------------- -------------- -------------- --------------
Operating Ratios (in percent)
Return (loss) on average assets 0.99% 1.02% .86% .65% (.54)%
Return (loss) on average equity 17.68 14.24 12.29 9.84 (8.37)
Equity % total assets (period end) 4.67 6.42 7.61 6.71 6.20
Net interest spread (fully taxable equivalent) 3.42 3.48 3.30 3.34 3.35
Net interest margin (fully taxable equivalent) 3.88 4.02 3.80 3.78 3.71
Dividend payout ratio 18.08 15.46 13.78 2.43 -
- ------------------------------------------------- -------------- -------------- -------------- -------------- --------------
(a) Shareholders' equity includes accumulated other comprehensive income (loss),
which consists of unrealized gains (losses) on investment securities, net of
taxes.
</TABLE>
7
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ITEM 7.
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS
- -------------------------------------------------------------------------------
1999 Summary
Alliance Bancorp of New England, Inc., ("Alliance" or the "Company") reported
record net income of $2.92 million for the year 1999 ($1.23 per diluted share),
up 14.2% from 1998 earnings of $2.56 million ($1.03 per diluted share). 1999
marked the fourth consecutive year of record earnings. Diluted earnings per
share increased by 19.4% in 1999 compared to 1998, including the benefit of a
stock repurchase in 1998. Dividends declared in 1999 totaled $0.23 per share, a
35.3% increase over the $0.17 per share total in 1998. Alliance is the holding
company for Tolland Bank (the "Bank").
Accomplishments in 1999 included the successful opening of four new offices
serving Tolland, Vernon, Hebron, and South Windsor. During 1999, Alliance
recorded growth of $13.8 million (8.5%) in total regular loans (excluding
purchased government guaranteed loans). This was primarily due to growth of
$15.8 million in total commercial loans, representing a 22.0% increase in the
commercial loan portfolio. Alliance has expanded its commercial lending division
and actively solicits business throughout its primary market and the central
Connecticut area.
During 1999, total assets grew by 8.2% to $306.9 million. This reflected growth
in loans and deposits, and resulted in a 14.6% increase in the Company's net
interest income. Net interest income in the second half of 1999 increased at an
annualized rate of 21.7% compared to the first half of the year, due to stronger
market conditions and the impact of new branch openings. The average balance of
deposit accounts excluding time accounts increased by 22.8% in 1999. Together
with the 22.0% increase in commercial loans noted above, these increases
contributed to a substantial improvement in the Company's earnings fundamentals.
During the year, Alliance recorded growth of $11.4 million (4.8%) in deposits.
This was due to an increase of $12.7 million in savings and money market
deposits. 1999 results also included the benefit of a $5.4 million (12.5%)
increase in average transaction account balances. Deposit growth resulted both
from promotions and account growth in new branches. By emphasizing lower cost
accounts, Alliance achieved deposit growth while decreasing deposit interest
expense by $153 thousand (1.7%).
During the last two years, several peer competitors in central Connecticut were
acquired and/or announced mergers with larger institutions. Additionally, the
market was impacted by the merger of New England's two largest banks, and the
subsequent planned divestiture of branches by Fleet Boston. Additionally, after
the end of 1999, a very public battle over ATM surcharges resulted in the
first-time imposition of ATM surcharges by large banks in Connecticut, which was
one of only two states with remaining surcharge bans. The effects of
consolidation and fee increases continue to provide opportunities for Alliance
to pursue market share growth and expansion of its branch market.
Alliance recorded an increase of $266 thousand (21.7%) in service charges and
fees in 1999 compared to 1998. This was primarily due to an increase in
commercial loan prepayment fees. Net gains on securities and other assets
totaled $190 thousand in 1999 compared to $1.19 million in 1998. Gains recorded
in 1998 resulted from securities gains, realizing the benefits of strongly
improving market valuations and active portfolio management. Total non-interest
expense increased by $418 thousand (5.7%) in 1999, compared to 1998. Increases
were recorded in most categories, due to the addition of new offices and other
growth in the Company. The efficiency ratio (non-interest expense as a
percentage of tax equivalent interest and fee income) decreased to 62.7% in
1999, compared to 67.5% in 1998. This reflected the lower growth rate of
expenses compared to revenues, in keeping with the Company's strategy to enhance
profitability through growth. Income tax expense decreased by $259 thousand
(19.0%) in 1999 compared to 1998. This reflected the benefit of the formation of
a passive investment corporation in 1999.
Total assets grew by $23.4 million (8.2%) in 1999. In addition to growth in
regular loans, Alliance also recorded growth of $7.0 million in total investment
securities, $2.4 million in cash and equivalents, and $5.9 million in other
assets (including $2.5 million in bank owned life insurance and growth of $3.0
million in net deferred tax assets). Purchased government guaranteed loans
decreased by $6.9 million due to runoff. Total borrowings increased by $16.0
million, including medium term borrowings from the Federal Home Loan Bank of
Boston and a $3.5 million trust preferred debenture. Shareholders' equity
totaled $14.3 million at year-end 1999, compared to $18.2 million at year-end
1998. This decrease was due to net unrealized losses on securities as a result
of declines in the market value of investment securities available for sale.
Excluding these changes, return on equity measured 15.5% for the most recent
quarter and 15.9% for the year 1999. The Company's capital remains in excess of
all regulatory requirements. The $3.5 million trust preferred debenture provided
additional Tier 1 equity capital at an after tax rate of 6.2% which compared
favorably with other sources of regulatory capital and without diluting common
equity.
8
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Results Of Operations - 1999 Versus 1998
Net Interest Income - Fully Taxable Equivalent (FTE) Basis
<TABLE>
<CAPTION>
(dollars in thousands) Average Balance Rate (FTE Basis)
- --------------------------------------------- --------- ------------------------- -------- -- ----------------------- --------
Years ended December 31 1999 1998 1997 1999 1998 1997
- --------------------------------------------- --------------- -------------- -------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Loans $ 185,851 $ 166,908 $ 148,601 7.88% 8.33% 8.17%
Securities available for sale 66,768 43,131 48,159 7.90 7.74 7.39
Securities held to maturity 17,020 18,336 20,634 6.40 5.87 5.85
Short term investments 11,103 11,944 5,618 5.02 5.79 5.70
- --------------------------------------------- --------------- -------------- -------------- ----------- ---------- -----------
Total earning assets 280,742 240,319 223,012 7.67 7.91 7.72
Other assets 14,373 10,751 10,965
- --------------------------------------------- --------------- -------------- -------------- ----------- ---------- -----------
Total assets $ 295,115 $ 251,070 $ 233,977
- --------------------------------------------- --------------- -------------- -------------- ----------- ---------- -----------
Interest bearing deposits $ 218,370 $ 204,869 $ 193,371 4.04 4.39 4.39
Borrowings 32,462 6,190 4,244 5.66 5.80 6.22
- --------------------------------------------- --------------- -------------- -------------- ----------- ---------- -----------
Interest bearing liabilities 250,832 211,059 197,615 4.25 4.43 4.43
Other liabilities 27,756 23,068 19,947
Shareholder's equity 16,527 16,943 16,415
- --------------------------------------------- --------------- -------------- -------------- ----------- ---------- -----------
Total liabilities and equity $ 295,115 $ 251,070 $ 233,977
- --------------------------------------------- --------------- -------------- -------------- ----------- ---------- -----------
Net Interest Spread 3.42% 3.48% 3.30%
Net Interest Margin 3.88% 4.02% 3.80%
Note: The average balance of loans included nonaccruing loans and deferred costs. Also, the balance and yield on all debt securities
is based on amortized original cost and not on fair value.
Net Interest Income FTE (in thousands) 1999 1998 1997
- ------------------------------------------------------ ----------------------- ----------------------- ----------------------
Loan interest $ 14,637 $ 13,896 $ 12,138
Securities available for sale (FTE) 5,276 3,340 3,561
Securities held to maturity 1,090 1,076 1,207
Other earning assets interest (FTE) 557 691 320
- ------------------------------------------------------ ----------------------- ----------------------- ----------------------
Total interest income (FTE) 21,560 19,003 17,226
Total interest expense 10,668 9,343 8,751
- ------------------------------------------------------ ----------------------- ----------------------- ----------------------
Net interest income (FTE) 10,892 9,660 8,475
Less tax equivalent adjustment (546) (632) (515)
- ------------------------------------------------------ ----------------------- ----------------------- ----------------------
Net interest income (Financial Statement) $ 10,346 $ 9,028 $ 7,960
- ------------------------------------------------------ ----------------------- ----------------------- ----------------------
</TABLE>
Net interest income on an FTE basis increased in 1999 by $1.23 million (12.8%)
due to a $40.4 million (16.8%) increase in average earning assets, which was
partially offset by a decrease in the net interest margin to 3.88% in 1999 from
4.02% in 1998.
The one year interest rate gap stood at $11 million at year-end 1999. During the
second half of 1999, the Federal Reserve Bank increased the fed funds rate by
0.75%, reversing a similar decrease in the second half of the prior year. The
prime rate changed by an equal amount. Long term interest rates increased even
more during the year, with the yield on the 10 year treasury bond increasing
from 4.65% at the end of 1998 to 6.39% at the end of 1999. Due to the positive
interest rate gap, and the balance sheet growth, net interest income increased
at a 21.7% annualized rate in the second half of 1999, compared to the first
half of the year.
Earning asset growth was due to both loan growth and to purchases of debt
securities. Average balances increased in all categories of regular loans
(excluding purchased government guaranteed loans). Loan origination is a
strategic focus of the Company, particularly in the commercial loan market. 1999
lending results also benefited from the generally favorable conditions in the
Connecticut economy. Average regular loans increased by $22.4 million (15.6%) in
1999, and included the benefit of strong growth recorded in the second half of
1998. Securities purchases were concentrated in early spring of 1999, and
reflected higher yields in the corporate bond sector, which compared favorably
to loan yields and to borrowing costs.
The decrease in the net interest margin was due to the reliance on interest
bearing liabilities to fund nearly all of the growth in earning assets. Average
non-interest bearing funds sources increased by $4.3 million in 1999, and were
used primarily to fund the $3.6 million increase in non-interest earning assets.
These assets included new branch premises, bank owned life insurance, due from
banks, and the deferred tax asset.
9
<PAGE>
Due to the reliance on interest bearing liabilities, managing the net interest
spread was important in order to minimize the decline in the net interest
margin. During 1999, loan and deposit spreads narrowed, reflecting more
competitive market pricing for both loans and deposits. As a result, the net
interest spread decreased to 3.42% in 1999 from 3.48% in 1998. However, the
spread in the fourth quarter of 1999 measured 3.63%, compared to 3.62% in the
fourth quarter of 1998. During 1999, the Company increased commercial loans and
long term debt securities in order to offset the impact of more competitive
pricing. These two asset classes generally provided higher yields. In 1999, the
commercial loan yield measured 8.75% and the yield on securities available for
sale measured 7.90%. The yield on total earning assets measured 7.67% in 1999,
decreasing from 7.91% in 1998; this included the impact of run-off and
refinancings in the second half of 1998 and first half of 1999.
Managing the cost of interest bearing liabilities was also an important aspect
of the Company's efforts to offset more competitive market pricing conditions.
As noted earlier, the total interest cost of deposits decreased in 1999, despite
a $16.3 million (7.2%) increase in average total deposits. In part, this was
accomplished due to a $5.4 million (12.5%) average increase in lower cost
transaction accounts, offsetting a $6.4 million (5.1%) average decrease in
higher cost time accounts. Contributing to transaction account growth were new
account openings in new branches opened by the Company in 1999. Additionally,
transaction account promotions and ATM fee changes further contributed to
transaction account growth. Lower time account costs also contributed to the
decrease in overall deposit costs. The average cost of time accounts decreased
to 5.66% in 1999 from 5.79% in 1998. This primarily reflected the impact of
maturing deposits which had been booked at higher promotional rates in earlier
years, and which renewed at shorter maturities and lower rates in 1999.
The $40.4 million increase in average earning assets was primarily funded by the
$26.3 million increase in average borrowings. The rate on average borrowings
decreased to 5.66% in 1999 from 5.80% in 1998. Alliance utilized medium term
callable borrowings from the Federal Home Loan Bank of Boston in the second half
of 1998 and the first half of 1999. The average rate on borrowings in 1999 was
equal to the average rate on time accounts, but borrowings provided the
additional benefit of a longer term funding source, and the marginal cost of
callable borrowings was significantly lower than time account costs for
equivalent maturities at the time the borrowings were booked. Borrowing costs in
1999 also included interest expense at 9.40% on $3.5 million in trust preferred
securities issued on June 30, 1999 to supplement regulatory capital.
Provision for Loan Losses
The provision for loan losses is made to establish the allowance for loan losses
at a level estimated to be adequate by management and the Board. The provision
for loan losses in 1999 totaled $237 thousand, compared to $179 thousand in
1998. The loan loss allowance increased to $3.20 million at year-end 1999,
compared to $3.06 million at year-end 1998. Please see the later discussion on
the Allowance for Loan Losses and the Summary of Significant Policies in the
Notes to the Consolidated Financial Statements.
Non-Interest Income
<TABLE>
<CAPTION>
Years ended December 31 (in thousands) 1999 1998 Change %
- ------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Loan related income $ 669 $ 500 $ 169 33.7%
Deposit related income 606 541 65 12.0
Miscellaneous charges and other income 217 185 32 17.3
- ------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
Total service charges and fees 1,492 1,226 266 21.7
Gross gains on securities 215 1,264 (1,049) (83.0)
Gross losses on securities (140) (60) (80) (133.3)
- ------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
Net gains on securities 75 1,204 (1,129) (93.8)
Gross gains on assets 139 34 105 301.6
Gross losses on assets (24) (45) 21 (45.8)
- ------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
Net gains (losses) on assets 115 (11) 126 -
- ------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
Total non-interest income $ 1,682 $ 2,419 $ 737 (30.5%)
- ------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
</TABLE>
Alliance recorded an increase of $266 thousand (21.7%) in service charges and
fees in 1999 compared to 1998. This was primarily due to an increase in
commercial loan prepayment fees. Two large commercial loan relationships chose
to pay prepayment fees in order to take advantage of lower fixed interest rates
at the beginning of the year. These fees totaled $250 thousand. Excluding these
fees, total fee income increased by $16 thousand (1.3%), including a $97
thousand (13.3%) increase in deposit and miscellaneous fees and an $81 thousand
(16.2%) decrease in other loan fees.
10
<PAGE>
The increase in deposit fees was primarily due to a $73 thousand increase in
insufficient funds fees. The increase in miscellaneous fees included a $35
thousand increase in the cash surrender value of a bank owned life insurance
policy related to a supplemental employee retirement plan. All other deposit and
other non-loan fees decreased by a total of $11 thousand in 1999. In the
competitive local market, Alliance has generally maintained an unchanged price
schedule, and has lowered certain transaction fees (including ATM fees) on
designated accounts. Alliance has focused on increasing market share in existing
markets, and promoting account growth in new offices, by continuing to
distinguish itself from the larger banks which charge higher fees.
The decrease in other loan fees included lower late fees, secondary market fees,
and miscellaneous loan fees. Total loan accounts originated decreased by about
21.3% in 1999. Loan bookings in 1998 benefited from a surge of refinancings as
rates declined throughout the year. The volume of refinancings declined in 1999
as interest rates moved higher through much of the year. Additionally, loan
pricing margins tightened in 1999 and Alliance had fewer loan promotions than in
the prior year.
Net gains on securities and other assets totaled $190 thousand in 1999 compared
to $1.19 million in 1998. Gains recorded in 1998 resulted from securities gains,
realizing the benefits of strongly improving market valuations and active
portfolio management. Gains on assets related primarily to the sale of bank
premises due to branch relocations in 1999.
Non-Interest Expense
<TABLE>
<CAPTION>
Years ended December 31 (in thousands) 1999 1998 Change %
- ------------------------------------------------------ ----------------- ---------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Compensation and benefits $ 4,008 $ 3,632 $ 376 10.4%
Occupancy 658 618 40 6.5
Data processing and equipment 970 829 141 8.9
Office and insurance 543 524 19 3.7
Purchased services 923 980 (57) (5.8)
Other 663 764 (101) 13.2
- ------------------------------------------------------ ----------------- ---------------- ----------------- ------------------
Total non-interest expense $ 7,765 $ 7,347 $ 418 5.7%
- ------------------------------------------------------ ----------------- ---------------- ----------------- ------------------
</TABLE>
Non-interest expense increased primarily in the staff, occupancy, and data
processing categories due to the addition of new offices and other growth in the
Company. Higher staff expenses resulted from $310 thousand in higher salaries
due to staff growth and compensation increases, and a $122 thousand reduction in
salary deferrals due to lower loan originations. Full time equivalent employees
totaled 98.5 at the end of 1999, a 7.1% increase compared to the 92 employee
total at the prior year-end. Salary increases were partially offset by a $49
thousand reduction in retirement plan expense, due to plan restructurings in
1998. Occupancy expense growth was due to the addition of new branches. Data
processing costs increased due to higher account and transactions volumes, as
well as a $54 thousand increase in computer equipment depreciation due to the
replacement of obsolete computers in 1998 and 1999. The $57 thousand decrease in
purchased services included lower legal and consulting fees. Changes in other
expenses included: a $90 thousand reduction in problem asset expense recoveries;
a $62 thousand reduction in charges related to the formation of the passive
investment corporation and branch relocations; and a $53 thousand increase in
premiums and promotions.
Income Tax Expense
Income tax expense decreased by $259 thousand (19.0%) in 1999 compared to 1998.
This reflected the benefit of the formation of a passive investment corporation
in 1999. New Connecticut tax statutes in 1998 permitted the formation of passive
investment corporations beginning in 1999 for the purpose of servicing real
estate related loans. As a result, the Company created Tolland Investment
Corporation in 1999 as a subsidiary of Tolland Bank. The impact of state income
taxes on income tax expense decreased by $252 thousand in 1999 compared to 1998.
Additionally, 1998 income tax expense included a $106 thousand charge related to
an increase in the deferred tax valuation allowance. The effective tax rate
declined to 27.4% in 1999 from 34.8% in the prior year. The effective tax rate
in 1999 was nearly all attributable to federal income taxes, including the
benefit of the dividends received deduction on all of the Company's marketable
equity securities.
Comprehensive Income
In addition to net income recorded in the Income Statement, comprehensive income
includes unrealized gains (losses) on securities available for sale, net of
income tax expense. In 1999, Alliance recorded a comprehensive loss of $3.44
million, compared to comprehensive income of $2.67 million in 1998. 1999 results
included unrealized securities holding losses of $6.32 million, net of $3.21
million of income tax benefit. Further information about securities holding
losses is contained in the "Securities" section later in this discussion.
11
<PAGE>
Financial Condition - Fiscal Year-End 1999 Versus 1998
Cash and Cash Equivalents
At year-end 1999, Alliance had an unusually high balance of cash and due from
banks, totaling $18.6 million, due to its Year 2000 liquidity contingency plan.
These excess balances were not needed for Year 2000 contingency purposes, and
were reduced shortly after year-end. The balance of cash and due from banks
averaged $7.15 million in 1999, compared to $5.83 million in the prior year. The
remainder of cash and cash equivalents during the year was held in short term
investments. These investments are normally in overnight federal funds brokered
through a program offered by the Bankers Bank Northeast, along with balances
held in Federated Investors money market mutual funds. Short term investments
averaged $11.1 million in 1999. These balances included funds raised in new
branches which are expected to be reinvested in future loan and investment
growth.
Securities
Alliance invests in securities primarily to produce income, in conjunction with
the loan portfolio. The primary market in which Alliance operates produces
higher levels of deposits than of loans, and these excess deposits are most
frequently invested in commercial loans originated by Alliance in central
Connecticut and in investment securities. Securities purchases are made as an
alternative to loan originations, depending on loan demand, market interest
rates, and borrowing options. Investment securities also play a role in other
aspects of asset liability management, including liquidity, interest rate
sensitivity, and capital adequacy.
During 1999, the total portfolio of investment securities increased to $81.0
million, an increase of $7.0 million (9.5%) from the prior year-end. The
portfolio primarily consists of publicly traded corporate securities, which
totaled $60.7 million, or 75% of the total portfolio as of December 31, 1999.
The remaining securities included $18.0 million of government agency and
mortgage backed securities, and $2.0 million of non-marketable common stock
(invested in the Federal Home Loan Bank of Boston and the Bankers Bank
Northeast, recorded at cost).
The corporate security portfolio includes debt securities (including trust
preferred securities) totaling $47.1 million, and equity securities totaling
$13.6 million. The equity securities were all purchased with a focus on dividend
yield, and are also eligible for the dividends received deduction, which
provides an advantaged tax equivalent yield. The corporate debt securities are
primarily invested in the following industries: banks, insurance companies, real
estate investment trusts, and securities brokers. The equity securities
portfolio includes electric utility common stocks and preferred stocks issued by
banks and securities brokers. The Company's policy is to generally invest in
corporate securities in the four highest rating/ranking categories of major
rating agencies, and at year-end 1999 the average corporate security rating was
BBB+. The Company's policy limits exposure to any one industry to 6% of assets,
and to any corporate issuer to $1.5 million (excluding government agencies).
Investments in government agency and mortagage backed securities are all rated
AAA or AA. The Company works with an investment advisor in managing the
investment portfolio. During 1999, Alliance established an Investment Committee
of the Board, which meets quarterly to review the portfolio and investment
strategies.
Securities purchased are normally classified as Available for Sale (AFS). On
occasion, AFS securities are transferred to Held to Maturity (HTM) based on
Management's judgment that it has the intent and ability to hold the securities
to maturity. Securities purchases in 1999 totaled $39.1 million, securities
calls and sales totaled $8.4 million, and amortizations and maturities totaled
$14.2 million. Securities purchases were mostly corporate debt securities that
were purchased earlier in the year based on attractive yield and spread
characteristics. Subsequently, interest rates increased and the value of AFS
securities decreased. Management made the determination that some of the debt
securities with unrealized losses would not be sold, and in the third quarter of
1999, Alliance transferred approximately $21.0 million of securities from AFS to
HTM. The unrealized loss at date of transfer included in other comprehensive
income was $2.3 million. This determination included consideration of the
attractive yield and quality of these securities, the unrealized loss, and the
anticipation that future unrealized losses might be higher due to potential
increases in market interest rates. At year-end 1999, the balance of HTM
securities also included $6.8 million in securities that had been transferred
from AFS to HTM in 1994.
During 1999, the average yield on the total investment portfolio increased to
7.60% from 7.28% in 1998. The weighted average maturity of the portfolio was
23.4 years at year-end 1999, compared to 16.3 years at the prior year-end.
Callable securities totaled $35.4 million at year-end 1999 compared to $24.9
million at year-end 1998. Callable securities are primarily trust preferred
issues with ten year calls.
12
<PAGE>
At year-end 1999, comprehensive income included $7.4 million in net unrealized
losses (pre-tax) on investment securities, compared to $1.4 million in net
unrealized gains at the prior year-end. This $8.7 million holding loss measured
about 10.4% of the average portfolio balance in 1999. This loss was principally
due to the rise in long term interest rates during 1999, and the resulting
decrease in prices of fixed rate investments. Spreads on corporate debt
securities were also affected by increased debt issuance prior to the Year 2000
date. Additionally, unrealized equity losses included declines in utility common
stock prices related to unfavorable market sentiment for certain value related
sectors. Management has evaluated the portfolio and has determined that there
were no situations involving other-than-temporary impairment of the carrying
value of the securities at December 31, 1999.
Management believes that the unrealized losses substantially relate to changes
in capital markets rather than changes in the ongoing earnings and financial
condition fundamentals of the securities issuers. Additional unrealized gains or
losses may result if there are further capital markets changes. Management
anticipates that the securities portfolio will continue to contribute
satisfactorily to the Company's earnings and risk management objectives. The
securities portfolio is closely monitored. The Company also monitors the effect
of unrealized equities losses in regulatory capital (see later Capital Resources
section).
Lending Activities
<TABLE>
<CAPTION>
December 31 (dollars in millions) 1999 1998 1997 1996 1995
- -------------------------------------- ------------- ------------------ ------------------ ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential mortgages $ 54.2 28.3% $ 57.6 31.2% $ 39.3 25.0% $ 41.7 28.2% $ 44.0 28.8%
Commercial mortgages 52.7 27.5 46.7 25.3 45.5 28.9 40.5 27.4 40.7 26.6
Other commercial loans 35.0 18.2 25.1 13.6 18.3 11.6 15.3 10.4 18.8 12.3
Consumer loans 33.8 17.7 32.5 17.6 29.5 18.7 26.1 17.7 22.4 14.7
- --------------------------------- -------- --------- -------- -------- --------- --------- -------- -------- -------- --------
Total regular loans 175.7 91.7 161.9 87.7 132.6 84.2 123.6 83.7 125.9 82.4
Government guaranteed loans 15.9 8.3 22.8 12.3 24.9 15.8 24.2 16.3 27.0 17.6
- --------------------------------- -------- --------- -------- -------- --------- --------- -------- -------- -------- --------
Total loans $ 191.6 100.0 $ 184.7 100.0 $ 157.5 100.0 $ 147.8 100.0 $ 152.9 100.0
- --------------------------------- -------- --------- -------- -------- --------- --------- -------- -------- -------- --------
</TABLE>
Alliance places primary emphasis on the origination of good quality loans as the
basis of its strategy for growth and profitability. The chief focus is on
originating commercial loans, which have higher balances and higher yields, and
which provide the opportunity for cross sales of deposits and other banking
products. Alliance originates commercial loans within its primary market and as
well as throughout Connecticut (excluding Fairfield County) and in south-central
Massachusetts. Alliance also actively promotes consumer loans, chiefly home
equity loans and lines of credit, to households in and around its primary
market. Alliance additionally originates residential mortgages, but these are
primarily sold on a servicing released basis at origination to secondary market
investors. The residential mortgage market is highly competitive and cyclical,
with the narrowest loan spreads. In addition to the above types of loans, which
are referred to as "regular loans," Alliance also owns 100% government
guaranteed (SBA and USDA) loans which were purchased in earlier years as an
alternative to investment securities, at a time when yields on these loans were
more favorable.
During 1999, Alliance recorded growth of $13.8 million (8.5%) in total regular
loans (excluding purchased government guaranteed loans). This was primarily due
to growth of $15.8 million in total commercial loans, representing a 22.0%
increase in the commercial loan portfolio. The Bank has expanded its commercial
lending division and actively solicits business throughout its primary market
and the central Connecticut area. Alliance also recorded a 4.1% increase in its
consumer loan portfolio, and a 2.3% increase in its residential mortgage
portfolio (excluding residential mortgages held for sale, which declined by $4.6
million from an unusually high $5.4 million at year-end 1998). Loan growth in
1998 had been primarily in residential mortgages, fueled by high refinancing
demand due to comparatively low interest rates. Commercial loan growth in 1999
benefited from strong real estate market conditions. Most of the Company's loans
are real estate secured. These loans totaled $155.7 million (81.1% of the total
loan portfolio) at year-end 1999, compared to $133.9 million (72.5% of the total
loan portfolio) at the prior year-end.
Alliance continues to be selective in pursuing commercial loan originations. The
Company utilizes a return on equity model in pricing new commercial loans.
Additionally, in 1999, the Company amended its commercial loan policy to lower
the maximum loan-to-value ratio and to increase the minimum debt service
coverage ratio. These changes were made as an ongoing component of the Company's
risk management process. While current market conditions are strong, Management
continues to evaluate risk carefully as the current economic expansion is
reaching a record duration, with the potential that conditions may soften due to
regular cyclical economic factors. In its residential and consumer lending
areas, nearly all of the Company's loan originations are at a loan-to-value of
80% or less, and the Company has no significant lending based on "sub-prime"
underwriting guidelines.
13
<PAGE>
During 1999, Alliance originated $42.9 million in commercial mortgages and
commercial loans, an increase of $4.7 million (12.3%) over the $38.3 million
originated in 1998. Commercial mortgage growth included both construction and
permanent loans, and a mix of variable rate loans and loans with fixed rates in
the five to ten year range. Residential mortgage originations declined from
$50.9 million in 1998 to $27.0 million in 1999. Residential mortgage
originations in 1999 included $16.0 million in loans sold to the secondary
market, $6.6 million in loans held for portfolio, and $4.4 million of
"Free-Refi" mortgages originated through a streamlined documentation process to
be held in portfolio. Consumer loan originations also declined in 1999, totaling
approximately $10.1 million, compared to $13.2 million in the prior year.
Purchased government guaranteed loans declined by $6.9 million to $15.9 million
in 1999, due to run-off as a result of declining interest rates over the past
few years. The overall yield on loans decreased to 7.88% in 1999 from 8.33% in
the prior year. The impact of the 0.75% prime rate decrease in the second half
of 1998 carried over into the first half of 1999 for one year adjustable rate
mortgages, and the impact of lower rates on refinancings also reduced yields
through the first half of the year. The yield on loans increased to 8.09% in the
fourth quarter of 1999, reflecting the increase in interest rates in the second
half of the year. At year-end 1999, outstanding commitments to originate new
loans totaled $12.6 million, compared to $21.2 million at the prior year-end.
Nonperforming Assets
<TABLE>
<CAPTION>
December 31 (dollars in millions) 1999 1998 1997 1996 1995
- --------------------------------------- ---------------- ---------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Nonaccruing loans $ 1.2 $ 0.6 $ 2.1 $ 3.4 $ 4.4
Foreclosed assets 0.1 0.1 0.6 1.0 2.0
- --------------------------------------- ---------------- ---------------- ---------------- --------------- ----------------
Total nonperforming assets $ 1.3 $ 0.7 $ 2.7 $ 4.4 $ 6.4
- --------------------------------------- ---------------- ---------------- ---------------- --------------- ----------------
Nonperforming assets as a 0.4% 0.2% 1.1% 1.9% 3.0%
percentage of total assets
</TABLE>
Total nonperforming assets remained at comparatively low levels throughout 1999.
Nonperforming assets measured 0.4% of assets at year-end 1999, compared to an
unusually low 0.2% of assets at the prior year-end. Nonperforming assets at
year-end 1999 primarily consisted of $1.1 million of nonaccruing residential
mortgages, due to an increase in mortgage delinquencies in the fourth quarter.
Accruing loans delinquent more than 30 days totaled $1.9 million at year-end
1999, down from $2.7 million at the prior year-end. At year-end 1999, accruing
loans included $1.8 million of classified loans with a potential to become
nonperforming based on identified credit weaknesses. This total increased from
$1.2 million at year-end 1998.
Allowance for Loan Losses
<TABLE>
<CAPTION>
December 31 (in thousands) 1999 1998 1997 1996 1995
- -------------------------------------------------- -------------- -------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Beginning balance $ 3,060 $ 3,000 $ 2,850 $ 2,340 $ 2,090
Charge-offs:
Residential mortgages (28) (150) (108) (74) (102)
Consumer (114) (200) (366) (273) (252)
Commercial (4) (51) (294) (220) (1,438)
- -------------------------------------------------- -------------- -------------- -------------- ------------- --------------
Total Charge-offs (146) (401) (768) (567) (1,792)
- -------------------------------------------------- -------------- -------------- -------------- ------------- --------------
Recoveries:
Residential mortgages 0 1 11 12 8
Consumer 31 101 45 61 53
Commercial 18 180 33 26 6
- -------------------------------------------------- -------------- -------------- -------------- ------------- --------------
Total Recoveries 49 282 89 99 67
- -------------------------------------------------- -------------- -------------- -------------- ------------- --------------
Net Charge-offs (97) (119) (679) (468) (1,725)
Provision for losses 237 179 829 978 1,975
- -------------------------------------------------- -------------- -------------- -------------- ------------- --------------
Ending balance $ 3,200 $ 3,060 $ 3,000 $ 2,850 $ 2,340
- -------------------------------------------------- -------------- -------------- -------------- ------------- --------------
</TABLE>
The total allowance for loan losses increased to $3.20 million at year-end 1999,
compared to $3.06 million a year earlier. For the past two years, loan
chargeoffs and nonperforming loans have been at comparatively low levels. While
the allowance has increased each year, the ratio of the allowance to regular
loans has declined in each of the last three years in recognition of the
improving composition of the portfolio.
The methodology for the determination of the allowance for loan losses is
described in Item 1 Part I of this report. The allowance is primarily determined
based on an analysis of loans pools. In allocating the allowance for loan
losses, amounts allocated to the individual categories of loans include (1)
allowances for specific impaired loans, (2) an allocation of remaining allowance
amounts based on the experience of management and the Company, (3) the overall
risk characteristics of the individual loan category and (4) the current
economic conditions that could affect the individual loan categories.
14
<PAGE>
<TABLE>
<CAPTION>
December 31 (dollars in thousands) 1999 1998 1997 1996 1995
- ---------------------------------------- ------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Allowance for loan losses
by type of loan:
Residential mortgage $ 442 13.8% $ 334 10.9% $ 202 6.7% $ 304 10.7% $ 173 7.4%
Consumer 449 14.0 426 13.9 399 13.3 416 14.6 276 11.8
Commercial 1,842 57.6 1,340 43.9 1,749 58.3 1,860 65.3 1,743 74.5
Unallocated 467 14.6 960 31.3 650 21.7 270 9.4 148 6.3
- ------------------------------------- ------- -------- -------- -------- -------- ------- -------- -------- -------- -------
Total $ 3,200 100.0 $ 3,060 100.0 $ 3,000 100.0 $ 2,850 100.0 $ 2,340 100.0
- ------------------------------------- ------- -------- -------- -------- -------- ------- -------- -------- -------- -------
</TABLE>
The allowance absorbs net loan chargeoffs, which totaled $97 thousand in 1999.
The allowance is increased by the provision for loan losses, which totaled $237
thousand in 1999. Major changes in the components of the allowance included
increases in the residential mortgage and commercial allowances, and a decrease
in the unallocated portion of the allowance. The residential mortgage allowance
increased due to the higher level of nonaccruing loans at year-end. The
commercial allowance increased due to commercial loan growth and to an increase
in the valuation allowance on impaired loans. The unallocated portion of the
allowance remained within a reasonable range based on peer group data. No
reserves are assigned to purchased government guaranteed loans, which are 100%
backed by guarantees from the SBA (Small Business Administration) or the USDA
(United States Department of Agriculture).
Net loan chargeoffs were a comparatively low .05% of average loans in 1999. The
allowance provided adequate coverage of chargeoffs based on historic experience.
The ratio of the allowance to total nonperforming loans was 263% at year-end
1999 and the allowance was deemed to have acceptable coverage of the risks
inherent in the nonperforming loan portfolio, which was comprised primarily of
residential mortgages adequately secured by first liens.
<TABLE>
<CAPTION>
Net charge-offs as a percentage of
average loans by type: 1999 1998 1997 1996 1995
------------------------------------------------- -------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Residential mortgage 0.05% 0.32% 0.24% 0.15% 0.21%
Consumer 0.25 0.32 1.21 0.84 0.88
Commercial (0.02) (0.20) 0.46 0.34 1.77
Total 0.05 0.07 0.46 0.31 1.16
Allowance as a percentage of
outstanding loans by type:
Residential mortgage 0.82% 0.58% 0.51% 0.75% 0.39%
Consumer 1.33 1.31 1.35 1.59 1.23
Commercial 2.10 1.86 2.74 3.33 2.93
Unallocated - - - - -
Subtotal Regular Loans 1.82 1.89 2.26 2.33 1.86
Government guaranteed loans - - - - -
Total 1.67 1.66 1.91 1.95 1.53
</TABLE>
Deposits and Borrowings
<TABLE>
<CAPTION>
December 31 (dollars in millions) 1999 1998 % change
- ------------------------------------------------------ ----------------------- ----------------------- ---------------------
<S> <C> <C> <C>
Demand deposits $ 25.7 $ 25.3 1.5%
NOW deposits 26.1 25.2 3.8
Money market deposits 35.3 29.6 19.4
Savings deposits 44.2 37.2 18.7
Time deposits < $100 thousand 102.1 106.5 (4.2)
Time deposits > $100 thousand 18.0 16.2 11.0
__
- ------------------------------------------------------ ----------------------- ----------------------- ---------------------
Total deposits $ 251.4 $ 240.0 4.8
- ------------------------------------------------------ ----------------------- ----------------------- ---------------------
Personal $ 211.4 $ 202.1 4.6
Commercial 36.4 32.5 12.1
Municipal 3.6 5.4 (32.6)
- ------------------------------------------------------ ----------------------- ----------------------- ---------------------
Total deposits $ 251.4 $ 240.0 4.8%
- ------------------------------------------------------ ----------------------- ----------------------- ---------------------
</TABLE>
15
<PAGE>
Total deposits increased by $11.4 million (4.8%) during 1999. The growth of
total deposits was attributable to new branches, which recorded deposit
increases of about $13.3 million during the year in the towns of Hebron and
South Windsor. The other significant accomplishment was the shift towards lower
cost non-time accounts. The average balance of these accounts increased by $22.8
million (22.8%) in 1999 compared to 1998. In addition to being lower cost, these
accounts are more central to customer relationships and allow more opportunities
for the Bank to distinguish itself through customer service and to offer cross
sales of other products.
The average balance of transactions accounts increased by 12.5%, the average
balance of savings accounts increased by 17.0%, and the average balance of money
market deposits increased by 52.2% in 1999 compared to 1998. In addition to
deposit promotions in new offices, Alliance also offered travel package
incentives and ATM fee reductions during 1999 in transaction account promotions.
Alliance also widened its advertising to include radio promotions during the
year. Alliance has continued to enjoy strong growth in its money market account,
which offers competitive tiered interest rates.
In addition to its on-balance sheet offerings, Alliance also offers a commercial
sweep product which automatically sweeps excess deposit balances into money
market mutual funds. This allows the Company to provide higher rate overnight
investments as part of its overall business transaction account product mix. At
December 31, 1999, sweep balances totaled $18.4 million, a $4.6 million (34%)
increase over a year earlier.
During 1999, Alliance added $12.5 million in medium term borrowings from the
Federal Home Loan Bank of Boston (FHLBB). At year-end 1999, these borrowings
totaled $32.5 million, with an average interest cost of 5.26%. These borrowings
are generally callable by the FHLBB over a 2 - 9 year period. Alliance used
these borrowings as a lower cost alternative to time deposit accounts to provide
funding for growth in the loan and deposit portfolios. In June, 1999 Alliance
issued a $3.5 million trust preferred security at a rate of 9.40%. This
obligation has a thirty year maturity and is callable after ten years. This
security is included in Tier 1 Capital for Alliance, and the proceeds were
downstreamed to provide equity capital to the Bank.
Interest Rate Sensitivity
Alliance manages its assets and liabilities to maximize net interest income,
while also giving consideration to interest rate risk, liquidity, capital
adequacy, customer demand, and other market factors. Interest rate risk is the
sensitivity of net interest income to fluctuations in interest rates over both
the short-term and long-term horizons. Alliance has an Asset Liability Committee
(ALCO) which meets weekly. ALCO establishes policy, sets interest rates and
product prices, monitors the balance sheet, and establishes goals and
strategies. On a monthly basis, the Board of Directors reviews key Asset
Liability ratios and ALCO minutes, and on a quarterly basis the Board reviews
interest rate sensitivity reports, related assumptions, and ALCO strategies.
The following table presents a breakdown of the Company's interest rate
sensitive assets and liabilities on December 31, 1999 by specific timeframes and
cumulatively, based on the assumptions used in the dynamic model. This table is
used to assess the overall repricing sensitivity of the portfolio, which is
primarily measured by the interest rate gap for each timeframe. The Company's
policy limits the one year interest rate gap as a percentage of earning assets,
establishing an acceptable range for this ratio of (15%) - 10%. Maintaining a
one year gap within this range is generally consistent with the 10% earnings at
risk limit discussed above. As the table shows, the one year gap measured $11
million, or 4% of earning assets, at December 31, 1999. Per the Company's Year
2000 liquidity plan, the Company had accumulated excess liquidity in
non-interest sensitive asset accounts at December 31, 1999. Without this
reallocation of liquid funds, the one year gap would have measured $18 million
or 6% of earning assets, at December 31, 1999.
16
<PAGE>
<TABLE>
<CAPTION>
Total
Interest Rate Sensitivity - Repricing Horizon Within 1-5 Over 5
(dollars in millions) One Year Years Years
- ------------------------------------------------------- ----------------------- ----------------------- ----------------------
<S> <C> <C> <C>
December 31, 1999
Earning Assets:
Loans $ 92 $ 59 $ 41
Securities available for sale 10 4 39
Securities held to maturity 4 5 19
Other assets 4 - -
- ------------------------------------------------------- ----------------------- ----------------------- ----------------------
Total earning assets $ 110 $ 68 $ 99
- ------------------------------------------------------- ----------------------- ----------------------- ----------------------
Interest Rate Swap 10 (10) -
Funds Supporting Earning Assets:
NOW deposits $ - $ 5 $ 21
Savings & Money Market 35 9 35
Time deposits < $100,000 59 43 -
Time deposits > $100,000 11 7 -
-
Borrowings 4 28 8
Non-interest bearing funds - - 12
- ------------------------------------------------------- ----------------------- ----------------------- ----------------------
Total funds supporting earning assets $ 109 $ 92 $ 76
- ------------------------------------------------------- ----------------------- ----------------------- ----------------------
December 31, 1999
- ------------------------------------------------------- ----------------------- ----------------------- ----------------------
Gap for period $ 11 $ (34) $ 23
Cumulative gap 11 (23) -
Cumulative gap as percent of total earning assets 4% (8%) -
- ------------------------------------------------------- ----------------------- ----------------------- ----------------------
</TABLE>
Maintaining a relatively predictable twelve month forward stream of earnings is
the main priority of the planning process. Within this framework, the gap will
be adjusted to maximize income based on expected increases or decreases in
interest rates. In recent years, interest rates have decreased to the lowest
levels in several decades. The Company has primarily focused on the risk of
short term upward spikes in interest rates, although the long term prospect
continues to generally favor comparatively low rates. Accordingly, the Company
generally prefers a positive one year interest rate gap, which will allow it to
increase earnings in an upward rate environment such as the one pre-vailing at
year-end 1999. The Company manages optionality in both its assets and
liabilities. Due to this optionality, the economic value of equity decreases in
the event of large interest rate changes in either direction; this scenario is
viewed by the Company as unlikely over the long term.
Based on the model previously used by the Company, the cumulative gaps at
year-end 1998 were ($22) million and ($63) million in the one year and 1-5 year
time frames, measuring (8%) and (23%) of total earning assets, respectively.
Based on the current model and assumptions, the cumulative gaps at that date
were $6 million and $19 million, respectively, measuring 2% and 7% of total
earning assets.
The primary strategies utilized by the Company in managing its interest rate
risk include adjusting the pricing of loans and deposits, timing the execution
of securities purchases and borrowings, and varying the amount of cash and
equivalents. At year-end 1999, Alliance maintained a comparatively high level of
cash and equivalents, and was promoting medium term time accounts in order to
lengthen its funding sources. Also, during 1999, Alliance entered into an
interest rate swap maturing in June 2001 which had the effect of increasing
short term asset sensitivity.
See also Item 7A.
Liquidity and Cash Flows
The Company's primary source of funds is dividends from the Bank, and its
primary use of funds is dividends to shareholders and semi-annual interest
payments on its capital trust preferred obligation. Dividends from the Bank are
primarily paid from current period cash earnings of the Bank, and secondarily
from other liquid assets of the Bank. Dividends from the Bank to the Company are
subject to restrictions as is further described in the Shareholder's Equity note
to the consolidated financial statements. In 1999, the issuance of a $3.5
million trust preferred obligation was an additional source of funds to
Alliance. These proceeds were used to provide an additional equity investment in
the Bank.
17
<PAGE>
Liquidity is also needed by the Bank to fund loan originations and the use of
credit commitments, along with deposit withdrawals and maturing borrowings. The
Bank manages its day-to-day liquidity by maintaining short term investments
and/or utilizing short term borrowings. In addition to its FHLBB relationship,
the Bank maintains $27 million in credit facilities for short term borrowings
and repurchase agreements. Additionally, in 1999, the Bank became eligible to
obtain short term advances from the Federal Reserve Bank of Boston. Over the
year, loan originations and asset purchases are funded by amortization of loans
and investments, as well as by deposit growth and FHLBB borrowings. In 1999, the
primary use of funds were the origination of loans and the purchase of
investment securities, and the primary sources of funds were growth in savings
and money market deposits, and new FHLBB borrowings. In the event of additional
funds needs, the Bank could choose to liquidate short term investments or to
obtain funds from the investment portfolio either by selling securities
available for sale or obtaining loans backed by investment securities.
Additionally, the portfolio of government guaranteed loan certificates
represents a readily marketable pool of assets.
During 1999, the Bank maintained comparatively high levels of short term
investments, which averaged $11.1 million for the year. This provided the Bank
with ample liquidity for day to day operations, and there was accordingly
minimal use of short term borrowings. The transfer of securities to held to
maturity did not affect planned use of liquidity sources. Because deposit growth
outpaced loan growth through much of the year, excess funds were accumulated in
anticipation of additional future loan growth. Additionally, the Bank's Year
2000 liquidity plan called for the accumulation of additional excess liquidity
at year-end. There was no significant need that developed for these funds as a
result of Year 2000 related events, although the Bank did not receive an extra
influx of cash balances as it sometimes has on the last day of the year.
Capital Resources
Total shareholders' equity decreased by $3.8 million, with net income of $2.9
million offset by a $6.4 million reduction in accumulated other comprehensive
income due to unrealized securities losses (see additional information in
"Securities" section of this discussion). Capital ratios for the Company and the
Bank exceeded all applicable regulatory requirements for all periods presented.
At December 31, 1999, the Risk Based Capital Ratios for the Company and the Bank
were 10.3% and 9.7%, respectively, compared to the Company's minimum objective
of 10.0% and to the regulatory minimum requirement of 8.0%. Book value per share
declined to $6.21 at the end of 1999, compared to $7.94 at the previous
year-end, including ($2.43) per share in accumulated other compehensive income
at year-end 1999. The ratio of equity to assets declined to 4.67% at year-end
1999. The Company does not place primary reliance on this ratio in assessing its
overall capital adequacy. As discussed in the "Interest Rate Sensitivity"
section, the Company evaluates the overall sensitivity of its portfolio to
interest rate risk and manages the economic value of equity at risk within
policy guidelines, and in conjunction with goals for the level of earnings and
the amount of earnings at risk.
In recognition of continued earnings growth, the Company increased the quarterly
cash dividend to six cents per share, from five cents per share, beginning in
the second quarter of 1999. The dividend payout ratio increased to 18.1% in 1999
from 15.5% in the prior year. Additionally, in 1999, Alliance issued a $3.5
million trust preferred obligation which contributed a like amount to Tier 1
regulatory capital for the Company and the Bank, but which is accounted for as
long term debt, and which pays interest at 9.4%, which is tax deductible. This
form of financing allowed the Company to improve regulatory capital levels using
an instrument with the lower costs associated with debt financing, as compared
to equity financing.
Impact of New Accounting Standards
Certain new accounting standards apply to future period reporting, as is more
fully discussed in the Recent Accounting Developments section of the Summary of
Significant Accounting Policies in the notes to the Consolidated Financial
Statements.
<PAGE>
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 implemented a Year 2000 project plan to address systems and
facilities changes necessary to properly recognize dates after 1999, assigned
implementation responsibilities and 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
implemented their own Year 2000 plans. The Company's project also addressed its
other suppliers, customers, and other constituents, as well as remediation and
business resumption contingency plans.
The Company has not encountered any significant Year 2000 related events and
currently does not anticipate that any such events will be encountered. The
Company's plan continues through December 31, 2001 and is focused on sensitive
dates established by its regulators. The Company has not been informed of any
significant Year 2000 related events among its customers and major
counterparties and currently does not anticipate that any such events will be
encountered. News releases by regulators and industry sources support this view
of the Company's environment.
18
<PAGE>
The primary uncertainty remaining is the ability of third party systems
providers to have identified and modified 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. The
Company's plans included both information technology ("IT") and non-IT systems.
Most of the Company's primary Year 2000 exposures related to IT systems,
primarily to the vendor of its account processing systems. This is a large
national banking systems vendor. This vendor has reported that there were no
significant Year 2000 related failures in its systems. The total expenses
incurred by the Company in conducting its Year 2000 program were about $50
thousand, including consulting and contingency related expenses. The Company
accelerated about $350 thousand in capital expenditures in 1998 and 1999 related
to computer systems and disaster recovery systems during the execution of its
Year 2000 plan. Virtually all of the computer systems located in the Company
were replaced during this period.
19
<PAGE>
Comparison of 1998 VERSUS 1997
Alliance recorded net profit of $2.56 million for the year 1998 ($1.03 per
diluted share), up 26.8% from 1997 earnings of $2.02 million ($.82 per diluted
share). For the year 1998, the Company achieved a return on average assets of
1.02% and a return on average equity of 14.2%. Return on average equity
increased to 15.6% in the last quarter of the year. 1998 results reflect growth
in the marketplace. The Company's loans grew by 17.3% and deposits grew by 8.2%
over the year.
Earnings growth in 1998 was primarily due to growth in the Bank's business
volume and to improved loan quality. This strong growth in business volume
produced a $1.07 million (13.4%) increase in net interest income for the year.
Higher net interest income resulted from $36.3 million (15.3%) of growth in
earning assets to $272.2 million. Interest income also benefited from an
improvement in the tax equivalent net interest margin to 4.02% in 1998 compared
to 3.80% in the previous year.
The resolution of problem assets resulted in a $2.0 million reduction in
nonperforming assets to $0.7 million at year-end 1998 from $2.7 million at
year-end 1997. In conjunction with this improvement, the provision for loan
losses declined by $650 thousand compared to 1997. Problem asset reductions also
resulted in $175 thousand in additional interest income recognition. At year-end
1998, nonperforming assets measured 0.2% of total assets, compared to 1.1% a
year ago.
Total non-interest income increased by $458 thousand and non-interest expense
increased by $936 thousand in the year 1998 compared to 1997. Non-interest
income benefited from growth of $78 thousand (6.9%) in service charges and fees
due to higher account volumes. Additionally, net gains on securities contributed
$243 thousand in increased earnings for 1998, realizing the benefits of
improving market valuations and active portfolio management. Compensation
expense in 1998 included staff additions related to growth in commercial lending
and to branch expansion. Growth in other expense in 1998 included expenses
related to increased business volume, computer system upgrades, and branch
expansion. Non-interest expense was flat across most other categories from year
to year.
The effective tax rate increased due to a $106 thousand second quarter charge
related to an increase in the deferred tax asset valuation allowance. The
Company initiated steps toward the formation of a passive investment subsidiary
in accordance with changes in Connecticut tax statutes, which reduced the
effective tax rate beginning in 1999. Additionally, 1997 results included the
benefit of a reduction in the valuation allowance on the deferred tax asset
totaling $150 thousand.
Total assets at year-end 1998 were $283.6 million, an increase of $36.4 million
(14.8%) over the prior year-end. During the last quarter, the Company took
advantage of favorable market conditions to increase its debt security portfolio
by about $20 million, funded by medium term borrowings. Year-end shareholders'
equity totaled $18.2 million, representing a book value of $7.94 per share, and
measuring 6.42% of assets.
Diluted earnings per share of $1.03 in 1998 benefited from a treasury stock
repurchase of 200,599 shares in the amount of $3.1 million, which was announced
on July 2, 1998. Additionally, the quarterly cash dividend to shareholders
increased by 50% as a result of a three-for-two common stock split effected as a
stock dividend which was paid on May 26, 1998. Prior period earnings, dividends,
and book value per share were restated for this change. The Company had
completed a four-for-three common stock split in 1997 which, together with the
1998 split, accomplished a cumulative two-for-one split over the last two years.
20
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
During 1999, Alliance improved its interest rate risk measurement, adopting the
use of a quarterly dynamic simulation model, and performing a detailed analysis
of assumptions and model output. Assumptions are made for each major category of
interest bearing assets and liabilities regarding their expected average lives,
their repricing frequencies and characteristics (including the optionality of
prepayment speeds and call provisions), and reinvestment expectations. In
adopting the new simulation model, Alliance updated and changed its modeling
assumptions, drawing more on secondary market information, peer group
comparisons, and a review of actual product behaviors over the last ten years.
The most significant impact of assumption changes was a lengthening of the
economic lives of non-time deposit accounts, and a shortening of the economic
lives of most loan categories. Modeling assumptions involve significant
estimations and uncertainties, and actual results may differ from estimated
results. Factors which could cause such differences include economic conditions,
banking industry profitability and competitive factors, changing consumer
preferences, and changes in capital markets behavior.
The simulation model evaluates changes in income which might result from
different levels of rate shocks. Policy limits are set with a primary focus on
the simulated impact of a 2.0% sudden rate shock on annualized net interest
income (earnings at risk) and on the economic value of financial instruments
(equity at risk). The Company's policy establishes a 10% limit on a decrease in
net interest income as a result of either a positive or negative 2.0% rate
shock, and the Company was within this limit at December 31, 1999. The economic
value of financial instruments is based on a net present value calculation of
long term simulated interest income and expense. The Company's policy
establishes a limit on the economic value of equity at risk equal to 2.5% of
total assets, and the Company was within this limit at December 31, 1999. The
Company was also within the above income and equity at risk limits at December
31, 1998 based on the current model and assumptions. The value of equity at risk
in 1999 averaged 1.4% of total assets, with a high of 2.1% and a low of 0.8%.
See also Interest Rate Sensitivity section in Item 7.
21
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Exhibit 99.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
------------------------------------------------------------------------
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
Incorporated by reference from Alliance's Proxy Statement for the 2000 Annual
Meeting of the Shareholders to be filed with the Securities and Exchange
Commission.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
Incorporated by reference from Alliance's Proxy Statement for the 2000 Annual
Meeting of the Shareholders to be filed with the Securities and Exchange
Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
Incorporated by reference from Alliance's Proxy Statement for the 2000 Annual
Meeting of the Shareholders to be filed with the Securities and Exchange
Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Incorporated by reference from Alliance's Proxy Statement for the 2000 Annual
Meeting of the Shareholders to be filed with the Securities and Exchange
Commission.
22
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(a) All schedules have been omitted as the required information is either
included herein or in the Proxy Statement, or is inapplicable.
(b) Reports on Form 8-K for Fourth Quarter
--------------------------------------
(i) On October 4, 1999, the Company filed a Form 8-K reporting, under Item
5, an appointment to the Board of Directors.
(ii) On October 27,1999, the Company filed a Form 8-K reporting, under Item
5, the appointment of a new shareholder services agent.
(c) Exhibit Index
The exhibits listed below are included in this report or are incorporated herein
by reference to the identified document previously filed with the Securities and
Exchange Commission as set forth parenthetically.
3(i) Certificate of Incorporation of Registrant (Exhibit 99.1 to the
Registration Statement on Form 8-A filed September 23, 1997).
3(ii) Bylaws of Registrant (Exhibit 99.2 to the Registration Statement on
Form 8-A filed September 23, 1997).
10(i) Change in Control Agreement between Tolland Bank and
Joseph H. Rossi, dated January 5, 1996 (Exhibit 10(i) to the Report
on Form 10-K filed March 27, 1998).
10(ii) 1997 Stock Incentive Plan for Directors, Officers and Key employees
(Exhibit 4.3 to the Registration Statement on Form S-8 filed
November 6, 1997).
10(iii) Supplemental Executive Retirement Plan and Agreement between
Tolland Bank and Joseph H. Rossi, dated December 14, 1999.
10(iv) Directors' Deferred Compensation Plan (Exhibit
10(iv) to the Report on Form 10-K filed on March 27, 1998).
10(v) 1999 Stock Option Plan for Non-Employee Directors (Exhibit 4.3 to
the Registration Statement on Form S-8 filed October 28, 1999).
10(vi) Cash Bonus Plan (Exhibit 10(vi) to the Report on Form 10-K filed on
March 27, 1998).
21. Subsidiaries of Registrant.
23. Independent Auditors' Consent
27. Financial Data Schedule.
99. Consolidated Financial Statements of the Registrant.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on February 22, 2000.
ALLIANCE BANCORP OF NEW ENGLAND, INC.
by
/s/ Joseph H. Rossi
- --------------------
Joseph H. Rossi
President/CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following directors and officers on behalf of the
Company on February 22, 2000:
/s/ Robert C. Boardman /s/ Patricia A. Noblet
- ------------------------- -------------------------
Robert C. Boardman Patricia A. Noblet
Director Director
/s/ Joseph P. Capossela /s/ Kenneth R. Peterson
- ------------------------- -------------------------
Joseph P. Capossela Kenneth R. Peterson
Director Vice Chairman
/s/ William E. Dowty, Jr. /s/ Mark L. Summers
- ------------------------- -------------------------
William E. Dowty, Jr. Mark L. Summers
Director Director
/s/ D. Anthony Guglielmo /s/ Joseph H. Rossi
- ------------------------- -------------------------
D. Anthony Guglielmo Joseph H. Rossi
Chairman Director/President/CEO
/s/ Reginald U. Martin /s/ David H. Gonci
- ------------------------- -------------------------------------
Reginald U. Martin David H. Gonci
Director Senior Vice President/Chief Financial
Officer/Treasurer
/s/ Douglas J. Moser
- -------------------------
Douglas J. Moser
Director
24
<PAGE>
Exhibit 10(iii)
TOLLAND BANK
SUPPLEMENTAL EXECUTIVE RETIREMENT INCOME PLAN
1.01 Synopsis. This document sets forth the Supplemental Executive
Retirement Plan (the "Plan"), established and maintained by Tolland Bank (the
"Bank") for the benefit of Joseph H. Rossi (the "Participant"). The Plan shall
provide a supplemental benefit at age 65 equal to 70% of Highest Five-Year
Average Compensation with a 50% offset for Social Security and a 100% offset for
employer-provided benefits under other qualified retirement and non-qualified
deferred compensation plans. Reduced Early Retirement benefits are payable if
the Participant continues service with the Bank until at least age 50. Early
Retirement benefits can commence beginning anytime after the earliest age at
which Social Security benefits are payable to the Participant Subsidized Early
Retirement benefits are payable if before age 65 the Participant is terminated
by the Bank involuntarily and without cause (as defined). No benefits are
payable on account of death, or if the Participant terminates service for cause
(as defined) or competes with the Bank. Accrued benefits shall be paid from the
general funds of the Bank. The Plan Administrator shall interpret and implement
this Plan.
ELIGIBILITY AND PARTICIPATION
2.01 Eligibility. Joseph H. Rossi shall be the only Participant
hereunder.
BENEFITS
3.01 Benefits. If the Participant remains employed by the Bank until
age 65, the Bank will pay to the Participant, commencing as soon as practical
following Retirement, an annuity for the life of the Participant (the
"Supplemental Benefit") having an annual payment equal to seventy percent (70%)
multiplied by the Participant's Highest Average Compensation, reduced by the
offset set forth under Section 3.02.
Retirement is the first date on which the Participant has ceased
employment with the Bank and attained age 65.
3.02 Offset. The reduction specified in Section 3.01 shall be the sum
of the following:
(i) 50% of the Participant's Primary Insurance Amount (as
defined below);
<PAGE>
(ii) the annual amount of the Participant's benefits
(expressed as a single life annuity) under any non-qualified plan of deferred
compensation maintained and funded by the Bank (other than this Plan); and
(iii) the annual amount of the Participant's benefits
(expressed as a single life annuity) attributable to employer contributions
(other than an account attributable to a salary reduction arrangement described
in 401(k) of the Internal Revenue Code) from any defined benefit or defined
contribution plan qualified under Section 401(a) of said Code maintained or
funded by the Bank, assuming for purposes hereunder that the Participant
received the amount of employer matching contributions attributable to the
maximum salary reduction contributions which would have been permissible for the
Participant in question to make.
In the case of a defined contribution plan or a deferred compensation
plan under (ii) or (iii) above where the Participant's benefits are expressed in
the form of an individual account or an amount otherwise than as a life annuity,
the Participant's benefits attributable to employer contributions shall be
determined by converting the Participant's account or amount at the time of
determination (including the value of any in-service distributions and loans
from the account but excluding amounts attributable to rollover from another
employer's plan) into an actuarially equivalent single life annuity determined
in accordance with factors as then stated in any defined benefit plan maintained
by the Bank or in which the Bank participates, and if there is no such defined
benefit plan, in accordance with such reasonable factors as shall be determined
by the Bank.
3.03 Highest Average Compensation. The Participant's Highest Average
Compensation shall be the average of the Participant's gross compensation for
the five (5) calendar years (whether or not consecutive) during the
Participant's last ten years of employment by the Bank in which such
compensation is the highest.
3.04 Primary Insurance Amount. The Primary Insurance Amount is the
basic annual Social Security retirement benefit actually payable to the
Participant (regardless of whether actually paid) at the earliest age at which
the Participant's Social Security old age benefits are payable, or if at such
earliest age the Participant has not then ceased employment with the Bank, then
at the age at which the Participant subsequently ceases employment with the
Bank. If the Participant fails to provide information to the Plan Administrator
sufficient to determine the Participant's Primary Insurance Amount, then the
Participant's Primary Insurance Amount shall be the maximum such amount payable
under Social Security at that date. The Primary Insurance Amount shall be
determined without regard to subsequent changes in the benefit, procedural or
other conditions (such as but not limited to earned income) which may result in
nonpayment, reduction or loss of Social Security benefits.
-2-
<PAGE>
3.05 Early Retirement. If the Participant ceases employment with the
Bank after attainment of age 50, then the Participant shall receive beginning at
age 65 an Early Retirement Benefit, which shall be the Supplemental Benefit set
forth in Section 3.01, as reduced by the offset in Section 3.02, and as further
reduced by a fraction. The numerator of said reduction fraction shall be the
Participant's number of months of service with the Bank after the Effective Date
and the denominator shall be the number of months of service with the Bank after
the Effective Date that the Participant would have had if the Participant would
have remained continuously employed with the Bank until age 65. In lieu of
beginning the Early Retirement Benefit hereunder at age 65, the Participant may
elect to commence to receive the Early Retirement Benefit after attainment of
the earliest age at which Social Security old age benefits are payable to the
Participant. If the Participant elects to so commence payment of Early
Retirement Benefits before age 65, then the Early Retirement Benefit shall be
reduced by 5/9 of one percent (.5555%) for each month by which the commencement
precedes the month in which the Participant attains age 65.
3.06 Disability Prior to Retirement. In the event the Participant shall
become disabled, mentally or physically, which disability shall entitle the
Participant to disability benefits under the Bank's group long-term disability
program, the Participant will for purposes of this Plan continue during such
disability to be treated as employed by the Bank (regardless of whether the
Participant is in fact so employed) and continue to accrue months of service for
purposes of Section 3.05. No benefits shall be payable hereunder until such time
as the Participant's Bank group long-term disability benefits cease.
3.07 Forfeiture for Cause or Competition. If the Participant's
employment with the Bank terminates for cause, then the Participant shall
immediately forfeit all benefits hereunder. Termination for cause shall include
only termination of employment (by resignation or otherwise) on account of
breach of fiduciary duty involving personal profit, willful violation of law
involving moral turpitude, or willful failure to perform or adhere to explicitly
stated duties after reasonable notice and an opportunity to cure such failure to
perform or adhere. In addition, if within twelve (12) months following
termination of employment with the Bank, while benefits are remaining to be paid
hereunder, the Participant becomes an employee, director, or consultant of, or
otherwise provides services to, a bank, credit union or other financial
institution having a principal place of business within thirty-five (35) miles
of the municipal limits of Vernon, Connecticut, then thereupon the Participant
shall immediately forfeit all benefits hereunder.
3.08 Death Benefits. There are no death benefits under this Plan. Upon
the Participant's death, all benefits hereunder shall cease.
-3-
<PAGE>
ADMINISTRATIVE PROVISIONS
4.01 Source of Benefits. Benefits shall be paid from the general assets
of the Bank. No Participant or beneficiary shall have a right to a benefit
hereunder greater than that of an unsecured general creditor of the Bank.
Nothing herein shall be deemed to create a trust of any kind or to create any
fiduciary relationship whatsoever.
4.02 Alienation of Benefits. Benefits are not subject to alienation,
anticipation or assignment by a Participant or beneficiary and are not subject
to being attached or reached and applied by any creditor of the Participant.
4.03 Withholding. The Bank reserves the right to withhold from payment
of contributions or benefits such amount of income, payroll, and other taxes as
the Bank determines is advisable.
4.04 Plan Administrator. The Plan Administrator shall have discretion
to operate, interpret, and implement the Plan. The Plan Administrator shall be
the Bank acting through its Board of Directors, or such individual Director or
Committee of Directors as the Board shall select from time to time. The Plan
Administrator's decisions and determinations (including determinations of the
meaning and reference of terms used in this Plan) shall be conclusive upon all
persons. The Plan Administrator shall be the Named Fiduciary for purposes of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA").
4.05 Intent. This Plan is intended to be unfunded and maintained by the
Bank primarily for the purpose of providing deferred compensation for a select
group of management or highly compensated employees within the meaning of
Section 201(2) of ERISA. Benefits are intended not to be taxable to Participants
under the Internal Revenue Code of 1986 as amended (the "Code") until paid. This
Plan shall be construed and interpreted in a manner consistent with the
foregoing intentions.
4.06 Governing Law. This Plan shall be governed by the law of the State
of Connecticut to the extent that it is not preempted by federal law.
4.07 Effective Date. This Plan shall be effective as of October 1,
1999.
4.08 Plan Year. The Plan Year shall be the 12-month period ending
December. The initial Plan Year shall be the period ending December 31, 1999.
4.09 Entire Agreement. This Plan document constitutes the entire
agreement of the Bank with respect to the subject matter thereof.
4.10 Amendment or Termination. The Bank reserves the right to terminate
or amend the Plan, in whole or in part, at any time.
-4-
<PAGE>
4.11 No Contract of Employment. This Plan shall not constitute an
express or implied contract of employment between the Bank and any Participant.
4.12 Successors. This Plan shall be binding on any successor-in-
interest of the Bank, and no agreement with respect to sale or transfer of
substantially all of the assets of the Bank shall be effective unless the
successor agrees to assume all liabilities hereunder.
4.13 Enhanced Early Retirement Benefits. If at any time before
attaining age 65 the Participant is terminated by the Bank without cause as
defined in Section 3.07, then for purposes of Section 3.05 (regarding Early
Retirement), the Participant shall be credited with months of service equal to
the number the Participant would have if he had remained employed by the Bank
through age 65, and the Participant may elect to commence payment of benefits,
subject to a reduction of 5/9 of one percent (.5555%) for each month by which
the commencement precedes the month in which the Participant actually attains
age 65.
CLAIMS PROCEDURE
5.01 Claims and Review. All inquiries and claims respecting the Plan
shall be in writing and shall be directed to the Plan Administrator at such
address as may be specified from time to time.
(a) Claims. In the case of a claim respecting a benefit under
the Plan, a written determination allowing or denying the claim shall be
furnished by the Plan Administrator to the claimant promptly upon receipt of the
claim. A denial or partial denial of a claim shall be dated and signed by the
Plan Administrator and shall clearly set forth: (1) the specific reason or
reasons for the denial; (2) specific reference to pertinent Plan provisions on
which the denial is based; (3) a description of any additional material or
information necessary for the claimant to perfect the claim and an explanation
of why such material or information is necessary; and (4) an explanation of the
review procedure set forth below.
If no written determination is furnished to the claimant within thirty
(30) days after receipt of the claim, then the claim shall be deemed denied and
the thirtieth (30th) day after such receipt shall be the determination date.
(b) Review. A claimant may obtain review of an adverse
determination by filing a written notice of appeal with the Plan Administrator
within sixty (60) days after the determination date or, if later, within sixty
(60) days after the receipt of a written notice denying the claim. Thereupon the
Named Fiduciary shall appoint one or more persons who shall conduct a full and
fair review, which shall include the right: (1) to be represented by a
spokesman; (2) to present a written statement of facts and of the claimant's
interpretation of any pertinent document, statute or regulation; and (3) to
-5-
<PAGE>
receive a prompt written decision clearly setting forth findings of fact and the
specific reasons for the decision written in a manner calculated to be
understood by the claimant and containing specific references to pertinent Plan
provisions on which the decision is based. A decision shall be rendered no more
than sixty (60) days after the request for review, except that such period may
be extended for an additional sixty (60) days if the person or persons reviewing
the claim determine that special circumstances, including the advisability of a
hearing, require such extension. The Named Fiduciary may appoint itself, one or
more of its members, or any other person or persons whether or not connected
with the Bank to review a claim.
All applicable governmental regulations regarding claims and review
shall be observed.
EXECUTED this 14th day of December, 1999.
TOLLAND BANK
By: /s/ Robert C. Boardman
Robert C. Boardman, Director
-6-
<PAGE>
Exhibit 21
Subsidiaries of Registrant
Subsidiary of Alliance Bancorp of New England, Inc.:
Tolland Bank
Alliance Capital Trust I
Subsidiaries of Tolland Bank:
Asset Recovery Systems, Inc.
Tolland Investment Corporation
<PAGE>
Exhibit 23
Independent Auditors' Consent
Consent of Independent Auditors
The Board of Directors
Alliance Bancorp of New England, Inc.:
We consent to incorporation by reference in the Registration Statements (No.
333-39645 and No. 333-89869), on Form S-8 of Alliance Bancorp of New England,
Inc. of our report dated January 25, 2000, relating to the consolidated balance
sheets of Alliance Bancorp of New England, Inc. and subsidiaries as of December
31, 1999 and 1998, and the related consolidated income statements, consolidated
statements of changes in shareholders' equity and consolidated statements of
cash flows for each of the years in the three-year period ended December 31,
1999, which report is included herein.
/s/ KPMG LLP
Hartford, Connecticut
March 28, 2000
<PAGE>
Exhibit 99
Independent Auditors' Report
To the Shareholders and Board of Directors of Alliance Bancorp of
New England, Inc.:
We have audited the accompanying consolidated balance sheets of Alliance Bancorp
of New England, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated income statements, statements of changes in shareholders'
equity, and statements of cash flows for each of the years in the three-year
period ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Alliance Bancorp of
New England, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
---------------------
KPMG LLP
Hartford, Connecticut
January 25, 2000
<PAGE>
Management's Report on the Financial Statements
The Management of Alliance Bancorp of New England, Inc. is responsible for the
accuracy and content of the consolidated financial statements and other
information in this annual report. The consolidated financial statements have
been prepared in conformity with generally accepted accounting principles
applied on a consistent basis in all material respects, and information
presented relies on Management's judgment where material estimates are required.
The consolidated financial statement disclosures include the fair values of
financial instruments, which include many assets and liabilities. They are not a
representation of the fair values or liquidation values of total assets and
liabilities, or the value of present and future business activities of the
Company.
The accounting systems which record, summarize, and report data are supported by
internal controls that are augmented by written policies, internal audits and
staff training programs. The Audit Committee of the Board of Directors is made
up solely of outside directors who are not employees of the Company. It directs
and reviews the activities of the internal audit function and meets at least
annually with representatives of KPMG LLP, the Company's independent auditors.
KPMG LLP, a firm of Certified Public Accountants, has been appointed by the
Audit Committee of the Board of Directors to conduct an independent audit and to
express an opinion as to the fairness of the presentation of the consolidated
financial statements of Alliance Bancorp of New England, Inc., in accordance
with generally accepted accounting principles.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
December 31, December 31,
(in thousands except share data) 1999 1998
- ---------------------------------------------------------------------- --------------------------- ----------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 18,584 $ 6,760
Short-term investments 4,028 13,456
- ---------------------------------------------------------------------- --------------------------- ----------------------------
Total cash and cash equivalents 22,612 20,216
Securities available for sale (at fair value) 53,156 58,556
Securities held to maturity
(fair value of $27,201 in 1999 and $15,519 in 1998) 27,857 15,431
Residential mortgage loans 54,197 57,555
Commercial mortgage loans 52,694 46,724
Other commercial loans 34,965 25,105
Consumer loans 33,841 32,515
Government guaranteed loans 15,935 22,827
- ---------------------------------------------------------------------- --------------------------- ----------------------------
Total loans 191,632 184,726
Less: Allowance for loan losses (3,200) (3,060)
- ---------------------------------------------------------------------- --------------------------- ----------------------------
Net loans 188,432 181,666
Premises and equipment, net 5,587 4,276
Foreclosed assets, net 53 80
Other assets 9,240 3,356
- ---------------------------------------------------------------------- --------------------------- ----------------------------
Total assets $ 306,937 $ 283,581
- ---------------------------------------------------------------------- --------------------------- ----------------------------
Liabilities and Shareholders' Equity
Demand deposits $ 25,707 $ 25,328
NOW deposits 26,120 25,155
Money market deposits 35,321 29,585
Savings deposits 44,199 37,238
Time deposits 120,044 122,679
- ---------------------------------------------------------------------- --------------------------- ----------------------------
Total deposits 251,391 239,985
Borrowings 39,575 23,610
Other liabilities 1,624 1,790
- ---------------------------------------------------------------------- --------------------------- ----------------------------
Total liabilities 292,590 265,385
Commitments and contingencies (Note 17)
Preferred stock, ($.01 par value; 100,000 shares
authorized, none issued) -- --
Common stock, ($.01 par value; authorized 4,000,000
shares; issued 2,509,882 in 1999 and 2,492,552 in 1998
outstanding 2,309,283 in 1999 and 2,291,953 in 1998) 25 25
Additional paid-in capital 11,429 11,306
Retained earnings 11,618 9,223
Accumulated other comprehensive income (loss), net (5,616) 751
Treasury stock (200,599 shares) (3,109) (3,109)
- ---------------------------------------------------------------------- --------------------------- ----------------------------
Total shareholders' equity 14,347 18,196
- ---------------------------------------------------------------------- --------------------------- ----------------------------
Total liabilities and shareholders' equity $ 306,937 $ 283,581
- ---------------------------------------------------------------------- --------------------------- ----------------------------
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
Consolidated Income Statements
<TABLE>
<CAPTION>
Years ended December 31
(dollars in thousands except share data) 1999 1998 1997
- ------------------------------------------------------- ---------------------- --------------------- -------------------------
<S> <C> <C> <C>
Interest Income
Loans $ 14,637 $ 13,896 $ 12,138
Debt securities 4,606 2,620 3,233
Dividends on equity securities 1,214 1,224 1,047
Short-term investments 557 631 293
- ------------------------------------------------------- ---------------------- --------------------- -------------------------
Total interest and dividend income 21,014 18,371 16,711
- ------------------------------------------------------- ---------------------- --------------------- -------------------------
Interest Expense
Deposits 8,831 8,984 8,487
Borrowings 1,837 359 264
- ------------------------------------------------------- ---------------------- --------------------- -------------------------
Total interest expense 10,668 9,343 8,751
- ------------------------------------------------------- ---------------------- --------------------- -------------------------
Net Interest Income 10,346 9,028 7,960
Provision For Loan Losses 237 179 829
- ------------------------------------------------------- ---------------------- --------------------- -------------------------
Net interest income after provision for loan losses 10,109 8,849 7,131
Non-Interest Income
Service charges and fees 1,492 1,226 1,148
Net gain on securities 75 1,204 961
Net gain (loss) on assets 115 (11) (148)
- ------------------------------------------------------- ---------------------- --------------------- -------------------------
Total non-interest income 1,682 2,419 1,961
Non-Interest Expense
Compensation and benefits 4,008 3,632 3,199
Occupancy 658 618 586
Data processing and equipment 970 829 903
Office and insurance 543 524 553
Purchased services 923 980 655
Other 663 764 515
- ------------------------------------------------------- ---------------------- --------------------- -------------------------
Total non-interest expense 7,765 7,347 6,411
- ------------------------------------------------------- ---------------------- --------------------- -------------------------
Income before income taxes 4,026 3,921 2,681
Income tax expense 1,104 1,363 664
- ------------------------------------------------------- ---------------------- --------------------- -------------------------
Net Income $ 2,922 $ 2,558 $ 2,017
- ------------------------------------------------------- ---------------------- --------------------- -------------------------
Per Share Data
Basic earnings per share $ 1.27 $ 1.07 $ .85
- ------------------------------------------------------- ---------------------- --------------------- -------------------------
Diluted earnings per share $ 1.23 $ 1.03 $ .82
- ------------------------------------------------------- ---------------------- --------------------- -------------------------
Average basic shares outstanding 2,297,048 2,389,828 2,382,654
Average additional dilutive shares 74,439 98,208 77,087
- ------------------------------------------------------- ---------------------- --------------------- -------------------------
Average diluted shares outstanding 2,371,487 2,488,036 2,459,741
- ------------------------------------------------------- ---------------------- --------------------- -------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Shareholders' Equity
Accumulated
Additional other
Years ended December 31 Common paid-In Retained com-prehensive Treasury
(in thousands except share data) stock capital earnings income stock Total
- --------------------------------------------- ------------- ------------ ------------- -------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ 1,173 $ 8,918 $ 5,731 $ (233) $ 15,589
- --------------------------------------------- ------------- ------------ ------------- ------------ ------------ -------------
Comprehensive income
Net income 2,017 2,017
Unrealized gains on securities,
net of reclassification adjustment 876 876
-------------
Comprehensive income 2,893
Dividends declared ($0.12 per share) (278) (278)
Shares issued 17 185 202
Four for three stock split
effected as a stock dividend 399 (399)
Conversion of par value
to $.01 per share from $1.00
due to formation of Alliance Bancorp (1,574) 1,574
Issuance of shares pursuant to exercise
of stock options 1 396 397
- --------------------------------------------- ------------- ------------ ------------- ------------ ------------ -------------
Balance, December 31, 1997 $ 16 $ 11,073 $ 7,071 $ 643 $ 18,803
- --------------------------------------------- ------------- ------------ ------------- ------------ ------------ -------------
Comprehensive income
Net income 2,558 2,558
Unrealized gains on securities,
net of reclassification adjustment 108 108
-------------
Comprehensive income 2,666
Dividends declared ($0.17 per share) (397) (397)
Three for two stock split
effected as a stock dividend 9 (9)
Shares issued 233 233
Purchase of treasury stock (3,109) (3,109)
- --------------------------------------------- ------------- ------------ ------------- ------------ ------------ -------------
Balance, December 31, 1998 $ 25 $ 11,306 $ 9,223 $ 751 $ (3,109) $ 18,196
- --------------------------------------------- ------------- ------------ ------------- ------------ ------------ -------------
Comprehensive income
Net income 2,922 2,922
Unrealized losses on securities,
net of reclassification adjustment (6,367) (6,367)
-------------
Comprehensive income (3,445)
Dividends declared ($0.23 per share) (527) (527)
Shares issued 123 123
- --------------------------------------------- ------------- ------------ ------------- ------------ ------------ -------------
Balance, December 31, 1999 $ 25 $ 11,429 $ 11,618 $ (5,616) $ (3,109) $ 14,347
- --------------------------------------------- ------------- ------------ ------------- ------------ ------------ -------------
Disclosure of reclassification amount
Years ended December 31 (in thousands) 1999 1998 1997
- ------------------------------------------------------ ---------------------- ---------------------- -----------------------
Unrealized holding gains (losses) arising during
the year net of income tax expense (benefit)
of ($3,113), $522 and $1,002, respectively $ (6,317) $ 830 $ 1,453
Less reclassification adjustment for
(gains) losses included in net income
net of income tax expense
of $25, $482 and $384, respectively (50) (722) (577)
- ------------------------------------------------------ ---------------------- ---------------------- -----------------------
- ------------------------------------------------------ ---------------------- ---------------------- -----------------------
Net unrealized gains (losses) on securities $ (6,367) $ 108 $ 876
- ------------------------------------------------------ ---------------------- ---------------------- -----------------------
</TABLE>
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31 (in thousands) 1999 1998 1997
- -------------------------------------------------------- ---------------------- ---------------------- ---------------------
<S> <C> <C> <C>
Operating Activities:
Net income $ 2,922 $ 2,558 $ 2,017
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Provision for loan losses 237 179 829
Depreciation and amortization 437 621 500
Net gain on securities and other assets (190) (1,193) (813)
Loans originated for sale (15,999) (27,105) (14,741)
Proceeds from loans sold 20,572 21,853 15,962
(Decrease) increase in other liabilities (68) 936 175
Decrease (increase) in other assets (2,890) 386 348
- -------------------------------------------------------- ---------------------- ---------------------- ---------------------
Net cash provided (used in) by operating
activities 5,021 (1,765) 4,277
Investing Activities:
Securities available for sale:
Proceeds from amortization and maturities 7,991 2,802 3,219
Proceeds from sales of securities 8,370 32,081 23,453
Purchases of securities (39,098) (49,660) (23,585)
Securities held to maturity:
Proceeds from amortization and maturities 6,261 4,518 741
Net increase in loans (11,684) (22,651) (12,963)
Proceeds from sales of foreclosed assets 139 1,097 2,021
Purchases of premises and equipment (2,047) (473) (88)
Proceeds from sales of premises and equipment 476 - -
- -------------------------------------------------------- ---------------------- ---------------------- ---------------------
Net cash used by investing activities (29,592) (32,286) (7,202)
Financing Activities:
Net increase in interest-bearing deposits 11,027 14,842 13,880
Net increase in demand deposits 379 3,410 2,245
Proceeds from issuance of FHLBB advances 16,500 21,929 6,052
Principal repayments of FHLBB advances (4,110) (2,058) (9,719)
Net increase (decrease) in other borrowings 3,575 (2,000) (1,000)
Stock options exercised 123 233 599
Cash dividends paid (527) (397) (278)
Purchase of treasury stock - (3,109) -
- -------------------------------------------------------- ---------------------- ---------------------- ---------------------
Net cash provided by financing activities 26,967 32,850 11,779
- -------------------------------------------------------- ---------------------- ---------------------- ---------------------
Net Change in cash and cash equivalents 2,396 (1,201) 8,854
Cash and cash equivalents at beginning of the year 20,216 21,417 12,563
- -------------------------------------------------------- ---------------------- ---------------------- ---------------------
Cash and cash equivalents at end of the year $ 22,612 $ 20,216 $ 21,417
- -------------------------------------------------------- ---------------------- ---------------------- ---------------------
Supplemental Information On Cash Payments
Interest expense $ 10,552 $ 9,289 $8,737
Income taxes 780 797 494
Supplemental Information On Non-cash Transactions
Net loans transferred to foreclosed assets 108 216 2,128
Securities transferred to held to maturity 20,963 - -
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
1. Summary Of Significant Accounting Policies
Principles of Business and Consolidation. Alliance Bancorp of New England, Inc.
("Alliance" or the "Company") is a one bank holding Company, chartered in
Delaware. Alliance owns 100% of the stock of Tolland Bank (the "Bank"), a
Connecticut chartered savings bank. Alliance also wholly owns Alliance Capital
Trust I (the "Trust"), a Delaware chartered trust which was formed in 1999 and
issued $3.5 million in privately offered trust preferred securities. Proceeds
from this issuance were invested in subordinated notes issued by Alliance, which
invested the note proceeds in new common stock issued by the Bank.
Tolland Bank provides consumer and commercial banking services from its nine
offices located in and around Tolland County, Connecticut. The Bank's deposits
are insured up to applicable limits by the Federal Deposit Insurance Corporation
("FDIC"). Tolland Bank wholly owns Tolland Investment Corporation ("TIC"), a
passive investment corporation chartered in Connecticut in 1999 to own and
service real estate secured loans purchased from the Bank. The Bank also wholly
owns a Connecticut chartered corporation named Asset Recovery Systems, Inc.
("ARS") which is a foreclosed asset liquidation subsidary. The consolidated
financial statements include Alliance, the Trust, Tolland Bank, TIC, and ARS.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
Basis of Preparation and Presentation. The consolidated financial statements
have been prepared and presented in conformity with generally accepted
accounting principles. Unless otherwise noted, all dollar amounts presented in
the financial statements and note tables are rounded to the nearest thousand
dollars, except share data. Certain prior period amounts have been reclassified
to conform with current financial statement presentation.
The Company uses the accrual method of accounting for all material items of
income and expense. The Company is required to make certain estimates and
assumptions in preparing these statements. The most significant estimates are
those necessary in determining the allowance for loan losses, the valuation of
foreclosed assets, and the determination of fair values of financial
instruments. Factors affecting these estimates include national economic
conditions, the level and trend of interest rates, local market conditions, and
real estate trends and values.
Securities. Debt securities that the Company has the positive intent and ability
to hold to maturity are classified as held to maturity securities and reported
at amortized cost. Trading securities, if any, will consist of securities bought
principally for the purpose of selling them in the near term. Unrealized gains
and losses on trading securities are included in earnings. Securities not
classified as either held to maturity securities or trading securities are
classified as available for sale securities and reported at fair value, with
unrealized net gains or losses excluded from earnings and reported in a separate
component of shareholders' equity net of applicable income taxes. Any decline in
the value of a security below its cost considered to be other than temporary is
reflected as a realized loss in the Consolidated Income Statements. Realized
gains or losses on the sale of securities are generally computed on a specific
identified cost basis and reported in Net Gain (Loss) on Securities and Other
Assets in the Consolidated Income Statements. Premiums and discounts are
recognized as an adjustment of yield by the interest method. Calls of securities
are accounted for as sales.
Loans. Total loans are reported at the principal amount outstanding, and
adjusted for the net amount of deferred fees and costs, premiums and discounts,
except for charged-off loans as discussed below. Net loans are total loans less
the amount of the allowance for loan losses. Residential mortgage loans held for
sale, included in residential mortages on the balance sheet, are stated at the
lower of amortized cost or market value. Gains or losses are determined using
the specific identification method. Premiums and discounts are recognized as an
adjustment of yield by the interest method based on the contractual terms of the
loan. Commitment fees are considered to be an adjustment to the loan yield. Loan
origination fees and certain direct costs of loan origination are also deferred
and accounted for as an adjustment to yield. The unamortized balance of deferred
fees and costs is credited or charged to the consolidated income statement at
the time a loan repays.
Interest income receivable is included in Other Assets on the Consolidated
Balance Sheets. Most of the Company's loans require interest payments monthly in
arrears. The Company generally places loans on nonaccrual when a payment becomes
more than three months past due. The Company may also place a loan on nonaccrual
sooner if a concern develops as to the ultimate collection of principal or
interest. The Company may grant a waiver from nonaccrual status on certain
commercial loans which are well secured and in the process of collection.
Generally, when a commercial loan is placed on nonaccrual status, any interest
receivable over 90 days is charged-off, and interest receivable on all other
loans is charged off entirely. Payments received on nonaccruing loans are
normally applied first against unpaid interest. The Company recognizes as
separate assets rights to service mortgage loans for others. Mortgage servicing
rights are assessed for impairment based on the fair value of those rights, and
any impairment is recognized through a valuation allowance. Mortgage servicing
rights are amortized in proportion to and over the period of, estimated net
servicing income. All related amortization and impairment valuations are charged
to mortgage servicing income.
<PAGE>
Allowance for Loan Losses and Provision for Loan Losses. The allowance for loan
losses is maintained at a level estimated by the Company to be adequate to
absorb estimated credit losses associated with the loan portfolio, including all
binding commitments to lend. The Company's estimation of the adequacy of the
allowance is based on an evaluation of the portfolio, past loan loss and
recovery experience, current economic conditions, the age and composition of the
portfolio, loan loss experience at peer group competitors and other relevant
factors. The provision for loan losses is a charge to current period income
necessary to establish the loan loss allowance at the level estimated to be
adequate by the Company.
The Company's Credit Committee is responsible for assessing the adequacy of the
loan loss allowance and for recommending any loan loss provision necessary to
establish the allowance at an adequate level. The Committee maintains the
allowance in accordance with generally accepted accounting principles and with
regulatory accounting principles. The Committee also considers regulatory
guidelines in effect regarding the establishment of the loan loss allowance. The
Committee provides its quarterly assessment to the Board of Directors for
approval of the amount of the loan loss allowance.
The Company maintains a detailed methodology for assessing the loan loss
allowance. This methodology is based on dividing the loan portfolio into
homogeneous loan pools, and dividing the commercial loan portfolio into pools
based on risk rating. A reserve is established for each pool of loans.
Additional reserves are maintained on classified loans, and management may
establish specific additional allocations for certain loans based on
management's assessment. Impairment reserves are maintained in accordance with
SFAS 114. Additionally, a management allocation is assigned to the overall
allowance based on management's assessment of the overall risks and trends of
the portfolio, and other applicable factors.
A loan is considered impaired when it is probable that the Company will not be
able to collect all amounts due according to the contractual terms of the
agreement. Management excludes large groups of smaller balance homogeneous
loans, including residential mortgages and consumer loans, which are evaluated
collectively for impairment. The amount of impairment for all impaired loans is
determined by the difference between the present value of the expected cash
flows related to the loan, using the original contractual interest rate, and its
recorded value, or as a practical expedient, for collateral dependent loans, the
difference between the appraised value of the collateral and the recorded amount
of the loan. When foreclosure is probable, impairment is measured based on the
fair value of the collateral. The Company's method of recognition of interest
income on impaired loans is consistent with the method of recognition of
interest on all loans.
The Company's estimates of the collectibility of principal and interest rely in
many cases on estimates of future borrower cash flows and market conditions and
expectations. In addition, federal and state regulatory agencies, as an integral
part of their examination process, periodically review the Company's allowance
for losses on loans. Based on information available to them at the time of their
examination, and on regulatory guidelines then in effect, such agencies may
require the Company to recognize additions to the allowance for loan losses.
Accordingly, current estimates of loan losses may vary from future estimates and
from ultimate loan loss experience.
Loan Charge-offs. Most nonaccruing consumer loans are automatically charged-off
once they become 120-180 days past due depending on the circumstances,
regardless of how well secured they are. Other nonaccruing loans are charged off
in whole or in part when it has been determined that there has been a loss of
principal. For real estate secured loans, this determination is normally made in
conjunction with a current appraisal analysis and the transfer of the loan to
foreclosed assets. Charge-offs and recoveries are booked to the allowance for
loan losses. Initial write-downs on recently acquired foreclosed assets are also
charged-off against the allowance for loan losses.
Foreclosed Assets. Foreclosed assets include foreclosed real estate, real estate
deeded to the Company, and personal property repossessed by the Company, net of
a valuation allowance for specific properties. Foreclosed assets are transferred
from loans at the lower of cost or fair value less selling costs, with any
necessary write down from carrying value being charged against the allowance for
loan losses.
The Company periodically obtains and analyzes appraisals of foreclosed real
estate. If the fair value less selling costs is less than the carrying value of
these assets, these assets are written down to that value by increasing the
amount of the valuation allowance. Additionally, the Company may recognize a
gain or loss on the ultimate disposition of foreclosed assets. The net amount of
these gains and provisions to increase the valuation allowance are reported in
Net Gain (Loss) on Securities and Other Assets in the Consolidated Income
Statements. The carrying value of foreclosed real estate is subject, in general,
to the same uncertainties discussed above regarding the Allowance for Loan
Losses. Net receipts and disbursements related to the operations of foreclosed
real estate are included in Other Expense in the Consolidated Income Statements.
<PAGE>
Premises and Equipment. Property and equipment are stated at cost less
accumulated depreciation. Depreciation is charged to operations on a
straight-line basis over the estimated useful lives of the related assets.
Bank-Owned Life Insurance. The cash surrender value of bank-owned life insurance
is included in Other Assets in the Consolidated Balance Sheets. Increases in
cash surrender value are included in Non-Interest Income in the Consolidated
Income Statements.
Intangible Assets. Intangible assets related to branch acquisitions are
amortized on a straight line basis over 10-15 years. On a periodic basis, the
Company reviews the intangible assets for events or changes in circumstances
that may indicate that the carrying value of the assets may not be recoverable.
Income Taxes. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss carry-forwards. Deferred tax assets are
reduced by a valuation allowance when it is more likely than not that such
deferred tax assets will not be realized. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Stock Options. The Company measures the compensation cost for its stock option
plans using the intrinsic value method prescribed by Accounting Principles Board
(APB) Opinion 25, Accounting for Stock Issued to Employees. No compensation cost
is recognized if, at the grant date, the exercise price of the options is equal
to the fair market value of the Company's common stock. In the notes to its
consolidated financial statements, the Company makes pro forma disclosures of
net income and earnings per share as if the fair value method of accounting in
Statement of Financial Accounting Standards (SFAS), Accounting for Stock-Based
Compensation (SFAS 123), has been applied. Under this method, compensation cost
of stock options is measured at the grant date based on the fair market value of
the award and is recognized over the service period.
Disclosures of Fair Values of Financial Instruments. Fair value estimates are
made at a specific point in time, based on relevant market information and
information about the financial instrument. These estimates do not reflect any
premium or discount that could result from offering for sale, at one time, the
Company's entire holdings of a particular financial instrument. Because no
market exists for a portion of the Company's financial instruments, fair value
estimates were based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and, therefore, cannot
be determined with precision. Changes in assumptions could affect the estimates
significantly. Fair value estimates were based on existing on and off-balance
sheet financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that are not
considered financial instruments. In addition, the tax ramifications relating to
the realization of the unrealized gains and losses may have a significant effect
on fair value estimates and have not been considered in the estimates. Fair
value methods and assumptions are set forth below for the Company's financial
instruments.
The carrying amounts reported in the balance sheets for cash and short-term
instruments approximate those assets' fair values. Fair values of investment
securities were based on quoted market prices where available. If quoted market
prices were not available, fair values were based on quoted market prices of
comparable instruments. For loans, the fair values were calculated by
discounting scheduled future cash flows using current interest rates offered on
loans with similar terms adjusted to reflect the estimated credit losses
inherent in the portfolio. The carrying amounts of accrued interest receivable
approximates fair values.
The fair values of deposits with no stated maturity, was, by definition, equal
to their carrying value. The fair value of time deposits was based on the
discounted value of contractual cash flows, calculated using the discount rates
that equaled the interest rates offered at the valuation date for deposits of
similar remaining maturities. The carrying amounts of short-term borrowings
approximated their fair values. Rates currently available for debt with similar
terms and remaining maturities were used to estimate fair value of long-term
borrowings. The carrying amount of accrued interest payable approximates fair
value. The fair value of off balance sheet instruments is based on fees
currently charged for such instruments.
<PAGE>
Cash Flow Reporting. The Company uses the indirect method to report cash flows
from operating activities. Under this method, net income is adjusted to
reconcile it to net cash flow from operating activities. Net reporting of cash
transactions affecting balance sheet items has been used where permitted. The
Company considers due from banks and short-term investments to be cash
equivalents.
Comprehensive Income. Comprehensive income includes net income and any changes
in equity from non-owner sources that are not included in the income statement,
including changes in unrealized investment gains and losses, net of applicable
income taxes. Comprehensive income is 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.
Business Segments. An operating segment is a component of a business for which
separate financial information is available that is evaluated regularly by the
chief operating decision-maker in deciding how to allocate resources and
evaluate performance. The Company's operations are limited to financial services
provided within the framework of a community bank, and decisions are based
generally on specific market areas and or product offerings. Accordingly, based
on the financial information now regularly evaluated by the Company's chief
operating decision-maker, the Company operates in a single business segment and
detailed segment information is not provided.
Recent Accounting Developments. In April, 1998, the American Institute of
Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-5,
Reporting on the Costs of Start-up Activities. This statement requires that
costs of start-up activities and organization costs be expensed as incurred. The
statement became effective for financial statements for fiscal years beginning
after December 15, 1998. Initial application of this statement was to be
reported as the cumulative effect of a change in accounting principle. The
adoption of this statement did not have a material impact on the Company's
financial position or results of operations.
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. As amended by
SFAS 137, this statement 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.
<PAGE>
2. Cash And Cash Equivalents
<TABLE>
<CAPTION>
Short-term investments at December 31 (in thousands) 1999 1998
- ------------------------------------------------------------------------ ------------------------- -------------------------
<S> <C> <C>
Federal funds sold $ 4,000 $ 13,450
FHLBB Ideal Way account 28 6
- ------------------------------------------------------------------------ ------------------------- -------------------------
Total short-term investments $ 4,028 $ 13,456
- ------------------------------------------------------------------------ ------------------------- -------------------------
</TABLE>
The Company is required to maintain certain average vault cash and cash reserve
balances with the Federal Reserve Bank of Boston. Cash and due from banks
included amounts so required of $682,000 and $757,000 at December 31, 1999 and
December 31, 1998, respectively.
<PAGE>
3. Securities
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
December 31, 1999 (in thousands) Cost Gains Losses Value
- ------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Securities available for sale
U.S. Government and agency $ 6,751 $ - $ (298) $ 6,453
U.S. Agency mortgage-backed 2,936 - (52) 2,884
Other debt securities 30,991 116 (2,831) 28,276
Marketable equity 16,364 87 (2,891) 13,560
Non-marketable equity 1,983 - - 1,983
- ------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
Total available for sale $ 59,025 $ 203 $ (6,072) $ 53,156
- ------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
Securities held to maturity
U.S. Government and agency $ 1,971 $ - $ (8) $ 1,963
U.S. Agency mortgage-backed 6,752 1 (80) 6,673
Other debt securities 19,134 10 (579) 18,565
- ------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
Total held to maturity $ 27,857 $ 11 $ (667) $ 27,201
- ------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
Amortized Unrealized Unrealized Fair
December 31, 1998 (in thousands) Cost Gains Losses Value
- ------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
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
- ------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
Total available for sale $ 57,176 $ 1,639 $ (259) $ 58,556
- ------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
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
- ------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
Total held to maturity $ 15,431 $ 116 $ (28) $ 15,519
- ------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
</TABLE>
The amortized cost, estimated fair value and average yield of debt securities
are shown below by contractual maturity, except for mortgage-backed (including
collateralized mortgage obligations) and asset-backed instruments, which are
classified based on their expected average lives. The average yield is
calculated based on amortized cost. The expected average lives have been
determined based on prepayment and related assumptions. Accordingly, the
expected average lives may differ from actual lives.
<TABLE>
<CAPTION>
Amortized Fair Average
December 31, 1999 (in thousands) Cost Value Yield
- ------------------------------------------------------ ----------------------- ----------------------- ----------------------
<S> <C> <C> <C>
Securities available for sale
Due in 1 year or less $ 6,028 $ 6,015 5.19%
Due after 1 to 5 years 2,859 2,824 7.19
Due after 5 to 10 years 3,556 3,309 7.20
Due after 10 years 28,235 25,465 7.68
- ------------------------------------------------------ ----------------------- ----------------------- ----------------------
Total available for sale $ 40,678 $ 37,613 7.23%
- ------------------------------------------------------ ----------------------- ----------------------- ----------------------
Securities held to maturity
Due in 1 year or less $ 2,543 $ 2,578 6.22%
Due after 1 to 5 years 6,592 6,479 6.01
Due after 5 to 10 years - - -
Due after 10 years 18,722 18,144 7.80
- ------------------------------------------------------ ----------------------- ----------------------- ----------------------
Total held to maturity $ 27,857 $ 27,201 7.23%
- ------------------------------------------------------ ----------------------- ----------------------- ----------------------
</TABLE>
<PAGE>
As of December 31, 1999, securities having an amortized cost of $3,018,000 were
pledged to secure treasury, tax and loan and other deposits, and securities with
an amortized cost of $5,750,000 were pledged to secure a discount window
borrowing capability. During 1999, securities totaling $20,963,000 which were
purchased as available for sale, were subsequently transferred to held to
maturity.
All securities sold in 1999, 1998 and 1997 were securities available for sale.
The book value of securities called in 1999 was $4,107,000 with gross gains of
$24,000 and the book value of securities called in 1998 was $20,910,000, with
gross gains of $40,000. The book value of debt and equity securities sold
(including securities called), together with gross gains and gross losses, were
as follows:
<TABLE>
<CAPTION>
Years ended December 31 (in thousands) 1999 1998 1997
- ------------------------------------------------------ ----------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Debt securities sold
Book value at sale $ 5,799 $ 18,908 $ 8,716
Gross gains 64 4 7
Gross losses (51) - -
Equity securities sold
Book value at sale $ 2,496 $ 11,969 $ 13,776
Gross gains 151 1,260 954
Gross losses (89) (60) -
</TABLE>
<PAGE>
4. Total Loans
<TABLE>
<CAPTION>
December 31 (in thousands) 1999 1998
- ------------------------------------------------------------------------ -------------------------- --------------------------
<S> <C> <C>
Residential mortgage loans $ 54,197 $ 57,555
Commercial mortgage loans 52,694 46,724
Other commercial loans:
Construction 11,817 6,062
Other commercial real estate secured 8,979 5,658
Other commercial, not real estate secured 14,169 13,385
- ------------------------------------------------------------------------ -------------------------- --------------------------
Total other commercial loans 34,965 25,105
Consumer loans:
Installment 12,020 12,602
Home equity line loans 18,071 17,906
Other consumer loans 3,750 2,007
- ------------------------------------------------------------------------ -------------------------- --------------------------
Total consumer loans 33,841 32,515
- ------------------------------------------------------------------------ -------------------------- --------------------------
Total regular loans 175,697 161,899
Purchased government guaranteed loans 15,935 22,827
- ------------------------------------------------------------------------ -------------------------- --------------------------
Total loans $ 191,632 $ 184,726
- ------------------------------------------------------------------------ -------------------------- --------------------------
Net deferred costs included in total loans $ 475 $ 489
</TABLE>
The majority of the Company's loans are secured by real estate located within
Tolland County and surrounding communities. Real estate loan activities are
governed by the Company's loan policies, and loan to value ratios are based on
an analysis of the collateral backing each loan. At December 31, 1999 and 1998
residential mortgage loans held for sale totaled $781,000 and $5,354,000,
respectively. Following is additional information about the Company's
nonaccruing loans and impaired loans.
<TABLE>
<CAPTION>
December 31 (in thousands) 1999 1998
- ------------------------------------------------------------------------ ------------------------- -------------------------
<S> <C> <C>
Total nonaccruing loans $ 1,218 $ 574
Accruing loans past due 90 days or more - -
Impaired loans:
Impaired loans - valuation allowance required 852 420
Impaired loans - no valuation allowance required 102 252
- ------------------------------------------------------------------------ ------------------------- -------------------------
Total Impaired Loans $ 954 $ 672
Total valuation allowance on impaired loans 280 110
Commitments to lend additional funds for impaired loans - -
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years ended December 31 (in thousands) 1999 1998 1997
- ------------------------------------------------------------------------ ---------------- ----------------- ----------------
<S> <C> <C> <C>
Additional interest income that would have been earned on year- end loans if
they had been accruing based on originals terms:
Nonaccruing loans $ 52 $ 38 $ 310
Loans restructured prior to January 1, 1995 - - 17
Total income recognized on impaired loans 96 84 111
Average recorded investment in impaired loans 844 1,928 3,949
</TABLE>
In the ordinary course of business, the Company makes loans to its directors and
officers and their related interests for substantially the same terms prevailing
at the time of origination for comparable transactions with others. As of
December 31, 1999, and 1998, loans to related parties totaled $573,000 and
$199,000 respectively. During 1999, originations of related party loans totaled
$271,000, payments on related party loans totaled $274,000 and transfers totaled
$377,000. Loans serviced for others totaled $6,912,000 and $7,280,000 at
December 31, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
5. Allowance For Loan Losses
Years ended December 31 (in thousands) 1999 1998 1997
- ------------------------------------------------------ ----------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Balance at beginning of year $ 3,060 $ 3,000 $ 2,850
Charge-offs (146) (401) (768)
Recoveries 49 282 89
Provision for loan losses 237 179 829
- ------------------------------------------------------ ----------------------- ---------------------- ----------------------
Balance at end of year $ 3,200 $ 3,060 $ 3,000
- ------------------------------------------------------ ----------------------- ---------------------- ----------------------
6. Premises and Equipment, Net
December 31 (in thousands) 1999 1998
- ------------------------------------------------------------------------ ------------------------- -------------------------
Land $ 1,436 $ 1,222
Buildings 4,864 4,375
Furniture, fixtures, and equipment 2,879 3,452
- ------------------------------------------------------------------------ ------------------------- -------------------------
Total property and equipment 9,179 9,049
Less: accumulated depreciation and amortization (3,592) (4,773)
- ------------------------------------------------------------------------ ------------------------- -------------------------
Property and equipment, net $ 5,587 $ 4,276
- ------------------------------------------------------------------------ ------------------------- -------------------------
7. Foreclosed Assets, Net
December 31 (in thousands) 1999 1998
- ------------------------------------------------------------------------ ------------------------- -------------------------
Foreclosed and repossessed assets $ 53 $ 80
Foreclosed asset valuation allowance - -
- ------------------------------------------------------------------------ ------------------------- -------------------------
Net foreclosed assets $ 53 $ 80
- ------------------------------------------------------------------------ ------------------------- -------------------------
</TABLE>
Transactions in the valuation allowance for foreclosed assets, and foreclosed
asset gains and losses included in net gain (loss) on assets in the Consolidated
Income Statements, were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Years ended December 31 (in thousands) 1999 1998 1997
- ------------------------------------------------------ ----------------------- ---------------------- ----------------------
Transactions in the valuation allowance:
Balance at beginning of year $ - $ 360 $ 222
Write-downs, net - (360) -
Provision for losses, net - - 138
- ------------------------------------------------------ ----------------------- ---------------------- ----------------------
Balance at end of year $ - $ - $ 360
- ------------------------------------------------------ ----------------------- ---------------------- ----------------------
Gains and losses included in net gain (loss) on assets in the statements of
income:
Gross gains $ 6 $ 34 $ 31
Gross losses (2) (45) (179)
- ------------------------------------------------------ ----------------------- ---------------------- ----------------------
Net gain (loss) $ 4 $ (11) $ (148)
- ------------------------------------------------------ ----------------------- ---------------------- ----------------------
</TABLE>
<PAGE>
8. Other Assets
<TABLE>
<CAPTION>
December 31 (in thousands) 1999 1998
- ------------------------------------------------------------------------ ------------------------- -------------------------
<S> <C> <C>
Bank-owned life insurance $ 2,599 $ -
Accrued loan interest receivable 1,385 1,336
Other accrued interest and dividends receivable 1,226 841
Purchased deposit premium, net 60 105
Goodwill, net 109 139
Mortgage servicing rights 32 44
Deferred tax asset, net 2,984 -
Income tax receivable 305 305
All other assets 540 586
- ------------------------------------------------------------------------ ------------------------- -------------------------
Total other assets $ 9,240 $ 3,356
- ------------------------------------------------------------------------ ------------------------- -------------------------
</TABLE>
9. Deposits
<TABLE>
<CAPTION>
December 31 (dollars in thousands) 1999 1998
- ------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
Amount Avg. Rate Amount Avg. Rate
- ------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Demand deposits $ 25,707 -% $ 25,328 -%
NOW deposits 26,120 1.82 25,155 1.82
Money market deposits 35,321 4.31 29,585 4.05
Savings deposits 44,199 2.48 37,238 2.30
- ------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
Total non-time deposits 131,347 2.36 117,306 2.14
Time deposits, by remaining
period to maturity:
Within 1 year 66,721 4.72 87,488 5.12
After 1, but within 2 years 28,693 5.19 23,556 5.45
After 2, but within 3 years 12,592 5.80 3,875 5.76
After 3 years 12,038 5.73 7,760 5.84
- ------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
Total time deposits 120,044 5.05 122,679 5.25
- ------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
Total deposits $251,391 3.64 $239,985 3.73
- ------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
</TABLE>
Amounts and average rates of time deposits of $100,000 or more, by remaining
period to maturity, were as follows:
<TABLE>
<CAPTION>
December 31 (dollars in thousands) 1999 1998
- ------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
Amount Avg. Rate Amount Avg. Rate
- ------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Within 3 months $ 5,085 4.86% $ 5,226 4.80%
After 3 months, but within 6 months 2,615 5.01 3,322 4.67
After 6 months, but within 12 months 1,546 4.48 5,001 5.38
After 12 months 8,709 5.46 2,619 6.01
- ------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
Total time deposits of $100,000 or more $17,955 5.14% $16,168 5.15%
- ------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
</TABLE>
Interest expense and interest paid on deposits is summarized as follows:
<TABLE>
<CAPTION>
Years ended December 31 (in thousands) 1999 1998 1997
- ------------------------------------------------------ ----------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Interest Expense
NOW deposits $ 423 $ 379 $ 361
Money market deposits 1,385 914 285
Savings deposits 993 809 850
Time deposits 6,030 6,882 6,991
- ------------------------------------------------------ ----------------------- ---------------------- ----------------------
Total deposit interest expense $ 8,831 $ 8,984 $ 8,487
- ------------------------------------------------------ ----------------------- ---------------------- ----------------------
Interest Paid
Time deposits of $100,000 or more $ 851 $ 727 $ 773
Total deposit interest paid 8,831 9,003 8,470
</TABLE>
<PAGE>
10. Borrowings
<TABLE>
<CAPTION>
December 31 (dollars in thousands) 1999 1998
- -------------------------------------------------------- --------------- ---------------- ----------------- ----------------
Due Date Amount Rate Amount Rate
- -------------------------------------------------------- --------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
FHLBB advances by remaining period to maturity:
Within 1 year $ 3,500 6.11% $ 110 6.98%
After 1, but within 2 years - - 3,500 6.11
After 2, but within 3 years - - - -
After 3 years 32,500 5.26 20,000 4.90
- -------------------------------------------------------- --------------- ---------------- ----------------- ----------------
Total FHLBB advances 36,000 5.34 23,610 5.09
- -------------------------------------------------------- --------------- ---------------- ----------------- ----------------
Capital trust preferred obligation 3,500 9.40 - -
Secured borrowing 75 9.75 - -
- -------------------------------------------------------- --------------- ---------------- ----------------- ----------------
Total Borrowings $ 39,575 5.71% $ 23,610 5.09%
- -------------------------------------------------------- --------------- ---------------- ----------------- ----------------
</TABLE>
The Company has a line of credit equal to 2% of total assets with the Federal
Home Loan Bank of Boston (FHLBB). The Company may borrow additional funds from
the FHLBB subject to certain limitations. To secure advances from the FHLBB, the
Company has pledged certain qualifying assets, as defined in the FHLBB Statement
of Credit Policy. To obtain additional loan advances, the Company may be
required to invest in additional amounts of FHLBB stock, per FHLBB guidelines.
FHLBB advances maturing after three years at December 31, 1999 were callable at
the option of the lender as follows: $10,000,000 in 2001, $7,500,000 in 2002,
$5,000,000 in 2003, $5,000,000 in 2004, and $5,000,000 in 2008. At December 31,
1999, the Company had a $20,000,000 facility for repurchase agreements, and two
lines of credit for unsecured federal funds borrowings for $4,000,000 and
$3,000,000. The Company maintains compensating balances of $30,000 related to
the $4,000,000 line of credit. The Company paid $1,721,000, $286,000, and
$267,000, in interest on borrowings during the years ended December 31, 1999,
1998, and 1997, respectively. The capital trust preferred obligation bears
interest at 9.40% and has a maturity of 30 years, with early redemption at par
at the Company's option after ten years, or in the event of certain regulatory
or tax changes. Additionally, payments on this obligation may be suspended by
the Company for up to five years under certain circumstances. This obligation
meets the requirements for inclusion in Tier 1 regulatory capital.
11. Shareholders' Equity
Treasury Stock
On July 1, 1998, the Company purchased 200,599 common shares from an
institutional shareholder in a privately negotiated transaction totaling $3.11
million. The shares are being held as treasury stock.
Accumulated Other Comprehensive Income (Loss)
<TABLE>
<CAPTION>
December 31 (dollars in thousands) 1999 1998
- ------------------------------------------------------------------------ ------------------------- -------------------------
<S> <C> <C>
Net gain (loss) on securities available for sale $ (5,869) $ 1,379
Net unamortized loss on securities held to maturity (2,285) (77)
Income tax effect 2,538 (551)
- ------------------------------------------------------------------------ ------------------------- -------------------------
Total Accumulated Other Comprehensive Income (Loss) $ (5,616) $ 751
- ------------------------------------------------------------------------ ------------------------- -------------------------
</TABLE>
The net unamortized loss on securities held to maturity relates to securities
transferred in 1999 and in 1994 from securities available for sale to securities
held to maturity.
Dividends
The Company's principal asset is its investment in its bank subsidiary. As such,
the Company's ability to pay dividends to its shareholders is largely dependent
on the ability of the Bank to pay dividends to the Company. The declaration of
cash dividends is dependent on a number of factors, including regulatory
limitations, financial conditions, and the Bank's operating results. The
shareholders of the Company will be entitled to dividends only when, and if,
declared by the Company's Board of Directors out of funds legally available
therefrom. The declaration of future dividends will be subject to favorable
operating results, financial conditions, tax considerations and other factors.
The Federal Deposit Insurance Corporation regulations require banks to maintain
certain capital ratios as noted below which may otherwise restrict the ability
of the Bank to pay dividends to the Company. The Bank's ability to pay dividends
is also governed by State of Connecticut banking regulations.
<PAGE>
Regulatory Capital Requirements
The Company and Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and Bank must meet specific capital guidelines that involve quantitative
measures of the Company's and Bank's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Company's and Bank's capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures defined by regulation to ensure capital adequacy require
the Company and Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1
capital to average assets. Management believes, as of December 31, 1999, that
the Company and Bank met all capital adequacy requirements to which they were
subject. As of December 31, 1999, the most recent notification from the FDIC as
of September 30, 1999 categorized the Bank as Well Capitalized under the
regulatory framework for prompt corrective action.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
(dollars in thousands) Actual Adequacy Purposes Action Provisions
- ------------------------------------- -------------- ------------- -------------- -------------- -------------- --------------
Amount Ratio => Amount => Ratio => Amount => Ratio
- ------------------------------------- -------------- ------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Consolidated, December 31, 1999:
Risk-based Total Capital $ 24,454 10.3% $ 18,895 8.0% $ 23,619 10.0%
Risk-based Tier 1 Capital 21,499 9.1 9,448 4.0 14,172 6.0
Tier 1 Leverage Capital 21,499 7.0 12,281 4.0 15,351 5.0
Tolland Bank, December 31, 1999:
Risk-based Total Capital $ 23,110 9.7% $ 19,005 8.0% $ 23,756 10.0%
Risk-based Tier 1 Capital 20,139 8.5 9,502 4.0 14,254 6.0
Tier 1 Leverage Capital 20,139 6.6 12,282 4.0 15,353 5.0
Consolidated, December 31, 1998:
Risk-based Total Capital $ 20,127 10.5% $ 15,286 8.0% $ 19,108 10.0%
Risk-based Tier 1 Capital 17,302 9.0 7,643 4.0 11,465 6.0
Tier 1 Leverage Capital 17,302 6.5 10,646 4.0 13,308 5.0
Tolland Bank, December 31, 1998:
Risk-based Total Capital $ 19,812 10.4% $ 15,182 8.0% $ 18,977 10.0%
Risk-based Tier 1 Capital 17,000 9.0 7,591 4.0 11,386 6.0
Tier 1 Leverage Capital 17,000 6.4 10,652 4.0 13,315 5.0
</TABLE>
<PAGE>
Stock Options
At December 31, 1999, the Company had two stock option plans, which are
described below. As permitted by SFAS 123, the Company applies APB Opinion No.
25 and related Interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its stock option plans. Had
compensation cost for the Company's stock options been determined consistent
with the fair value method in SFAS 123, the Company's net income and earnings
per share would have been reduced to the pro forma amounts indicated below. The
fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model in accordance with the weighted-average
assumptions indicated as follows:
<TABLE>
<CAPTION>
Year ended December 31 (in thousands except share data ) 1999 1998
- ------------------------------------------------------------------- -- -------------------------- --------------------------
<S> <C> <C> <C>
Net income As Reported $ 2,922 $ 2,558
Pro forma 2,710 2,451
Basic earnings per share As Reported 1.27 1.07
Pro forma 1.18 1.03
Diluted earnings per share As Reported 1.23 1.03
Pro forma 1.14 .99
Assumptions used as of December 31 1999 1998
- ------------------------------------------------------------------- --- ------------------------- --------------------------
Expected dividend yield 2.63% 1.75%
Expected volatility 27.75% 28.00%
Risk free interest rate 6.39% 4.66%
Expected life (years) 10.00 10.00
</TABLE>
The Company maintains a Stock Option Incentive Plan for the benefit of officers
and other employees of the Company. Under the terms of this Plan, 299,993 shares
may be issued or transferred pursuant to the exercise of options to purchase
shares of common stock and stock appreciation rights (SARs) and awards of
restricted stock. The exercise price of the option is equal to the market price
of the common stock on the date of grant. Options granted to officers and other
full-time salaried employees may be accompanied by SARs and awards of restricted
stock. No SARs or awards of restricted stock have been granted as of December
31, 1999. Total shares reserved for future grants were 109,406 at December 31,
1999.
<PAGE>
The Company also maintains a Stock Option Plan for Non-Employee Directors. Under
the terms of this Plan, 161,000 shares may be issued or transferred pursuant to
the exercise of options to purchase shares of common stock. Total shares
reserved for future grants were 124,200 at December 31, 1999. Total shares
outstanding also included shares previously granted under expired option plans.
A summary of the status of the Company's stock option plans and changes in them
is presented below.
<TABLE>
<CAPTION>
Years ended December 31 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted-Avg. Weighted-Avg. Weighted-Avg.
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 229,225 $ 7.12 223,212 $ 6.24 244,969 $ 5.06
Granted 108,450 9.14 45,600 10.59 87,986 8.59
Exercised (17,330) 7.13 (38,288) 6.09 (109,743) 5.49
Forfeited (10,566) 8.04 (1,299) 9.02 - -
- ------------------------------------------ ------------ -------------- ------------ ------------- ------------ -------------
Outstanding at end of year 309,779 $ 7.80 229,225 $ 7.12 223,212 $ 6.24
- ------------------------------------------ ------------ -------------- ------------ ------------- ------------ -------------
Options exercisable at year-end 288,679 $ 7.67 219,159 $ 7.07 213,213 $ 6.19
- ---------------------------------------------------- -- -------------- ------------ ------------- ------------ -------------
Weighted-average fair value of options granted $ 1.96 $ 2.34 $ 2.23
- ------------------------------------------ ------------ -------------- ------------ ------------- ------------ -------------
Shares reserved for future grants 233,606 - 177,156 - 322,011 -
- ------------------------------------------------------- -------------- ------------ ------------- ------------ -------------
</TABLE>
<TABLE>
<CAPTION>
The following table summarizes information about stock options outstanding at
December 31, 1999:
Options Outstanding Options Exercisable
- ---------------------------- ---------------- --------------------- ------------------- ---------------- -------------------
Range of Number Weighted-Avg. Weighted-Avg. Number Weighted-Avg.
Exercise Outstanding Remaining Exercise Outstanding Exercise
Prices at 12/31/99 Contractual Life Price at 12/31/99 Price
- ---------------------------- ---------------- --------------------- ------------ ------- ---------------- -------------------
<S> <C> <C> <C> <C> <C>
$ 1 to 6 96,389 3.7 years $ 4.23 96,389 $ 4.23
6 to 9 102,440 8.5 8.30 101,340 8.29
9 to 12 110,950 8.4 10.43 90,950 10.63
- ---------------------------- ---------------- --------------------- ------------------- ---------------- -------------------
Total 309,779 7.0 years $ 7.80 288,679 $ 7.67
- ---------------------------- ---------------- --------------------- ------------------- ---------------- -------------------
</TABLE>
<PAGE>
12. Financial Instruments With Off-Balance Sheet Risk
<TABLE>
<CAPTION>
December 31 ( in thousands) 1999 1998
- ------------------------------------------------------------------------ ------------------------- -------------------------
<S> <C> <C>
Commitments to extend credit:
Commitments to originate new loans $ 12,567 $ 21,218
Unadvanced construction lines of credit 8,902 4,873
Unadvanced home equity credit lines 23,164 19,417
Unadvanced commercial lines of credit 12,178 7,987
Unadvanced reserve credit lines 416 421
Standby letters of credit 1,089 733
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Since many
of the commitments are expected to expire without being drawn on, the total
commitment amounts do not necessarily represent future cash requirements or
credit risk. Standby letters of credit are commitments issued by the Company to
guarantee the performance of a customer to a third party. Those guarantees are
generally payable only if the customer fails to perform some specified
contractual obligation. Standby letters of credit are generally unconditional
and irrevocable, and are generally not expected to be drawn upon. For the above
types of financial instruments, the Company evaluates each customer's
creditworthiness on a case-by-case basis, and collateral is obtained, if deemed
necessary, based on the Company's credit evaluation. In general, the Company
uses the same credit policies in providing these financial instruments as it
does in making funded loans.
13. Derivative Financial Instruments with Off-Balance Sheet Risk
The Bank has entered into a $10,000,000 interest rate swap agreement with Fleet
Boston as a hedge against variable rate money market deposit accounts. This
contract amount, also known as notional amount, expresses the volume of the
swap; the amount potentially subject to credit risk is much smaller. Under the
swap, the Bank pays a fixed rate of interest of 6.00%, and receives back a
variable rate of interest, equal to six month LIBOR, which averaged 5.38% in
1999. The swap agreement will mature June 7, 2001, and had a fair value of
$75,000 at December 31, 1999. The swap interest income and expense are recorded
as borrowing interest expense. The net interest paid was $37,000 in 1999.
14. Fair Values of Financial Instruments
<TABLE>
<CAPTION>
Years ended December 31 (in thousands) 1999 1998
- ------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
Carrying Fair Carrying Fair
Value Value Value Value
- ------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 22,612 $ 22,612 $ 20,216 $ 20,216
Securities available for sale 53,156 53,156 58,556 58,556
Securities held to maturity 27,857 27,201 15,431 15,519
Net loans 188,432 187,973 181,666 190,640
Accrued interest receivable 2,611 2,611 2,177 2,177
Financial liabilities:
Deposits with no stated maturity 131,347 131,347 117,306 117,306
Time deposits 120,044 117,777 122,679 124,502
Borrowings 39,575 38,499 23,610 23,323
Accrued interest payable 265 265 260 260
Off balance sheet financial instruments - 328 - 289
</TABLE>
<PAGE>
15. Retirement Plans
The Company sponsors a noncontributory defined benefit pension plan covering all
employees who meet certain eligibility requirements. Benefits are based on
length of service and qualifying compensation. The Company's policy is to fund
the plan in accordance with the requirements of applicable regulations. Plan
assets are invested in stock, bond, and money market mutual funds. The plan
valuation date is October 1. The pension plan's funded status and amounts
recognized in the Company's financial statements are as follows:
<TABLE>
<CAPTION>
Years ended December 31 (in thousands) 1999 1998
- ------------------------------------------------------------------------ ------------------------- -------------------------
<S> <C> <C>
Change in benefit obligation:
Projected benefit obligation at beginning of year $ 2,746 $ 2,326
Service cost 154 117
Interest cost 151 164
Liability (gain) loss (672) 173
Benefits paid (72) (34)
- ------------------------------------------------------------------------ ------------------------- -------------------------
Projected benefit obligation at end of year $ 2,307 $ 2,746
- ------------------------------------------------------------------------ ------------------------- -------------------------
Change in plan assets:
Assets at beginning of year $ 2,823 $ 2,564
Employer contributions - 61
Actual return 428 262
Expenses paid (25) (30)
Benefits paid (72) (34)
- ------------------------------------------------------------------------ ------------------------- -------------------------
Assets at end of year $ 3,154 $ 2,823
- ------------------------------------------------------------------------ ------------------------- -------------------------
December 31 (in thousands) 1999 1998
- ------------------------------------------------------------------------ ------------------------- -------------------------
Funded status 848 77
Unrecognized net transition obligation being recognized over 15 years (55) (72)
Unrecognized net (gain) loss (579) 233
Unrecognized past service liability (54) (71)
- ------------------------------------------------------------------------ ------------------------- -------------------------
Prepaid pension cost 160 167
- ------------------------------------------------------------------------ ------------------------- -------------------------
Weighted average assumptions as of October 1:
Discount rate 7.25% 6.25%
Expected return on plan assets 9.25% 9.25%
Rate of compensation increase 5.00% 5.00%
</TABLE>
<TABLE>
<CAPTION>
Components of net periodic pension cost (excluding administrative cost):
Years ended December 31 (in thousands) 1999 1998 1997
- ------------------------------------------------------ ----------------------- ----------------------- ----------------------
<S> <C> <C> <C>
Service costs earned during the year $ 154 $ 117 $ 98
Interest cost on projected benefit obligation 151 164 151
Expected return on plan assets, net (403) (232) (398)
Net amortization and deferral 106 (35) 176
- ------------------------------------------------------ ----------------------- ----------------------- ----------------------
Net periodic pension expense $ 8 $ 14 $ 27
- ------------------------------------------------------ ----------------------- ----------------------- ----------------------
</TABLE>
The Company also sponsors a defined contribution 401(k) savings plan. This plan
includes a discretionary matching contribution by the Company which was 35% of
the employees' contribution up to 6% of earnings for the years 1999, 1998, and
1997. The expense of this contribution totaled $49,000, $47,000, and $42,000 for
the years 1999, 1998, and 1997. Additionally, the Company offers retirees
participation in its medical insurance benefit program. The cost of offering
this participation is not material to the financial condition or results of
operations of the Company.
<PAGE>
16. Income Tax Expense (Benefit)
<TABLE>
<CAPTION>
Charges (credits) for income taxes (benefits) in the Consolidated Income
Statements are composed of the following:
Years ended December 31 (in thousands) 1999 1998 1997
- ------------------------------------------------------------ -------------------- --------------------- --------------------
<S> <C> <C> <C>
Current:
Federal $ 1,098 $ 958 $ 575
State 1 212 131
- ------------------------------------------------------------ -------------------- --------------------- --------------------
Total current 1,099 1,170 706
Deferred:
Federal 39 14 57
State (98) 73 51
- ------------------------------------------------------------ -------------------- --------------------- --------------------
Total deferred (59) 87 108
Change in valuation allowance for the gross
deferred tax asset 64 106 (150)
- ------------------------------------------------------------ -------------------- --------------------- --------------------
Total income tax expense $ 1,104 $ 1,363 $ 664
- ------------------------------------------------------------ -------------------- --------------------- --------------------
</TABLE>
The actual income tax expense (benefit) differs from the "expected" income tax
expense, (computed by applying the statutory U.S. Federal corporate tax rate of
34%) to income before income taxes, as follows:
<TABLE>
<CAPTION>
Years ended December 31 (in thousands) 1999 1998 1997
- ------------------------------------------------------------ -------------------- --------------------- --------------------
<S> <C> <C> <C>
Expected income tax expense (benefit) at statutory rate $ 1,368 $ 1,333 $ 912
Increase (decrease) in income tax resulting from:
Connecticut state tax - 188 120
Dividend received deduction (265) (278) (237)
Change in valuation allowance for deferred tax assets - 106 (150)
Other, net 1 14 19
- ------------------------------------------------------------ -------------------- --------------------- --------------------
Total income tax expense (benefit) $ 1,104 $ 1,363 $ 664
- ------------------------------------------------------------ -------------------- --------------------- --------------------
</TABLE>
The Company made income tax payments of $780,000, $797,000 and $494,000 during
the years ended December 31, 1999, 1998, and 1997, respectively. The tax effects
of temporary differences that give rise to significant portions of the deferred
tax assets and deferred tax liabilities are presented below:
<TABLE>
<CAPTION>
Years ended December 31 ( in thousands) 1999 1998
- ------------------------------------------------------------------------ ------------------------- -------------------------
<S> <C> <C>
Deferred tax asset:
Allowance for loan losses $ 757 $ 815
State NOL carry forward 180 -
Depreciation expense 59 47
Unrealized loss on securities 3,177 31
Other, net 247 155
- ------------------------------------------------------------------------ ------------------------- -------------------------
Total gross deferred tax asset 4,420 1,048
Less: valuation allowance (808) (136)
Gross asset, net of valuation allowance 3,612 912
Less: deferred tax liabilities
Unrealized gain on securities - (551)
Loan origination fees (375) (191)
Depreciation expense - -
Core deposit amortization (24) (42)
Other (229) (227)
- ------------------------------------------------------------------------ ------------------------- -------------------------
Total gross deferred tax liability (628) (1,011)
- ------------------------------------------------------------------------ ------------------------- -------------------------
Net deferred tax asset (liability) $ 2,984 $ (99)
- ------------------------------------------------------------------------ ------------------------- -------------------------
</TABLE>
<PAGE>
In 1998, a valuation allowance of $105,000 was established by the Company
against the state deferred tax asset following the creation of a Connecticut
Passive Investment Company subsidiary. Income of the passive investment company
subsidiary and its dividends to its parent are exempt from the Connecticut
Corporation Business Tax and accordingly, the Company no longer expects to
realize its state deferred tax asset. During 1999, the Company increased its
valuation allowance by $64,000 to offset an increase in the state deferred tax
asset attributable to increased net deductible temporary differences arising
during the year. Additionally, the valuation allowance increased by $608,000 to
offset the increase in the state deferred tax asset for net unrealized losses
which is a component of stockholders' equity.
In assessing the realizability of deferred tax assets, Management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. In making the assessment, Management considers the
estimated reversal of deferred tax liabilities, projected future taxable income,
income taxes paid in prior years that are recoverable, and tax planning
strategies. Based on the level of historical taxable income, and projections for
future taxable income over the periods in which the deferred tax assets are
deductible, Management believes it is more likely than not that the Company will
realize the benefits of the deductible temporary difference, net of the existing
valuation allowance at December 31, 1999.
17. Commitments and Contingencies
Future minimum rental payments required under operating leases that have
remaining noncancellable lease terms in excess of one year as of December 31,
1999, total $879,000, due by years ending December 31 as follows: 2000 -
$83,000; 2001 - $83,000; 2002 - $83,000; 2003 - $75,000; 2004 - $75,000; and
$480,000 thereafter. Total rental expense under these leases and prior leases
was $131,000, $86,000, and $70,000, for the years ended December 31, 1999, 1998
and 1997 respectively. There are various legal proceedings against the Company
arising out of its business. Although the outcome of these cases is uncertain,
in the opinion of Management, based on discussions with legal counsel, these
matters are not expected to result in a material adverse effect on the financial
position or future operating results of the Company.
<PAGE>
18. Condensed Financial Statements of Alliance Bancorp of New England, Inc.
(Parent Company)
<TABLE>
<CAPTION>
Balance Sheet
December 31 (in thousands except share data) 1999 1998
- ---------------------------------------------------------------------- ------------------------- -----------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 103 $ 108
Investment in subsidiaries 17,695 17,999
Other assets 219 180
- ---------------------------------------------------------------------- ------------------------- -----------------------------
Total assets $ 18,017 $ 18,287
- ---------------------------------------------------------------------- ------------------------- -----------------------------
Liabilities and Shareholders' Equity
Liabilities:
Accrued expenses $ 170 $ 91
Subordinated note payable to non-bank subsidiaries 3,500 -
- ---------------------------------------------------------------------- ------------------------- -----------------------------
Total liabilities 3,670 91
Total shareholders' equity 14,347 18,196
- ---------------------------------------------------------------------- ------------------------- -----------------------------
Total liabilities and shareholders' equity $ 18,017 $ 18,287
- ---------------------------------------------------------------------- ------------------------- -----------------------------
</TABLE>
Income Statement
<TABLE>
<CAPTION>
Years ended (1999 and 1998) and quarter ended (1997)
December 31 (in thousands except share data) 1999 1998 1997
- ---------------------------------------------------------------------- ----------------- ------------------ ------------------
<S> <C> <C> <C>
Dividends from subsidiaries $ 665 $ 3,489 $ 258
Interest expense paid to subsidiary 165 - -
- ---------------------------------------------------------------------- ----------------- ------------------ ------------------
Net interest income 500 3,489 258
- ---------------------------------------------------------------------- ----------------- ------------------ ------------------
Non-interest expenses 185 379 44
Income before income tax benefit and
equity in net income of subsidiaries 315 3,110 214
- ---------------------------------------------------------------------- ----------------- ------------------ ------------------
Income tax benefit 119 157 22
Income before equity in net income of subsidiaries 434 3,267 236
Equity in undistributed income of subsidiaries 2,488 (709) 329
- ---------------------------------------------------------------------- ----------------- ------------------ ------------------
Net Income $ 2,922 $ 2,558 $ 565
- ---------------------------------------------------------------------- ----------------- ------------------ ------------------
</TABLE>
<PAGE>
Statement of Cash Flows
<TABLE>
<CAPTION>
Years ended (1999 and 1998) and quarter ended (1997)
December 31 (in thousands) 1999 1998 1997
- ---------------------------------------------------------------------- ---------------- ----------------- ----------------
<S> <C> <C> <C>
Operating Activities:
Net income $ 2,922 $ 2,558 $ 563
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed net income of subsidiaries (2,488) 709 (329)
(Increase) in other assets (41) (30) (148)
Increase in other liabilities 79 79 13
- ---------------------------------------------------------------------- ---------------- ----------------- ----------------
Net cash provided by operating activities 472 3,316 99
Investing Activities:
Equity investment in subsidiaries (3,573) - -
- ---------------------------------------------------------------------- ---------------- ----------------- ----------------
Net cash used by investing activities (3,573) - -
Financing Activities:
Notes issued to non-bank subsidiary 3,500 - -
Stock options exercised 123 233 55
Dividends paid to stockholders (527) (397) (89)
Purchase of treasury stock - (3,109) -
- ---------------------------------------------------------------------- ---------------- ----------------- ----------------
Net cash provided by financing activities 3,096 (3,273) (34)
- ---------------------------------------------------------------------- ---------------- ----------------- ----------------
Net Change in Cash and Cash Equivalents (5) 43 65
- ---------------------------------------------------------------------- ---------------- ----------------- ----------------
Cash and cash equivalents beginning of period 108 65 -
- ---------------------------------------------------------------------- ---------------- ----------------- ----------------
Cash and cash equivalents end of period $ 103 $ 108 $ 65
- ---------------------------------------------------------------------- ---------------- ----------------- ----------------
</TABLE>
<PAGE>
Consolidated Supplementary Financial Data (unaudited)
Selected Quarterly Financial Data
<TABLE>
<CAPTION>
1999 1998
(in thousands except share data) 4 3 2 1 4 3 2 1
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income $ 2,801 $ 2,639 $ 2,521 $ 2,386 $ 2,489 $ 2,280 $ 2,172 $ 2,087
Provision for loan losses 84 17 11 125 11 10 14 144
Non-interest income 306 339 461 575 502 467 768 682
Non-interest expense 1,984 1,942 1,961 1,878 1,998 1,769 1,836 1,745
Income tax expense 286 281 279 258 306 315 464 278
-----------------------------------------------------------------------------------------------------------------------------
Net income $ 753 $ 738 $ 731 $ 700 $ 676 $ 653 $ 626 $ 602
-----------------------------------------------------------------------------------------------------------------------------
Per Share Data:
Basic earnings per share $ 0.33 $ 0.32 $ 0.32 $ 0.31 $ 0.29 $ 0.28 $ 0.25 $ 0.24
Diluted earnings per share .32 .31 .31 .30 .28 .27 .24 .23
Cash dividends declared .06 .06 .06 .05 .05 .05 .03 .03
Common stock price:
High 10.00 12.75 12.38 12.38 13.00 15.75 16.67 14.25
Low 8.75 9.50 9.13 9.62 9.00 9.75 14.00 10.92
Close 8.88 10.13 12.31 9.75 11.75 10.13 15.75 14.00
</TABLE>
Net interest income increased due to ongoing growth of earning assets, as well
as due to the resolution of problem assets and the collection of nonaccrued
interest in the second half of 1998. Increases in the provision for loan losses
coincided with increases in reserves on impaired or nonaccruing loans.
Non-interest income reflected higher securities gains in 1998 and higher loan
prepayment fees in the first half of 1999. Non-interest expense has generally
increased as the Company has grown and expanded. Higher expenses in the fourth
quarter of 1998 included charges related to branch expansion. Income tax expense
in the second quarter of 1998 included a charge related to an increase in the
valuation allowance on the deferred tax asset related to the establishment of a
plan for the formation of a passive investment corporation. This corporation was
formed in the first quarter of 1999, eliminating state income tax expense in
1999.
Volume and Rate Analysis - FTE Basis
<TABLE>
<CAPTION>
1999 versus 1998 Change due to 1998 versus 1997 Change due to
- ------------------------------------- ------------- -------------- ------------- -------------- ------------- ----------------
(in thousands) Volume Rate Total Volume Rate Total
- ------------------------------------- ------------- -------------- ------------- -------------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Interest income
Loans $ 1,519 $ (778) $ 741 $ 1,520 $ 238 $ 1,758
Securities available for sale 1,866 70 1,936 (384) 163 (221)
Securities held to maturity (80) 94 14 (134) 3 (131)
Other earning assets (46) (88) (134) 366 5 371
- ------------------------------------- ------------- -------------- ------------- -------------- ------------- ----------------
Total Change 3,259 (702) 2,557 1,368 409 1,777
- ------------------------------------- ------------- -------------- ------------- -------------- ------------- ----------------
Interest expense
Deposits 571 (724) (153) 505 (8) 497
Borrowings 1,487 (9) 1,478 114 (19) 95
- ------------------------------------- ------------- -------------- ------------- -------------- ------------- ----------------
Total Change 2,058 (733) 1,325 619 (27) 592
- ------------------------------------- ------------- -------------- ------------- -------------- ------------- ----------------
Net Change $ 1,201 $ 31 $ 1,232 $ 749 $ 436 $ 1,185
- ------------------------------------- ------------- -------------- ------------- -------------- ------------- ----------------
</TABLE>
Note: Changes attributable jointly to volume and rate have been allocated
proportionately.
<PAGE>
<TABLE>
<CAPTION>
Construction and Commercial Loans
1 Year 1-5 Over 5
December 31, 1999 (in millions) or Less Years Years Total
----------------------------------------------------- ----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Contractual maturity:
Construction loans:
Residential $ - $ - $ .1 $ .1
Commercial 2.8 3.7 5.2 11.7
Commercial loans 7.4 10.0 58.1 75.5
----------------------------------------------------- ----------------- ---------------- ----------------- -----------------
Total $ 10.2 $ 13.7 $ 63.4 $ 87.3
----------------------------------------------------- ----------------- ---------------- ----------------- -----------------
Interest rate sensitivity:
Predetermined rates $ 2.5 $ 7.7 $ 36.3 $ 46.5
Variable rates 7.7 6.0 27.1 40.8
----------------------------------------------------- ----------------- ---------------- ----------------- -----------------
Total $ 10.2 $ 13.7 $ 63.4 $ 87.3
----------------------------------------------------- ----------------- ---------------- ----------------- -----------------
</TABLE>
Securities Cost and Fair Value
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------- ------------ ------------ ------------ ------------ ------------ -------------
Amortized Fair Amortized Fair Amortized Fair
December 31, (in thousands) Cost Value Cost Value Cost Value
--------------------------------------------- ------------ ------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Available for sale
U.S. Government and agency $ 6,751 $ 6,453 $ 16,694 $ 16,646 $ 18,081 $ 17,891
U.S. Agency mortgage-backed 2,936 2,884 2,312 2,333 5,366 5,391
Other debt securities 30,991 28,276 19,265 19,715 1,312 1,321
Marketable equity 16,364 13,560 17,724 18,681 16,710 18,296
Non-marketable equity 1,983 1,983 1,181 1,181 830 830
--------------------------------------------- ------------ ------------ ------------ ------------ ------------ -------------
Total available for sale $ 59,025 $53,156 $ 57,176 $ 58,556 $ 42,299 $ 43,729
--------------------------------------------- ------------ ------------ ------------ ------------ ------------ -------------
Held to maturity
U.S. Government and agency $ 1,971 $ 1,963 $ 1,952 $ 2,017 $ 2,901 $ 2,941
U.S. Agency mortgage-backed 6,752 6,673 12,095 12,089 15,214 15,224
Other debt securities 19,134 18,565 1,384 1,413 1,834 1,856
--------------------------------------------- ------------ ------------ ------------ ------------ ------------ -------------
Total held to maturity $ 27,857 $27,201 $ 15,431 $ 15,519 $ 19,949 $ 20,021
--------------------------------------------- ------------ ------------ ------------ ------------ ------------ -------------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001046002
<NAME> ALLIANCE BANCORP OF NEW ENGLAND, INC.
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 18,584
<INT-BEARING-DEPOSITS> 28
<FED-FUNDS-SOLD> 4,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 53,156
<INVESTMENTS-CARRYING> 27,857
<INVESTMENTS-MARKET> 27,201
<LOANS> 191,632
<ALLOWANCE> 3,200
<TOTAL-ASSETS> 306,937
<DEPOSITS> 251,391
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,624
<LONG-TERM> 39,575
0
0
<COMMON> 25
<OTHER-SE> 14,322
<TOTAL-LIABILITIES-AND-EQUITY> 306,937
<INTEREST-LOAN> 14,637
<INTEREST-INVEST> 5,820
<INTEREST-OTHER> 557
<INTEREST-TOTAL> 21,014
<INTEREST-DEPOSIT> 8,831
<INTEREST-EXPENSE> 10,668
<INTEREST-INCOME-NET> 10,346
<LOAN-LOSSES> 237
<SECURITIES-GAINS> 75
<EXPENSE-OTHER> 6,083
<INCOME-PRETAX> 4,026
<INCOME-PRE-EXTRAORDINARY> 4,026
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,922
<EPS-BASIC> 0
<EPS-DILUTED> 1.23
<YIELD-ACTUAL> 3.88
<LOANS-NON> 1,218
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,800
<ALLOWANCE-OPEN> 3,060
<CHARGE-OFFS> 146
<RECOVERIES> 49
<ALLOWANCE-CLOSE> 3,200
<ALLOWANCE-DOMESTIC> 3,200
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 467
</TABLE>
