Alliance Bancorp of New England 10-Q 2003 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2003
	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-13405

ALLIANCE BANCORP OF NEW ENGLAND, INC.
(Exact name of registrant as specified in its charter)

Delaware	06-1495617
(State of incorporation)	(I.R.S. Employer Identification No.)
348 Hartford Turnpike, Vernon, Connecticut	06066
(Address of principal executive offices)	(Zip Code)
(860) 875-2500
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes                       No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes                       No

The number of shares of the registrant's Common Stock outstanding as of August 8, 2003 was 2,678,504 shares.

Available on the web at www.alliancebancorp.com

FORM 10-Q
TABLE OF CONTENTS

		Page
PART I	Financial Information
	Item 1.   Financial Statements (Unaudited)	3
	Item 2.   Management’s Discussion and Analysis of Financial Condition and
	Results of Operations	13
	Item 3.   Quantitative and Qualitative Disclosures About Market Risk	23
	Item 4.   Controls and Procedures	23
PART II	Other Information
	Item 1.   Legal Proceedings	24
	Item 2.   Changes in Securities and Use of Proceeds	24
	Item 3.   Defaults Upon Senior Securities	24
	Item 4.   Submission of Matters to a Vote of Security Holders	24
	Item 5.   Other Information	24
	Item 6.   Exhibits and Reports on Form 8-K	24
SIGNATURES		25

2

Alliance Bancorp of New England, Inc.
Consolidated Balance Sheets (Unaudited)

(in thousands, except share data)	June 30, 2003			December 31, 2002
Assets
Cash and due from banks	$	17,712		$	13,941
Short-term investments		21,776			4,520
Total cash and cash equivalents		39,488			18,461
Securities available for sale (at fair value)		93,467			87,812
Securities held to maturity
(fair value of $5,984 in 2002)		—			5,372
Loans held for sale		4,725			11,942
Residential mortgage loans		87,141			78,717
Commercial mortgage loans		93,873			94,692
Other commercial loans		39,763			39,550
Consumer loans		37,703			39,547
Government guaranteed loans		20,880			25,756
Total loans		279,360			278,262
Less: Allowance for loan losses		(4,100	)		(4,050	)
Net loans		275,260			274,212
Premises and equipment, net		5,700			5,104
Accrued interest income receivable		2,178			2,417
Cash surrender value of life insurance		6,358			6,207
Other assets		2,005			2,987
Total assets	$	429,181		$	414,514
Liabilities and Shareholders’ Equity
Demand deposits	$	37,841		$	35,600
NOW deposits		42,617			39,091
Money market deposits		44,018			43,964
Savings deposits		81,161			77,605
Time deposits		130,294			134,572
Total deposits		335,931			330,832
Borrowings		58,276			54,510
Other liabilities		4,600			3,622
Total liabilities		398,807			388,964
Preferred stock, $0.01 par value; 100,000 shares
authorized, none issued		—			—
Common stock, $0.01 par value; authorized 4,000,000
shares; issued 2,879,103 in 2003 and 2,868,105 in 2002;
outstanding 2,678,504 in 2003 and 2,667,506 in 2002		29			29
Additional paid-in capital		12,863			12,791
Retained earnings		20,624			19,183
Accumulated other comprehensive loss, net		(33	)		(3,344	)
Treasury stock (200,599 shares)		(3,109	)		(3,109	)
Total shareholders’ equity		30,374			25,550
Total liabilities and shareholders’ equity	$	429,181		$	414,514

See accompanying notes to consolidated financial statements.

3

Alliance Bancorp of New England, Inc.
Consolidated Income Statements (Unaudited)

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands, except share data)	2003		2002		2003			2002
Interest and Dividend Income
Loans	$	4,392	$	4,444	$	8,809		$	8,964
Debt securities		700		1,255		1,602			2,592
Dividends on equity securities		185		206		388			391
Other interest and dividend income		177		107		340			132
Total interest and dividend income		5,454		6,012		11,139			12,079
Interest Expense
Deposits		1,572		2,186		3,223			4,296
Borrowings		835		757		1,663			1,520
Total interest expense		2,407		2,943		4,886			5,816
Net Interest Income		3,047		3,069		6,253			6,263
Provision For Loan Losses		6		65		51			237
Net interest income after provision for loan losses		3,041		3,004		6,202			6,026
Non-Interest Income
Service charges and other income		1,073		553		1,986			1,046
Net gain (loss) on securities and other assets		12		131		(66	)		303
Total non-interest income		1,085		684		1,920			1,349
Non-Interest Expense
Compensation and benefits		1,647		1,442		3,236			2,752
Occupancy		182		164		390			336
Data processing services and equipment		279		312		586			620
Office and insurance		150		128		316			291
Purchased services		342		219		593			533
Other		198		187		346			387
Total non-interest expense		2,798		2,452		5,467			4,919
Income before income taxes		1,328		1,236		2,655			2,456
Income tax expense		409		371		813			741
Net Income	$	919	$	865	$	1,842		$	1,715
Share Data
Basic earnings per share	$	0.34	$	0.34	$	0.68		$	0.67
Diluted earnings per share	$	0.32	$	0.32	$	0.65		$	0.63
Average basic shares outstanding		2,696,009		2,580,784		2,695,037			2,577,381
Average additional dilutive shares		148,746		137,657		141,143			124,907
Average diluted shares		2,844,755		2,718,441		2,836,180			2,702,288

See accompanying notes to consolidated financial statements.

4

Alliance Bancorp of New England, Inc.
Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

(in thousands, except share data)	Common stock		Additional paid- in capital		Retained earnings			Accumulated other comprehensive loss			Treasury stock			Total
2002
Balance, December 31, 2001	$	25	$	11,577	$	16,473		$	(2,877	)	$	(3,109	)	$	22,089
Comprehensive income
Net income						1,715									1,715
Unrealized losses on securities,
net of reclassification adjustment									(380	)					(380	)
Comprehensive income															1,335
Dividends declared ($0.136 per share)						(349	)								(349	)
Stock split effected in the form
of a stock dividend		3				(10	)								(7	)
Exercise of stock options				109											109
Balance, June 30, 2002	$	28	$	11,686	$	17,829		$	(3,257	)	$	(3,109	)	$	23,177
2003
Balance, December 31, 2002	$	29	$	12,791	$	19,183		$	(3,344	)	$	(3,109	)	$	25,550
Comprehensive income
Net income						1,842									1,842
Unrealized gains on securities,
net of reclassification adjustment									3,311						3,311
Comprehensive income															5,153
Dividends declared ($0.15 per share)						(401	)								(401	)
Directors’ deferred stock compensation				21											21
Exercise of stock options				38											38
Tax benefit from exercise
of stock options				13											13
Balance, June 30, 2003	$	29	$	12,863	$	20,624		$	(33	)	$	(3,109	)	$	30,374

Disclosure of reclassification amount

Six months ended June 30 (in thousands)	2003		2002
Unrealized holding gains (losses) arising during
the period, net of income tax effect
of ($1,683) and $98, respectively	$	3,267	$	(182	)
Reclassification adjustment for losses
(gains) included in net income, net of income
tax effect of $(22) and $102, respectively		44		(198	)
Net unrealized gains (losses) on securities	$	3,311	$	(380	)

See accompanying notes to consolidated financial statements.

5

Alliance Bancorp of New England, Inc.
Consolidated Statements of Cash Flows (Unaudited)

	Six months ended June 30,
(in thousands)	2003			2002
Operating Activities:
Net income	$	1,842		$	1,715
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses		51			237
Depreciation and amortization		51			147
Net losses (gains) on securities and other assets		66			(303	)
Loans originated for sale		(52,191	)		(7,874	)
Proceeds from loans sold		59,408			9,529
Increase in other liabilities		978			1,778
Decrease in accrued interest income receivable		239			88
Decrease in other assets		1,173			197
Net cash provided by operating activities		11,617			5,514
Investing Activities:
Securities available for sale:
Proceeds from repayments and maturities		9,343			6,015
Proceeds from sales		7,316			11,462
Proceeds from calls		8,430			1,000
Purchases of securities		(22,535	)		(16,349	)
Securities held to maturity:
Proceeds from amortization and maturities		286			1,641
Proceeds from calls		—			1,000
Net increase in total loans		(1,126	)		(3,590	)
Purchases of premises and equipment		(806	)		(45	)
Net cash provided by investing activities		908			1,134
Financing Activities:
Net increase in interest-bearing deposits		2,858			27,040
Net increase in demand deposits		2,241			180
Proceeds from FHLBB advances		87,750			11,568
Principal repayments of FHLBB advances		(83,984	)		(18,037	)
Net decrease in other borrowings		—			(2,100	)
Exercise of stock options		38			109
Cash dividends paid		(401	)		(349	)
Net cash provided by financing activities		8,502			18,411
Net Increase in Cash and Cash Equivalents		21,027			25,059
Cash and cash equivalents at beginning of the period		18,461			15,314
Cash and cash equivalents at end of the period	$	39,488		$	40,373
Supplemental Information on Cash Payments
Interest	$	4,879		$	5,825
Income taxes		1,090			1,200
Supplemental Information on Non-cash Transactions
Securities transferred to available for sale		5,087			1,057

See accompanying notes to consolidated financial statements.

6

Notes to Consolidated Financial Statements (unaudited)

Note 1.     Basis of Presentation and Principles of Business and Consolidation

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 (Trust I) and Alliance Capital Trust II (Trust II). These Trusts have issued trust preferred securities which are included in borrowings in the consolidated balance sheets.

Tolland Bank provides consumer and commercial banking services from its nine offices located in and around Tolland County, Connecticut. A tenth office in Enfield is under construction with an opening scheduled in the fourth quarter of 2003. The Bank also provides non-deposit financial products in association with third parties. The Bank’s deposits are insured up to applicable limits by the Federal Deposit Insurance Corporation (“FDIC”). The Bank wholly owns a passive investment company, Tolland Investment Corporation (“TIC”), chartered in Connecticut to own and service real estate secured loans. The Bank also wholly owns a Connecticut chartered corporation named Asset Recovery Systems, Inc. (“ARS”) which is a foreclosed asset liquidation subsidiary.

The consolidated financial statements include Alliance, the Bank, Trust I, Trust II, TIC, and ARS. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company and its subsidiaries have no significant transactions with entities in which they hold an investment interest, except for Bankers Bank Northeast (a mutually owned correspondent bank) and the Federal Home Loan Bank of Boston. Transactions with these entities are generally limited to correspondent banking, and borrowing transactions; income includes dividends received from these entities.

Basis of Preparation and Presentation.     The consolidated financial statements have been prepared and presented in conformity with accounting principles generally accepted in the United States of America. Unless otherwise noted, all dollar amounts presented in the financial statements and note tables are rounded to the nearest thousand dollars, except share data. All share and per share data for prior periods has been adjusted to reflect the eleven-for-ten stock split effected in the form of a 10% stock dividend distributed in May 2002. 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.

Significant Estimates.     Management is required to make certain estimates and assumptions in preparing the Company’s consolidated financial statements. The most significant estimates are those related to assessing the allowance for loan losses, including the identification and valuation of impaired loans; determining and measuring other-than-temporary declines in the fair value of securities; estimating securities fair values in determining accumulated other comprehensive income (loss); and establishing the deferred tax asset valuation allowance. Factors affecting these estimates include national and local economic conditions, the level and trend of interest rates, real estate trends and values, securities market trends and values, and financial ratings methodologies.

Note 2.     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 No. 25, Accounting for Stock Issued to Employees, and related interpretations including FASB Interpretation No. 44. No compensation cost is recognized because, at the grant date, the exercise price of the options is equal to the fair market value of the Company’s common stock. When options are exercised, new shares are issued with proceeds credited to common stock and to additional paid-in capital, including, for non-qualifying options, the related income tax benefit.

7

The table below summarizes pro forma net income and earnings per share data as if the fair value method of accounting in SFAS No. 123, Accounting for Stock-Based Compensation, had been applied to all awards granted. 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.

	Three months ended					Six months ended
	June 30,					June 30,
(in thousands, except share data)	2003		2002			2003		2002
Net income, as reported	$	919	$	865		$	1,842	$	1,715
Deduct total stock-based compensation expense
determined under the fair-value-based method,
net of related tax effects		—		(6	)		—		(25	)
Pro forma net income	$	919	$	859		$	1,842	$	1,690
Basic earnings per share
As reported	$	0.34	$	0.34		$	0.68	$	0.67
Pro forma		0.34		0.33			0.68		0.66
Diluted earnings per share
As reported		0.32		0.32			0.65		0.63
Pro forma		0.32		0.32			0.65		0.63

There were 9,240 stock options granted in the first six months of 2002. None were granted in 2003. The fair value of options granted was estimated using the Black-Scholes option-pricing model in accordance with the weighted-average assumptions indicated below. The resulting weighted-average fair value was $2.68 in 2002.

Assumptions used for grants made in the six months ended June 30	2003		2002
Expected dividend yield		—		2.00	%
Expected volatility		—		31.88	%
Risk free interest rate		—		4.80	%
Expected life (years)		—		8.0

Note 3.     Securities

Information concerning the securities portfolio is summarized below as of June 30, 2003 and December 31, 2002.

June 30, 2003 (in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Securities available for sale
U.S. Government and agency debt	$	19,059	$	364	$	—		$	19,423
U.S. Agency mortgage-backed debt		27,261		180		(14	)		27,427
Other mortgage-backed		152		5		—			157
Trust preferred		17,536		1,449		(103	)		18,882
Other corporate debt		12,427		385		(381	)		12,431
Marketable equity		13,603		275		(1,552	)		12,326
Non-marketable equity		2,821		—		—			2,821
Total available for sale	$	92,859	$	2,658	$	(2,050	)	$	93,467

8

December 31, 2002 (in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Securities available for sale
U.S. Government and agency debt	$	26,167	$	159	$	—		$	26,326
U.S. Agency mortgage-backed debt		13,615		160		—			13,775
Trust preferred		17,551		229		(782	)		16,998
Other corporate debt		15,841		207		(1,771	)		14,277
Marketable equity		15,758		188		(2,295	)		13,651
Non-marketable equity		2,785		—		—			2,785
Total available for sale	$	91,717	$	943	$	(4,848	)	$	87,812
Securities held to maturity
U.S. Government and agency debt	$	1,047	$	65	$	—		$	1,112
U.S. Agency mortgage-backed debt		850		20		—			870
Other mortgage-backed debt		259		8		—			267
Other corporate debt		3,216		530		(11	)		3,735
Total held to maturity	$	5,372	$	623	$	(11	)	$	5,984

During the first quarter, the held to maturity category was eliminated and the entire portfolio was transferred to available for sale. It is the Company’s intent that purchases of investment securities will be accounted for as available for sale for the foreseeable future. Ten securities with an amortized cost totaling $5.1 million were transferred to available for sale from held to maturity. The transfer resulted in an additional unrealized gain of $415 thousand (net of income taxes of $214 thousand) which was recorded as a decrease in the accumulated other comprehensive loss.

Note 4.     Nonperforming Loans

Following is information about the Company’s nonaccruing loans and impaired loans.

(in thousands)	June 30, 2003		December 31, 2002
Total nonaccruing loans	$	1,137	$	2,433
Accruing loans past due 90 days or more		27		185
Impaired loans:
Valuation allowance required	$	230	$	774
No valuation allowance required		440		989
Total impaired loans	$	670	$	1,763
Total valuation allowance on impaired loans	$	104	$	127
Commitments to lend additional funds
to borrowers with impaired loans		—		—

Note 5.     Allowance for Loan Losses

Changes in the allowance for loan losses were as follows:

	Six months ended June 30,
(in thousands)	2003			2002
Balance at beginning of period	$	4,050		$	3,700
Charge-offs		(28	)		(47	)
Recoveries		27			35
Provision for loan losses		51			237
Balance at end of period	$	4,100		$	3,925

9

Note 6.     Standby Letters of Credit

The Company had outstanding standby letters of credit of $2,153,000 and $1,987,000 at June 30, 2003 and December 31, 2002, respectively. Most of the Company’s outstanding standby letters of credit are performance standby letters of credit within the scope of FASB Interpretation No. 45 (“FIN 45”). These are irrevocable undertakings by the Company, as guarantor, to make payments in the event a specified third party fails to perform under a nonfinancial contractual obligation. Most of the Company’s performance standby letters of credit arise in connection with lending relationships and have terms of one year or less. The maximum potential future payments the Company could be required to make equals the face amount of the letters of credit referred to above. FIN 45 also requires the recognition, at fair value, of a liability by a guarantor at the inception of certain guarantees issued or modified after December 31, 2002. The Company’s recognized liability for performance standby letters of credit was $2,153,000 at June 30, 2003.

Note 7.     Recent Accounting Developments

In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized and depreciated as part of the carrying amount of the long-lived asset. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. Earlier adoption is permitted. The adoption of this statement did not have a material impact on the consolidated financial statements.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair-value-based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 was effective for fiscal years ending after December 15, 2002 for transition guidance and annual disclosure provisions. The Company has provided the disclosures required by SFAS No. 148 in Note 2 to the consolidated financial statements.

FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, addresses disclosures to be made by a guarantor in its financial statements about its obligations under guarantees. The required disclosures applicable to the Company are included in Note 6 to the consolidated financial statements. The interpretation also requires the recognition, at fair value, of a liability of a guarantor at the inception of certain guarantees issued or modified after December 31, 2002. This recognition requirement did not have a material impact on the Company’s consolidated financial statements.

In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51, which establishes accounting guidance for consolidation of variable interest entities (VIEs) that function to support the activities of the primary beneficiary. The primary beneficiary of a VIE entity is the entity that absorbs a majority of the VIE’s expected losses, receives a majority of the VIE’s expected residual returns, or both, as a result of ownership, controlling interest, contractual relationship or other business relationship with a VIE. Prior to the implementation of FIN 46, VIEs were generally consolidated by an enterprise when the enterprise had a controlling financial interest through ownership of a majority of voting interest in the entity. The provisions of FIN 46 were effective immediately for all arrangements entered into after January 31, 2003, and are otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted FIN 46 on July 1, 2003. In its current form, FIN 46 may require the Company to re-characterize the trust preferred securities issued by its two wholly owned subsidiary business trusts (Trust I and Trust II) in future financial statements. Such re-characterization is not expected to affect the carrying amount of the liability reported in the consolidated financial statements or the recognition of related funding costs as interest expense.

10

In July 2003, the Board of Governors of the Federal Reserve System issued a supervisory letter instructing bank holding companies to continue to include the trust preferred securities in their Tier I capital for regulatory capital purposes until notice is given to the contrary. The Federal Reserve intends to review the regulatory implications of any accounting treatment changes and, if necessary or warranted, provide further appropriate guidance. There can be no assurance that the Federal Reserve will continue to allow institutions to include trust preferred securities in Tier I capital for regulatory capital purposes. As of June 30, 2003, if the Company was not allowed to include its $7.0 million of trust preferred securities issued by Trust I or Trust II within Tier I capital, then the Company would still exceed the regulatory required minimums for capital adequacy purposes.

In April 2003, FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under FASB Statement No. 133. This statement is not expected to have a material impact on the Company’s consolidated financial statements.

In May 2003, FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this statement is not expected to have a material impact on the Company’s consolidated financial statements.

Note 8.     Other Accounting Policies

Securities.     It is the Company’s intent that purchases of investment securities will be accounted for as available for sale for the foreseeable future. Trading securities, if any, are 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 trading securities are classified as available for sale securities and reported at fair value, with unrealized net gains or loses excluded from earnings and reported in a separate component of shareholders’ equity (accumulated other comprehensive income or loss), net of applicable taxes.

Earnings Per Share.     Earnings per share are computed in accordance with SFAS No. 128, Earnings Per Share. Basic earnings per share are calculated by dividing net income by weighted average shares outstanding, plus shares issuable under the Directors’ Deferred Compensation Plan. Average additional dilutive shares are an incremental number of shares reflecting the potential dilution that could occur if outstanding stock options were converted into common stock using the treasury stock method. Dilutive shares also include all shares in the Stock Option Income Deferral Plan.

Directors’ Retirement Plan.     The Tolland Bank Directors’ Retirement Plan provides payments to former directors upon retirement from the board. The Company accrues costs related to this plan over the period of service, based on various actuarial assumptions including normal director retirement expectations.

Note 9.     Subsequent Event

On July 16, 2003, Alliance announced that it had signed a definitive agreement to merge with New Haven Savings Bank (NHSB), pursuant to which NHSB will acquire all of the outstanding shares of Alliance. Separately, NHSB announced its intention to convert from a mutual savings bank to a stock savings bank and simultaneously merge with Alliance and Connecticut Bancshares, Inc., holding company for the Savings Bank of Manchester.

11

Under the terms of the merger agreement, Alliance shareholders will be entitled to receive $25 per share in the form of stock issued at the conversion price, cash, or a combination thereof, subject to election and allocation procedures that are intended to ensure that, in the aggregate, at least 75% of Alliance’s shares will be exchanged for stock of the new holding company and no more than 25% will be exchanged for cash.

The transactions are expected to be completed in the first quarter of 2004. NHSB has adopted a plan for conversion to convert to a public company simultaneously with the acquisitions. As part of the conversion, NHSB will form a new holding company and conduct a subscription offering of its common stock to eligible depositors and others under applicable law. Remaining shares are expected to be offered for sale to the community and the general public. The conversion is subject to approval from the FDIC, the Connecticut Banking Commissioner and NHSB’s Corporators. The acquisition is contingent on the approvals of shareholders of the Company, the FDIC, the Federal Reserve Board, and the Connecticut Banking Commissioner.

12

ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION:     Alliance Bancorp of New England, Inc. (“Alliance” or the “Company”) is the holding company for Tolland Bank (the “Bank”). The consolidated financial statements and related notes should be read in conjunction with this discussion. This discussion and analysis updates, and should be read in conjunction with, Management’s Discussion and Analysis included in the 2002 Annual Report on Form 10-K filed by Alliance on March 31, 2003. In the following discussion, income statement comparisons are against the same period of the previous year and balance sheet comparisons are against the previous fiscal year-end, unless otherwise noted. All share and per share data for the 2002 interim periods has been adjusted to reflect the eleven-for-ten stock split effected in the form of a 10% stock dividend distributed on May 21, 2002.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS:     This filing 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,” “plan”, “create”, “utilize”, “project” and similar expressions identify forward-looking statements. The Company’s ability to predict results or the effect of future plans or strategies or qualitative or quantitative changes based on market risk exposure is inherently uncertain. Factors which could affect actual results include but are not limited to changes in general market interest rates, general economic conditions, legislative/regulatory changes, fluctuations of interest rates, changes in the quality or composition of the Company’s loan and investment portfolios, deposit flows, competition, demand for financial services in the Company’s markets, and changes in accounting principles. These factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements.

DISCUSSION OF CRITICAL ACCOUNTING POLICIES:     The most material estimates made by Management in preparing the Company’s consolidated financial statements are summarized in Note 1 to the consolidated financial statements in the most recent annual report, which should be read in conjunction with this discussion and analysis. Further discussion of the two most critical accounting estimates and their impact on the consolidated financial statements is as follows:

Loan Loss Allowance:     The allowance for loan losses is based on Management’s assessment of both short and long term risk factors. Loan loss experience has been cyclical since 1990, with earlier periods of relatively high credit losses followed by much lower levels of losses in recent years. The adequacy of the allowance for loan losses is sensitive to the assessment of impaired loans and their related reserves which, in turn, is linked to the level, trend, and collateral protection of commercial substandard loans. Commercial real estate collateral values and collateral liquidity can decline quickly, particularly if accompanied by rising interest rates from current very low levels. Banking industry loan performance in general has been very strong for several years, and consensus economic forecasts do not predict destabilizing factors. However, such factors could nonetheless emerge under more adverse conditions, with a negative effect on the adequacy of the Company’s loan loss allowance.

Securities Impairment:     Alliance has a portfolio of corporate debt and equity securities, all of which were purchased under investment grade guidelines. The unrealized losses on the Company’s securities in these sectors are viewed as temporary, but continued unfavorable developments could change Management’s view and result in future writedowns. Some debt securities have been downgraded to non-investment-grade status and some utility common stocks have experienced significant price depreciation. The assessment as to whether impairment is other than temporary and the estimates of fair market values of these securities involve various judgments and estimates.

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SUMMARY

Alliance reported quarterly earnings of $919 thousand in the second quarter of 2003, representing a 6% increase over earnings of $865 thousand in the second quarter of 2002. Diluted earnings per share totaled $0.32 for both of these periods. Alliance earned a 13% return on shareholders’ equity in the most recent quarter, and book value per share increased by 11% to $11.34.

For the year-to-date, Alliance earned $1.84 million, representing a 7% increase over earnings of $1.72 million for the first half of 2002. Diluted earnings per share increased to $0.65 from $0.63 for these periods.

Alliance announced a quarterly dividend of 7.5 cents per share, payable on August 19, 2003 to shareholders of record on August 5, 2003.

Second quarter results benefited from higher levels of residential mortgage secondary market income. Low interest rates prompted record mortgage demand. Together with continuing loan and deposit growth, these revenues offset the effect of lower interest rates on reductions to our net interest margin. Alliance believes it is positioned to benefit from an improving economy and potentially higher interest rates.

Alliance’s total assets reached a quarter-end record of $429 million at mid-year 2003, increasing at a 7% annualized rate since year-end. Total regular loans (excluding government guaranteed loans) increased at a 5% annualized rate to $258 million, while deposits grew at a 3% annualized rate to $336 million. Net interest income declined slightly by $10 thousand through mid-year, due to a decline in the net interest margin, which measured 3.17% in the second quarter, compared to 3.37% in the second quarter of 2002. The $22 million balance of short term investments at quarter-end was anticipated to mostly be reinvested in loans in process and purchases of investment securities.

The provision for loan losses declined by $59 thousand for the second quarter and by $186 thousand for the year-to-date, reflecting lower problem assets and lower commercial loan growth. Net loan charge-offs were negligible for the first half of the year. The loan loss allowance measured 1.59% of total regular loans at June 30, 2003, which was little changed from 1.60% at the previous year-end. Nonperforming assets totaled $1.1 million (0.26% of total assets) at quarter-end, down from $2.4 million (0.59% of assets) at the beginning of the year. There were no foreclosed assets during the first six months.

Service charges and other income grew by $520 thousand (94%) in the second quarter and by $940 thousand (90%) in the first six months. This growth was primarily due to higher secondary market income related to the higher volume of residential mortgage originations and sales. Secondary market income, which consists principally of gains on sale of loans, increased by $413 thousand for the second quarter and by $710 thousand for the year-to-date in 2003, compared to the same periods in 2002. Service charge income for the first six months also benefited from a $148 thousand increase in non-deposit investment product commissions.

Net securities gains decreased by $119 thousand in the second quarter and by $369 thousand in the first six months of 2003, compared to the same periods of 2002. In the first six months of 2003, the Company recorded a net securities loss of $66 thousand, including gross gains of $1.107 million and gross losses of $1.173 million. Securities gains were recorded on the sale and redemption of $6 million in corporate securities which were viewed as fully valued. The securities loss was recorded on a debt security issued by a mutual insurance company which was written down to estimated fair value. During the first quarter, Alliance eliminated the held to maturity classification of investment securities, which had decreased to a balance of $5 million at year-end 2002. These securities were transferred to the available for sale category, where security purchases will be recorded for the foreseeable future.

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Non-interest expense increased by $346 thousand (14%) in the second quarter and by $548 thousand (11%) in the first six months of 2003 compared to 2002. For the first six months, most of the expense increase was in compensation expense related to higher business volumes, including a $354 thousand increase in commissions and temporary help expense. Higher pension costs also contributed an $81 thousand increase. Total full time equivalent staff measured 111 at quarter-end, compared to 109 at year-end 2002. During the second quarter, purchased services expense increased by $123 thousand due mainly to professional fees related to corporate strategic initiatives.

Shareholders’ equity totaled $30 million at quarter-end and measured 7.1% of total assets, up from 6.2% at year-end 2002. The Company’s capital remained in excess of all regulatory requirements and continued to exceed the requirement for the highest regulatory capital category of Well Capitalized. The $4.8 million (19%) increase in shareholders’ equity in the first six months of 2003 included a $3.3 million improvement resulting from net appreciation of investment securities, reflecting the impact of lower interest rates and improved corporate security pricing spreads.

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Consolidated Selected Financial Data (Unaudited)

	As of and for the three months ended June 30,						As of and for the six months ended June 30,
	2003			2002			2003			2002
For the Period (in thousands)
Net interest income	$	3,047		$	3,069		$	6,253		$	6,263
Provision for loan losses		6			65			51			237
Service charges and other income		1,073			553			1,986			1,046
Net gain (loss) on securities and other assets		12			131			(66	)		303
Non-interest expense		2,798			2,452			5,467			4,919
Net income	$	919		$	865		$	1,842		$	1,715
Per Share
Earnings – basic	$	0.34		$	0.34		$	0.68		$	0.67
Earnings – diluted		0.32			0.32			0.65			0.63
Dividends declared		0.075			0.068			0.15			0.136
Book value		11.34			8.96			11.34			8.96
Common stock price:
High		24.63			15.45			24.63			15.45
Low		19.70			12.55			18.51			10.68
Close		23.00			13.77			23.00			13.77
At Quarter End (in millions)
Total assets	$	429.2		$	406.1		$	429.2		$	406.1
Total loans		279.4			285.1			279.4			258.1
Other earning assets		120.0			119.7			120.0			119.7
Deposits		335.9			330.6			335.9			330.6
Borrowings		58.3			48.5			58.3			48.5
Shareholders’ equity		30.4			23.2			30.4			23.2
Operating Ratios
Return on average equity		13.25	%		15.40	%		13.72	%		15.35	%
Return on average assets		0.87			0.87			0.88			0.88
Net interest margin		3.17			3.37			3.28			3.52
Efficiency ratio		66.49			65.90			64.89			65.66
Equity/total assets		7.08			5.71			7.08			5.71
Dividend payout ratio		21.86			20.37			21.81			20.50
Loan Related Ratios
Net charge-offs/average regular loans		(0.03	)%		(0.02	)%		0.00	%		(0.01	)%
Loan loss allowance/regular loans		1.59			1.71			1.59			1.71
Nonperforming assets/total assets		0.27			0.70			0.27			0.70
Growth (in percent)
Net income		6.2	%		5.4	%		7.4	%		4.1	%
Regular loans		4.7			4.6			4.7			4.6
Deposits		3.0			17.9			3.0			17.9

(1) All share and per share data for the 2002 periods has been adjusted to reflect the eleven-for-ten stock split effected in the form of a 10% stock dividend distributed in May 2002.

(2) The efficiency ratio is non-interest expense divided by the sum of net interest income (fully taxable equivalent) and service charges and other income. Return, margin and charge-off ratios are annualized based on average balances for the period. Net interest margin is fully taxable equivalent.

(3) Regular loans are total loans excluding government guaranteed loans.

(4) Growth of net income is compared to the same period in the prior year. Growth of regular loans and deposits is compared to the prior year-end, annualized.

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RESULTS OF OPERATIONS

Average Balance Sheets and Interest Rates – Fully Taxable Equivalent (FTE)

The following table sets forth, for the periods indicated, the average balances and their associated average interest rates. Average balances are based on average daily balances. The balance and yield on all securities is based on amortized cost and not on fair value.

(dollars in thousands)	Average Balance				Rate (FTE Basis)
Quarters ended June 30	2003		2002		2003			2002
Residential mortgage loans	$	84,247	$	61,384		6.19	%		6.96	%
Commercial mortgage loans		94,808		88,677		7.03			7.77
Other commercial loans		40,155		39,140		6.50			6.27
Consumer loans		38,172		40,593		4.33			5.23
Government guaranteed loans		22,721		28,235		6.36			7.00
Total loans		280,103		258,029		6.28			6.87
Securities		85,516		91,776		4.56			6.81
Loans held for sale		10,258		1,273		4.80			5.87
Short term investments		20,086		24,858		1.15			1.75
Total earning assets		395,963		375,936		5.60			6.51
Other assets		27,714		24,667
Total assets	$	423,677	$	400,603
NOW deposits	$	40,549	$	37,140		0.42	%		0.93	%
Money market deposits		45,048		41,428		1.37			1.95
Savings deposits		81,049		74,697		0.97			2.05
Time deposits		131,436		139,367		3.60			4.37
Total interest bearing deposits		298,082		292,632		2.12			3.00
Borrowings		56,771		48,500		5.90			6.26
Interest bearing liabilities		354,853		341,132		2.72			3.46
Demand deposits		38,125		32,251
Other liabilities		2,869		4,690
Shareholders’ equity		27,830		22,530
Total liabilities and equity	$	423,677	$	400,603
Net Interest Spread						2.88	%		3.05	%
Net Interest Margin						3.17	%		3.37	%

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(dollars in thousands)	Average Balance				Rate (FTE Basis)
Six months ended June 30	2003		2002		2003			2002
Residential mortgage loans	$	82,613	$	60,749		6.30	%		7.06	%
Commercial mortgage loans		94,823		88,202		7.08			7.86
Other commercial loans		39,849		38,984		6.31			6.61
Consumer loans		38,624		40,246		4.40			5.35
Government guaranteed loans		23,979		28,828		6.40			6.77
Total loans		279,888		257,009		6.31			6.97
Securities		87,580		92,922		4.97			6.85
Loans held for sale		10,121		1,492		5.22			5.15
Short term investments		15,547		15,518		1.16			1.84
Total earning assets		393,136		366,941		5.78			6.71
Other assets		27,723		25,061
Total assets	$	420,859	$	392,002
NOW deposits	$	39,013	$	36,086		0.42	%		0.94	%
Money market deposits		45,040		41,782		1.41			2.11
Savings deposits		79,396		69,791		1.03			2.02
Time deposits		132,499		135,837		3.68			4.44
Total interest bearing deposits		295,948		283,496		2.20			3.06
Borrowings		58,004		49,663		5.78			6.17
Interest bearing liabilities		353,952		333,159		2.78			3.52
Demand deposits		36,665		31,759
Other liabilities		3,167		4,552
Shareholders’ equity		27,075		22,532
Total liabilities and equity	$	420,859	$	392,002
Net Interest Spread						3.00	%		3.19	%
Net Interest Margin						3.28	%		3.52	%

FTE basis net interest income presents earnings on tax-advantaged securities on a basis equivalent to yields on fully-taxable securities. A tax rate of 40% was used to compute the tax-equivalent adjustment for all periods presented. A reconciliation of net interest income follows:

	Three months ended June 30,				Six months ended June 30,
Net interest income (in thousands)	2003		2002		2003		2002
As reported in the consolidated
income statements	$	3,047	$	3,069	$	6,253	$	6,263
Tax-equivalent adjustment		88		99		186		183
FTE basis	$	3,135	$	3,168	$	6,439	$	6,446

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Net Interest Income:     Net interest income decreased by $22 thousand and $10 thousand for the second quarter and for the year-to-date. Growth in earning assets was offset by margin compression during these periods.

Interest rates continued to decline in 2003, following the steep declines in 2002 to record low levels. Short term treasury rates declined by about 0.35% in the first six months, while the ten year treasury rate declined by about 0.80% to a low of 3.11% near the end of the second quarter. Subsequently, by the date of this report, the ten year treasury rate had rebounded to about 4.30%. The plunge in rates in the second quarter fueled record demand for asset refinancings in many major markets. A modest recovery in the stock market, together with the low interest rates, also muted the unusually strong deposit demand experienced in recent years. The slower deposit growth constrained opportunities to offset lower yields with higher volume. The Company is asset sensitive, indicating that net interest income is negatively affected when interest rates decrease. This is further discussed in the Interest Rate Sensitivity section of this report.

Total earning assets grew by $11 million (3%) during the first six months of 2003. This growth was funded primarily by $5 million in deposit growth and $4 million in net new borrowings. The asset growth was held in short term investments at period-end, which increased by $17 million to $22 million for the year-to-date.

The net interest margin measured 3.17% in the most recent quarter, compared to 3.37% in the second quarter of 2002. The margin had improved to 3.39% in the first quarter of 2003, but declined further in the most recent quarter. This was primarily due to changes in the purchased assets portfolio, including a .60% reduction in the average yield on investment securities and a $12 million reduction in the average balance of investment securities and government guaranteed loans, with the proceeds being held in lower yielding short term investments.

For the first six months of 2003, most asset yields and liability costs continued to decrease due to the ongoing effects of lower interest rates. The yield on earning assets fell to 5.60% in the second quarter of 2003, from 6.51% in the second quarter of 2002 and from 6.11% in the fourth quarter of 2002. The cost of interest bearing liabilities declined to 2.72%, from 3.46% and from 3.07% for the same periods, respectively.

Provision for Loan Losses:     The provision is made to maintain the allowance for loan losses at a level deemed adequate by management. The provision was $51 thousand for the first six months of the year, compared to $237 thousand in the same period of the prior year. The higher provisioning in 2002 related to growth in commercial loans and to an increase in the impairment reserve on one loan. The allowance totaled $4.1 million, or 1.59% of regular loans at June 30, 2003, which was little changed from 1.60% at the previous year-end.

Non-Interest Income:     Service charges and other income grew by $520 thousand (94%) in the second quarter and by $940 thousand (90%) in the first six months. Secondary market income increased by $413 thousand for the second quarter and by $710 thousand for the year-to-date in 2003, compared to the same period in 2002. Proceeds from loans sold totaled $59 million for the first half of 2003 compared to $10 million for the same period last year. The pipeline of applications in process for loans to be held for sale totaled $33 million at June 30, 2003. The volume of new applications declined after quarter-end after the sharp increase in long-term interest rates. Service charge and other income for the first six months also benefited from a $148 thousand increase in non-deposit investment product commissions. Under a new third party agreement, the Company records these commissions on a gross basis, rather than on a net basis. The higher income reflected this new commission structure, together with an increase in sales volume. Excluding the above increases, other revenues from service charges and other income increased by $82 thousand (8%), including a $40 thousand increase in prepayment fees associated with loan refinancings. For the first six months of 2003, the ratio of fee income to total revenues increased to 24% from 14% in the first half of 2002 (total revenues are the sum of net interest income and service charges and other income).

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Net securities gains decreased by $369 thousand in the first six months of 2003, compared to the same period in 2002. In the first six months of 2003, the Company recorded a net securities loss of $66 thousand, including gross gains of $1.107 million and gross losses of $1.173 million. Securities gains were recorded on the sale and redemption of $6 million in corporate securities which were viewed as fully valued. The securities loss was recorded on a debt security issued by a mutual insurance company which was written down to estimated fair value. The net gain recorded in 2002 was primarily due to the sale of two utility common stocks due to favorable market conditions for these securities.

Non-Interest Expense and Income Tax Expense:     Non-interest expense increased by $346 thousand (14%) in the second quarter and by $548 thousand (11%) in the first six months of 2003 compared to 2002. For the first six months, most of the expense increase was in compensation expense related to higher business volumes, including a $354 thousand increase in commissions and temporary help expense. Compensation expense in 2003 also included a new compensation related to investment product sales under the new third party agreement. Higher pension costs also contributed an $81 thousand increase. Total full time equivalent staff measured 111 at quarter-end, compared to 109 at year-end 2002. During the second quarter, purchased services expense increased by $123 thousand due mainly to corporate strategic initiatives, including costs related to the merger agreement. Excluding compensation and higher purchased services expenses, all other expenses decreased by $59 thousand (2%) during the first six months of the year. The ratio of total annualized non-interest expense to average total assets was 2.60% in the first six months of 2003, compared to 2.51% for the first half of 2002. Due to the higher fee income, the efficiency ratio improved to 64.9% compared to 65.7% for the same periods, respectively. Also, for the first six months of 2003 vs. 2002 the effective income tax rate increased to 30.6% from 30.2% due to a lower proportionate balance of equity investments, together with lower average yields on equity investments. The effective income tax rate benefits from the dividends received deduction on equity securities, accrued increases in cash surrender value of bank owned life insurance, and the state income tax benefit of the Company’s passive investment corporation.

Comprehensive Income:     Comprehensive income includes changes (after tax) in the market valuation of investment securities available for sale. Comprehensive income was $5.15 million in the first half of 2003, compared to $1.34 million in the same period last year. The net unrealized loss on securities declined in the first half of 2003 due to the plunge in interest rates, improved market spreads on corporate debt securities, and the recognition of a loss deemed to be other-than-temporary. Please see the following discussion on investment securities.

FINANCIAL CONDITION

Cash and Cash Equivalents:     Total cash and equivalents increased by $21 million to $39 million at June 30, 2003 due to decreases totaling $12 million in loans held for sale and government guaranteed loans, along with increases totaling $9 million in deposits and borrowings. The Company expects to reinvest the majority of short-term investments into higher yielding loans and investment securities during the second half of the year.

Investment Securities:     As previously noted, during the most recent quarter, Alliance eliminated the category of securities held to maturity and transferred the outstanding balance of these securities to the available for sale category. This represented a change in intent regarding the entire balance of securities held to maturity, which consisted of ten securities with an amortized cost of $5.1 million. All future purchases of investment securities will be categorized as available for sale for the foreseeable future.

Total investment securities increased by less than 1% during 2003. Proceeds of $25 million from repayments, maturities, calls, and sales were reinvested into purchases of $23 million. The $25 million in proceeds included $8 million of U.S. agency securities, $9 million of mortgage backed securities, and $8 million of corporate debt and equity securities. The $23 million in purchases were all in three year adjustable rate U.S. agency mortgage passthrough securities.

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At June 30, 2003, total securities of $93 million included government, agency, and mortgage backed securities totaling $47 million (50%). All of these securities were rated AA or AAA. Corporate debt and equity securities totaled $44 million (47%) and investments in Federal Home Loan Bank and Bankers Bank Northeast totaled $3 million (3%). All of the corporate securities had ratings by Moodys and/or Standard & Poors, except for $8 million in utility common stocks, all of which were ranked in the five highest stock ranking categories by Standard & Poors and a $2.5 million ultrashort bond fund. Excluding non-investment grade rated securities (discussed below), the rated corporate securities had an average rating of A- at June 30, 2003.

The securities portfolio includes six corporate debt securities which are rated non-investment grade. One of these debt securities was downgraded further during the current quarter and failed to make a scheduled payment. For the first six months of 2003, Management recorded total charges of $1.17 million to write down this security to estimated fair value. At quarter-end, the Company had four securities rated in the BB- to BB+ range with a total unrealized loss of $328 thousand (7% of unamortized cost). The Company had two debt securities rated D which had been written down for other-than-temporary decline in value. The equity security portfolio had a net unrealized loss of $1.28 million, concentrated in three utility common equity securities with an unrealized loss of $1.5 million, at June 30, 2003. Management’s assessment was that this decline was temporary and the prices of these securities are expected to improve over time.

The total investment securities portfolio had a $608 thousand net unrealized gain as of June 30, 2003, measuring 0.7% of amortized cost, compared to a net unrealized loss of $3.3 million at year-end 2002, measuring 3.4% of amortized cost. As previously noted, this improvement was due to generally lower interest rates, improved spreads on corporate securities, and the recognition of a loss deemed other than temporary.

The average balance of investment securities decreased by $10 million in the most recent quarter, compared to the fourth quarter of 2002, and by $6 million compared to the second quarter of 2002. The quarter-end balance was slightly higher than the year-end 2002 balance, as sales and runoff early in the quarter were replaced by purchases later in the quarter. The fully taxable equivalent yield on investment securities was 4.56% in the most recent quarter, down more than 2% from 6.81% in the same quarter of the previous year due to the combined effects of sales, runoff, lower interest rates, and reinvestments into shorter duration, lower yielding mortgage backed securities.

Total Loans:     Total loans increased by $1 million to $279 million for the first half of 2003. Total regular loans increased by $6 million to $258 million. The growth was mostly in residential mortgage loans, which primarily offset runoff of similar duration government guaranteed loans. The Company actively promoted its fee free mortgage refinance loans, with fixed rates in the 3-15 year range. As previously noted, prepayment speeds of many loan types accelerated sharply in the second quarter until long term rates increased after quarter end. During the first half of 2003, Alliance closed $60 million of conforming residential mortgages, plus an additional $16 million of fee free refinance mortgages. Commercial loan demand was generally slower in the first half of the year, but the Company believes that an improving economy in the second half of the year will cause such loan demand to increase. The balance of residential mortgage loans held for sale declined to $5 million at June 30, 2003, reflecting a high volume of sales shortly before the end of the quarter.

The average balance of total loans was flat in the most recent quarter compared to the prior quarter. It was up by $5 million from the fourth quarter of 2002 and by $22 million from the second quarter of 2002. The annualized growth rate of average regular loans was 7.5% in the most recent quarter, compared to the last quarter of 2002. The yield on total loans decreased to 6.28% from 6.60% for these periods due to the continuing effects of prime rate decreases and to ongoing refinances at lower interest rates.

Nonperforming Assets:     There were no foreclosed assets at June 30, 2003. Nonaccruing loans totaled $1.1 million, compared to $2.4 million at year-end 2002. Nonperforming assets were 0.27% of total assets at June 30, 2003, which was also improved from 0.59% at the beginning of the year.

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Allowance for Loan Losses:     The allowance totaled $4.10 million (1.59% of regular loans) at June 30, 2003, compared to $4.05 million (1.60% of regular loans) at year-end 2002. During the first half of the year, gross charge-offs were $28 thousand and gross recoveries were $27 thousand. The allowance measured 361% of nonaccruing loans at quarter-end.

Deposits and Borrowings:     Total deposits increased by $5 million in the first half of 2003. Increases were recorded in all categories except for time deposits, which decreased due to run-off of higher rate time accounts booked in previous years which were not retained in the current low interest rate environment. Non-maturity deposits grew at a 10% annualized rate for the first half, down from a 14% growth rate in the year 2002. Lower interest rates and an improvement in the stock market are believed to have contributed to a slowing in deposit demand, from the high growth levels in previous years. Total borrowings increased by $4 million in the first half of 2003, as some medium term Federal Home Loan Bank borrowings were used to offset time account runoff.

Total deposits averaged $336 million in the most recent quarter, which was little changed from $334 million in the fourth quarter of 2002 and which was increased from $325 million in the second quarter of 2002. The average cost of interest bearing deposits declined to 2.12% in the most recent quarter from 2.55% in the fourth quarter of 2002, while average borrowing costs decreased to 5.90% from 5.99%.

Interest Rate Sensitivity:     The Company’s interest rate sensitivity has increased modestly in the first half of 2003. The one year interest rate gap is estimated to have increased to $48 million at June 30, 2003 from $37 million at year-end 2002. The gap is the difference between rate sensitive assets and rate sensitive liabilities. As a percentage of earning assets, the gap is estimated to be 12%, which is viewed as a minor exception to the Bank’s policy guideline of 10%, and which is expected to decline based on anticipated loan originations in 2003. The Company believes that income and equity value would increase in a rising rate environment and decrease in a decreasing rate environment, primarily due to rate adjustments in its portfolio of prime based commercial and consumer loans. The Company believes that its earnings and equity sensitivities also exceeded policy limits at June 30 to a minor extent. These sensitivities were expected to come within limits based on the anticipated reduction in the one year interest rate gap. With interest rates at comparatively low levels, the Company generally is cautious toward the acquisition of new long term fixed rate assets in order to control equity at risk in a rising rate environment. Due to the low and volatile interest rate environment, uncertainty in the modeling process has increased.

Liquidity and Cash Flows:     The Company’s primary use of funds in the first half of 2003 was the purchase of three year adjustable rate mortgage passthrough agency securities. These purchases were funded by sales and runoff from other investment securities. The Company increased short term FHLBB borrowings in the first quarter, until short term investments started to build as a result of deposit and borrowing growth, together with reductions in loans held for sale and government guaranteed loans. The majority of short term investments are expected to be reinvested in loans and securities in the second half of the year. Borrowings and time deposits are the primary sources of liquidity for additional balance sheet growth. Short term investments and securities available for sale provide additional sources of liquidity. Additionally, the portfolio of government guaranteed loans represents a readily marketable pool of assets, although Management has no present intent to sell these assets. The Company’s primary source of funds is dividends received from the Bank, and its primary use of funds is dividends paid to shareholders and to trust preferred security holders.

Capital Resources:     Shareholders’ equity increased by $5 million to $30 million during the first half of 2003, benefiting from the comparatively high comprehensive income. Total equity measured 7.1% of assets at June 30, which was up from 6.2% at year-end 2002. At June 30, both Alliance and Tolland Bank continued to be capitalized in accordance with the “well capitalized” regulatory classification.

As discussed in Note 7 to the consolidated financial statements, the adoption of FASB Interpretation No. 46 (FIN 46) is required beginning in the third quarter of 2003. This may affect the financial reporting in the consolidated financial statments for the Company’s two statutory business trusts that have issued trust preferred securities totaling $7 million, and their continued qualification as Tier I capital for the Company under regulatory definitions. These financial reporting and regulatory determinations are currently under review and the Company expects that its capital will remain in excess of all regulatory requirements.

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ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See the discussion and analysis of quantitative and qualitative disclosures about market risk provided in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 filed on March 31, 2003. See also the discussion of Interest Rate Sensitivity in Item 2 of this Form 10-Q.

ITEM 4.     CONTROLS AND PROCEDURES

Based on their evaluation as of June 30, 2003, the Company’s Chief Executive Office, Joseph H. Rossi and Chief Financial Officer, David H. Gonci, concluded the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. There were no changes during the quarter ended June 30, 2003 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II     OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

The Company is not involved in any material legal proceedings other than ordinary routine litigation incidental to its business.

Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None.

Item 3. DEFAULTS UPON SENIOR SECURITIES

None.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

Item 5. OTHER INFORMATION

None.

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibit Index

The exhibits listed below are included with this Report.

31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 Certification by Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. Section 1350.

32.2 Certification by Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. Section 1350.

(b) Reports on Form 8-K filed during the quarter ended June 30, 2003

(i) On April 18, 2003, the Company filed a Form 8-K reporting, under Item 9, a news release reporting announcement of the Company’s 2003 annual meeting of shareholders for the 2002 fiscal year.

(ii) On April 30, 2003, the Company filed a Form 8-K reporting, under Item 9, a news release reporting earnings for the first quarter of the 2003 fiscal year.

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Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

ALLIANCE BANCORP OF NEW ENGLAND, INC.

Date:     August 13, 2003	/s/ Joseph H. Rossi
	Joseph H. Rossi
	President/Chief Executive Officer
Date:     August 13, 2003	/s/ David H. Gonci
	David H. Gonci
	Senior Vice President/Chief Financial Officer

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