FORM 10-Q
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United States Securities and Exchange Commission
Washington, DC 20549
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended June 30, 2000
Commission File Number 001-13405
ALLIANCE BANCORP OF NEW ENGLAND, INC.
Incorporated in the State of Delaware
IRS Employer Identification Number 06-1495617
Address and Telephone:
348 Hartford Turnpike, Vernon, Connecticut 06066, (860) 875-2500
Securities registered pursuant to Section 12(b) of the Act: Common Stock -- $.01
par value, which is registered on the American Stock Exchange.
Alliance Bancorp of New England (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days.
As of August 3, 2000, Alliance Bancorp of New England had 2,331,100 shares of
common stock outstanding.
TABLE OF CONTENTS Page
Table Consolidated Selected Financial Data..............................2
Part I Financial Information
Item 1 Financial Statements
Consolidated Balance Sheets...................................3
Consolidated Income Statements................................4
Consolidated Statements of Changes in Shareholders' Equity....5
Consolidated Statements of Cash Flows.........................6
Notes to Consolidated Financial Statements....................7
Item 2 Management's Discussion and Analysis
of Financial Condition and Results of Operations.............10
Special Note Regarding Forward-Looking Statements............10
Item 3 Quantitative and Qualitative Disclosures About Market Risk.......14
Part II Other Information................................................14
Table Average Balance Sheet and Interest Rates ........................15
Signatures .............................................................16
1
Alliance Bancorp of New England, Inc.
Consolidated Selected Financial Data (Unaudited)
As of and for the three months As of and for the six months
ended June 30, ended June 30,
-------------------------------- ---------------------------------
2000 1999 2000 1999
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For the Quarter (in thousands)
Net interest income $ 2,905 $ 2,521 $ 5,713 $ 4,907
Provision for loan losses 55 11 142 136
Service charges and other income 413 461 723 883
Net (loss) gain on securities and other assets (35) - 69 154
Non-interest expense 2,158 1,961 4,242 3,840
Income before income taxes 1,070 1,010 2,121 1,968
Income tax expense 275 279 554 537
Net income $ 795 $ 731 $ 1,567 $ 1,431
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Per Share
Basic earnings $ 0.34 $ 0.32 $ 0.68 $ 0.62
Diluted earnings 0.34 0.31 0.67 0.60
Dividends declared 0.07 0.06 0.13 0.11
Book value 6.39 6.98 6.39 6.98
Common stock price:
High 8.50 12.38 9.25 12.38
Low 6.88 9.13 6.88 9.13
Close 7.00 12.31 7.00 12.31
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At Quarter End (in millions)
Total assets $ 326.2 $ 307.6 $ 326.2 $ 307.6
Total loans 212.7 188.6 212.7 188.6
Other earning assets 91.7 105.2 91.7 105.2
Deposits 266.0 249.0 266.0 249.0
Borrowings 43.7 39.5 43.7 39.5
Shareholders' equity (a) 14.9 16.0 14.9 16.0
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Operating Ratios (in percent)
Return on average assets 0.98% 1.02% 0.98% 1.02%
Return on average equity 20.26 17.74 20.44 16.62
Equity % total assets (period end) 4.57 5.21 4.57 5.21
Net interest spread (fully taxable equivalent) 3.60 3.40 3.58 3.34
Net interest margin (fully taxable equivalent) 4.02 3.86 4.00 3.82
Dividend payout ratio 20.42 18.84 19.21 17.64
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(a) Shareholders' equity includes accumulated other comprehensive income (loss),
which consists of unrealized gains (losses) on investment securities, net of
taxes.
2
Alliance Bancorp of New England, Inc.
Consolidated Balance Sheets (Unaudited)
(in thousands except share data) June 30, December 31,
2000 1999
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Assets
Cash and due from banks $ 10,008 $ 18,584
Short-term investments 14,994 4,028
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Total cash and cash equivalents 25,002 22,612
Securities available for sale (at fair value) 51,222 53,156
Securities held to maturity 25,511 27,857
Residential mortgage loans 58,321 54,197
Commercial mortgage loans 62,860 52,694
Other commercial loans 40,673 34,965
Consumer loans 33,336 33,841
Government guaranteed loans 17,509 15,935
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Total loans 212,699 191,632
Less: Allowance for loan losses (3,350) (3,200)
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Net loans 209,349 188,432
Premises and equipment, net 5,735 5,587
Foreclosed assets, net 131 53
Other assets 9,290 9,240
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Total assets $ 326,240 $ 306,937
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Liabilities and Shareholders' Equity
Demand deposits $ 28,236 $ 25,707
NOW deposits 30,160 26,120
Money market deposits 35,620 35,321
Savings deposits 46,905 44,199
Time deposits 125,106 120,044
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Total deposits 266,027 251,391
Borrowings 43,707 39,575
Other liabilities 1,603 1,624
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Total liabilities 311,337 292,590
Preferred stock, ( $.01 par value; 100,000 shares
authorized, none issued) - -
Common stock, ($.01 par value; authorized 4,000,000
shares; issued 2,531,699 in 2000
and 2,509,882 in 1999; outstanding 2,331,100 in 2000
and 2,309,283 in 1999) 25 25
Additional paid-in capital 11,516 11,429
Retained earnings 12,883 11,618
Accumulated other comprehensive loss, net (6,412) (5,616)
Treasury stock (200,599 shares) (3,109) (3,109)
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Total shareholders' equity 14,903 14,347
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Total liabilities and shareholders' equity $ 326,240 $ 306,937
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See accompanying notes to 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) 2000 1999 2000 1999
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Interest Income
Loans $ 4,095 $ 3,569 $ 8,024 $ 7,112
Debt securities 1,281 1,074 2,568 2,011
Dividends on equity securities 274 299 553 588
Other earning assets 326 132 523 224
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Total interest and dividend income 5,976 5,074 11,668 9,935
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Interest Expense
Deposits 2,412 2,197 4,721 4,372
Borrowings 659 356 1,234 656
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Total interest expense 3,071 2,553 5,955 5,028
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Net Interest Income 2,905 2,521 5,713 4,907
Provision For Loan Losses 55 11 142 136
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Net interest income after provision for loan losses 2,850 2,510 5,571 4,771
Non-Interest Income
Service charges and other income 413 461 723 883
Net gain on securities - - 104 104
Net (loss) gain on assets (35) - (35) 50
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Total non-interest income 378 461 792 1,037
Non-Interest Expense
Compensation and benefits 1,178 985 2,294 2,034
Occupancy 158 176 350 356
Data processing services and equipment 283 223 564 459
Office and insurance 110 124 272 247
Purchased services 222 299 385 452
Other 207 154 377 292
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Total non-interest expense 2,158 1,961 4,242 3,840
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Income before income taxes 1,070 1,010 2,121 1,968
Income tax expense 275 279 554 537
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Net Income $ 795 $ 731 $ 1,567 $ 1,431
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Per Share Data
Basic earnings per share $ 0.34 $ 0.32 $ 0.68 $ 0.62
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Diluted earnings per share $ 0.34 $ 0.31 $ 0.67 $ 0.60
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Average basic shares outstanding 2,319,854 2,295,286 2,314,521 2,294,699
Average additional dilutive shares 35,217 72,326 38,097 74,536
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Average diluted shares outstanding 2,355,071 2,367,612 2,352,618 2,369,235
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See accompanying notes to financial statements
4
Alliance Bancorp of New England, Inc.
Consolidated Statements of Changes in
Shareholders' Equity (Unaudited)
Accumulated
Additional other Total
Six Months ended June 30 Common paid-In Retained comprehensive Treasury Shareholders'
(in thousands except share data) stock capital earnings income Stock equity
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1999
Balance, December 31, 1998 $ 25 $ 11,306 $ 9,223 $ 751 $ (3,109) $ 18,196
Comprehensive income
Net income 1,431 1,431
Unrealized (loss) on securities,
net of reclassification adjustment (3,371) (3,371)
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Comprehensive income (loss) (1,940)
Dividends declared and paid (251) (251)
Issuance of shares pursuant to exercise
of stock options 24 24
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Balance, June 30, 1999 $ 25 $ 11,330 $ 10,403 $ (2,620) $ (3,109) $ 16,029
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2000
Balance, December 31, 1999 $ 25 $ 11,429 $ 11,618 $ (5,616) $ (3,109) $ 14,347
Comprehensive income
Net income 1,567 1,567
Unrealized loss on securities,
net of reclassification adjustment (796) (796)
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Comprehensive income 771
Dividends declared and paid (302) (302)
Issuance of shares pursuant to exercise
of stock options 87 87
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Balance, June 30, 2000 $ 25 $ 11,516 $ 12,883 $ (6,412) $ (3,109) $ 14,903
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Disclosure of reclassification amount
Six months ended June 30 (in thousands) 2000 1999
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Unrealized holding loss arising during $ (727) $ (3,295)
the period net of income tax benefit
of $ 375 and $1,697, respectively
Less reclassification adjustment for
gains included in net income net of income
tax expense of $35 and $28, respectively (69) (76)
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Net unrealized loss on securities $ (796) $ (3,371)
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See accompanying notes to financial statements
5
Alliance Bancorp of New England, Inc.
Consolidated Statements of Cash Flows (Unaudited)
Six months ended June 30,
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(in thousands) 2000 1999
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Operating Activities:
Net income $ 1,567 $ 1,431
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Provision for loan losses 142 136
Depreciation and amortization 295 256
Net investment security gains (104) (104)
Net asset loss (gain) 35 (50)
(Decrease) increase in other liabilities (21) 1,151
(Increase) decrease in loans held for sale (877) 4,286
(Increase) decrease in other assets 633 (363)
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Net cash provided by operating activities 1,670 6,743
Investing Activities:
Securities available for sale:
Proceeds from amortization and maturities 5,498 7,281
Proceeds from sales of securities 915 4,852
Purchases of securities (4,874) (32,274)
Securities held to maturity:
Proceeds from amortization and maturities 1,450 4,114
Net increase in loans (20,321) (8,142)
Increase in foreclosed assets, net (78) -
Proceeds from the sale of premises and equipment - 464
Purchases of premises and equipment (423) (383)
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Net cash used in investing activities (17,833) (24,088)
Financing Activities:
Net increase in interest-bearing deposits 12,107 9,872
Net increase (decrease) in demand deposits 2,529 (851)
Net decrease in FHLB advances - 12,431
Net increase in other borrowings 4,132 3,500
Stock options exercised 87 24
Cash dividends paid (302) (251)
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Net cash provided by (used in) financing activities 18,553 24,725
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Net Change in Cash and Cash Equivalents 2,390 7,380
Cash and cash equivalents at beginning of the period 22,612 20,216
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Cash and cash equivalents at end of the period $ 25,002 $ 27,596
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Supplemental Information On Cash Payments
Interest expense $ 5,956 $ 4,926
Income tax expense 650 890
Supplemental Information On Non-cash Transactions
Net loans transferred to foreclosed assets 78 -
Transfer of held to maturity securities to available for sale 896 -
See accompanying notes to financial statements
6
Notes to Consolidated Financial Statements (unaudited)
Note 1. Basis of Presentation and Principles of Business and Consolidation
The consolidated financial statements have been prepared and presented in
conformity with generally accepted accounting principles. Unless otherwise
noted, all dollar amounts presented in the financial statements and note tables
are rounded to the nearest thousand dollars, except share data. Certain prior
period amounts have been reclassified to conform with current financial
statement presentation.
Alliance Bancorp of New England, Inc. ("Alliance" or the "Company") uses the
accrual method of accounting for all material items of income and expense. The
Company is required to make certain estimates and assumptions in preparing these
statements. The most significant estimates are those necessary in determining
the allowance for loan losses, the valuation of foreclosed assets, and the
determination of fair values of financial instruments. Factors affecting these
estimates include national economic conditions, the level and trend of interest
rates, local market conditions, and real estate trends and values.
The quarterly consolidated financial statements are unaudited. However, in the
opinion of Management, all material adjustments, consisting primarily of normal
recurring accruals, necessary for a fair presentation of the consolidated
financial statements have been included. Operating results for any interim
period are not necessarily indicative of results for any other interim period or
for the entire year.
Management's Discussion and Analysis of Financial Condition and Results of
Operations accompany these consolidated financial statements. These consolidated
interim financial statements and notes should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
Alliance 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"), 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. Alliance also wholly owns Alliance Capital
Trust II ("Trust II"), a Delaware chartered trust which was formed in the first
quarter of 2000 and issued $3.5 million in privately offered trust preferred
securities. Proceeds from the issuance of Trust II were invested in subordinated
notes issued by Alliance, which invested the note proceeds in a capital
contribution to 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 the 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 subsidiary. The
consolidated financial statements include Alliance, Trust I, Trust II, Tolland
Bank, TIC, and ARS. All significant intercompany accounts and transactions have
been eliminated in consolidation.
7
Note 2. Securities
Amortized Unrealized Unrealized Fair
June 30, 2000 (in thousands) Cost Gains Losses Value
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Securities available for sale
U.S. Government and agency $ 5,000 $ 9 $ (287) $ 4,722
U.S. Agency mortgage-backed 2,236 - (64) 2,172
Other debt securities 33,841 76 (4,576) 29,341
Marketable equity 15,560 6 (2,562) 13,004
Non-marketable equity 1,983 - - 1,983
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Total available for sale $ 58,620 $ 91 $ (7,489) $ 51,222
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Securities held to maturity
U.S. Government and agency $ 1,980 $ - $ (17) $ 1,963
U.S. Agency mortgage-backed 5,367 - (63) 5,304
Other debt securities 18,164 158 (1,342) 16,980
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Total held to maturity $ 25,511 $ 158 $ (1,422) $ 24,247
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Amortized Unrealized Unrealized Fair
December 31, 1999 (in thousands) Cost Gains Losses Value
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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
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Total available for sale $ 59,025 $ 203 $ (6,072) $ 53,156
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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
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Total held to maturity $ 27,857 $ 11 $ (667) $ 27,201
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Note 3. Nonperforming Loans
June 30, December 31,
(in thousands) 2000 1999
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Total nonaccruing loans $ 976 $ 1,218
Accruing loans past due 90 days or more - -
Impaired loans:
Impaired loans - valuation allowance required 571 852
Impaired loans - no valuation allowance required 837 102
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Total impaired loans $ 1,408 $ 954
Total valuation allowance on impaired loans 254 280
Commitments to lend additional funds for impaired loans - -
8
Note 4. Allowance for Loan Losses
Six Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2000 1999
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Balance at beginning of year $ 3,200 $ 3,060
Charge-offs (53) (24)
Recoveries 61 28
Provision for loan losses 142 136
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Balance at end of period $ 3,350 $ 3,200
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Note 5. New Accounting Standards
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that companies record all derivatives as either assets or liabilities
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 No. 137, this statement is effective for years
beginning after June 15, 2000. In June, 2000, the FASB issued SFAS No. 138 which
amends certain accounting and reporting standards of SFAS No. 133. This
statement is to be adopted concurrently with SFAS No. 133. The Company does not
believe that the adoption of this statement will have a material impact on its
financial position or results of operations.
9
ITEM 2 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS
OF OPERATIONS
Special Note Regarding Forward-Looking Statements
This report contains certain "forward-looking statements". These forward-looking
statements, which are included in Management's Discussion and Analysis, describe
future plans or strategies and include the Company's expectations of future
financial results. The words "believe," "expect," "anticipate," "estimate,"
"project" and similar expressions identify forward-looking statements. The
Company's ability to predict results or the effect of future plans or strategies
or qualitative or quantitative changes based on market risk exposure is
inherently uncertain. Factors which could affect actual results include but are
not limited to 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.
SUMMARY
Alliance reported an 8.8% increase in earnings for the second quarter ended June
30, 2000, with net income totaling $795 thousand ($.34 per share) compared to
$731 thousand ($.31 per share) for the same quarter a year earlier. Net income
for the first half of 2000 increased by 9.5% to $1.57 million ($.67 per share)
compared to $1.43 million ($.60 per share) in the same period of 1999. Dividends
declared were $.13 per share in the first six months of 2000, an 18.1% increase
over dividends of $.11 per share declared in the first half of 1999.
Total regular loans increased by $12.1 million in the last quarter, growing at a
26% annualized rate. The majority of this growth replaced lower yielding short
term investments, thereby contributing higher net interest income in the current
and future quarters. The Company achieved some of its current year goals for
loan growth by mid-year, with continuing strong loan demand, primarily in the
commercial market.
Several new sales officer appointments were announced in the second quarter.
Alliance also launched a new transaction account promotion, achieving growth of
$3.6 million in these balances during the second quarter, which resulted in an
annualized growth rate in excess of 20% for these low cost deposits. The new
offices in Hebron and South Windsor are contributing positively to earnings.
Tolland Bank is also moving forward with internet banking initiatives which it
plans to bring to the market in the second half of the year. Additionally,
during the first quarter, Alliance announced new management assignments to lead
sales and service, and was the first local bank to enroll in the SUM network,
which provides a surcharge free alternative to larger banks.
Net interest income increased by 15.3% in the second quarter and by 16.4% in the
first six months of 2000 compared to 1999, reflecting the growth noted above,
along with growth in savings and time deposits. The net interest margin
increased to 4.02% in the most recent quarter, compared to 3.86% in the second
quarter of 1999. Non-interest income decreased by 18% in the second quarter and
by 24% in the first six months of 2000 compared to 1999, primarily due to
unusually high loan prepayment fees in 1999. Over these same periods,
non-interest expense increased by 10% due to expansion and new offices.
Total assets were $326 million at June 30, 2000, up 6% from year-end 1999, while
shareholders' equity totaled $14.9 million, up 4%. Capital remained in excess of
all regulatory requirements. During the first quarter of 2000, Alliance placed
$3.5 million in 10.875% cumulative trust preferred securities through a wholly
owned Delaware subsidiary, Alliance Capital Trust II. All proceeds qualify as
regulatory capital, and $3.3 million in proceeds were contributed to Tolland
Bank as additional capital surplus.
10
RESULTS OF OPERATIONS
Net Interest Income: Net interest income increased by $384 thousand (15.3%) in
the second quarter and by $806 thousand (16.4%) in the first six months of 2000
compared to 1999. This was primarily due to a 10.7% increase in average earning
assets, together with the benefit of an increase in the fully taxable equivalent
net interest margin to 4.00% from 3.82% for the first six months of 2000,
compared to the same period of 1999.
Average total earning assets grew at an annualized rate of 11.7% and 14.1%
during the most recent quarter and first half of 2000, respectively, adjusting
for the unusually high level of cash and due from banks at year-end 1999 which
was held as part of the Year 2000 contingency plan. As noted above, this was
mostly due to the annualized growth rate of loans, primarily reflecting
commercial loan growth. While higher interest rates in the first quarter
contributed to reduced demand for residential mortgages and consumer loans,
Alliance has solicited a mix of variable and fixed rate commercial loans which
reflect the ongoing strong business conditions in the Connecticut markets.
The growth in the net interest margin is primarily due to an improvement in the
yield on loans to 8.10% in the first half of 2000 compared to 7.83% in the first
half of 1999. This primarily reflects the benefit of prime rate increases on
commercial and consumer loans which are tied to prime. The prime rate of
interest has increased from 7.75% to 9.50% over the 12 months ended June 30,
2000. The yield on short and long term investments also improved due to higher
short term interest rates and improved bond market spreads on new purchases.
These investment yield improvements largely offset the higher cost of funds
resulting from higher rates on maturing time deposit accounts and the higher
rate on the second trust preferred security issued by Alliance at the end of the
first quarter.
Alliance has maintained a positive one year interest rate gap, including the
benefit of $15.0 million in short term investments at June 30, 2000. This
interest rate gap has contributed to improved spreads at a time of increases in
short term rates and in credit market spreads. Additionally, average transaction
account balances have increased by $9.1 million (19.9%) in the most recent
quarter compared to the same quarter of last year, including growth of $5.0
million in average demand deposit balances. These low cost funds, primarily
sourced from new branches, have also contributed to the improved net interest
margin.
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 $142
thousand in the first half of 2000, compared to $136 thousand in the same period
of 1999. The allowance increased to $3.35 million at June 30, 2000, an increase
of $150 thousand from $3.2 million at year-end 1999. Please see the later
discussion on the Allowance for Loan Losses.
Non-Interest Income: First half service charge and other income decreased by
$160 thousand (18.1%) in 2000 compared to 1999 due to unusually high secondary
market fees and loan prepayment fees in 1999. Lower demand for residential
mortgages due to higher rates also contributed to a decline in secondary market
income in 2000. First half results in 2000 also included $210 thousand in
miscellaneous other income which was not included in 1999 results. Other income
in 2000 included $97 thousand related to interest received on tax refunds and
$70 thousand related to an increase in the cash value of bank owned life
insurance, which was purchased in the fourth quarter of 1999. Securities gains
totaled $104 thousand during the first half of both 2000 and 1999. The gains
recorded in 2000 were on one common equity security which had an unusual price
increase which was not viewed as sustainable, and the security was therefore
sold to take advantage of this situation.
Non-Interest Expense and Tax Expense: Non-interest expense in the second quarter
and first half of 2000 increased by $197 thousand (10.0%) and $402 thousand
(10.5%), respectively, due to expansion and new offices. Compensation related
expense grew by $260 thousand (12.8%) in the first half. Total full-time
equivalent staff at June 30, 2000 was 106.75, compared to 94 a year earlier,
representing an increase of 13.6% due to new offices and new lending related
staff. Compensation expense also included a $125 thousand increase in medical,
pension, and bonus related expense. Data processing and equipment expense
increased by $105 thousand (22.9%) due to new offices, account growth, and
higher computer systems depreciation due to upgrades installed over the last two
years. Other expense increases included $78 thousand in marketing related
expenses and $52 thousand in higher audit related fees, including fees related
to the income tax refund noted above. The first half effective tax
11
rate was 26% and 27% in 2000 and 1999, respectively, including the benefit of
the passive investment subsidiary and the dividends received deduction on equity
securities.
Comprehensive Income: Comprehensive income includes changes (after tax) in the
market valuation of investment securities available for sale. Comprehensive
income was $771 thousand in the first half of this year, compared to a loss of
$1.94 million in the same period of 1999. Please see the following discussion on
investment securities.
FINANCIAL CONDITION
Cash and Cash Equivalents: Total cash and equivalents increased by $2.4 million
in 2000. Most short term liquidity at year-end 1999 was held in cash and due
from banks in accordance with the Company's Year 2000 contingency plan. As of
June 30, 2000, Alliance held $15.0 million in short term investments, pending
additional anticipated loan originations in the second half of the year.
Investment Securities: Total investment securities decreased by $4.3 million in
2000, primarily due to the maturity of older, lower yielding structured U.S.
agency securities. Investment purchases have decreased in 2000 due to a decision
to hold liquid funds in the current rising rate environment, and to a preference
for the purchase of government guaranteed loans due to improved market
conditions for these instruments. Securities purchased in 2000 totaled $4.9
million, consisting of U.S. government agencies. Proceeds from amortization and
maturities totaled $6.9 million, also consisting principally of U.S. government
agencies. Security sales totaled $0.9 million, consisting of an equity security
which produced the $104 realized gain.
One security was transferred from the held to maturity category to the available
for sale category as of June 30, 2000. This security is a trust preferred
security issued by a national insurer which was downgraded to a BB rating by
Standard and Poors due to recent losses. The original cost of this security was
$1.03 million, and the unrealized loss at June 30, 2000 was $610 thousand.
Management has no present plans to sell this security, which continues to
perform in accordance with its original terms.
At June 30, 2000, securities available for sale included debt securities with a
cost basis of $41.1 million and an unrealized loss of $4.8 million (11.7%). This
compares to a net unrealized loss of $3.2 million (7.8%) at year-end 1999. The
additional unrealized loss includes $476 thousand related to the above mentioned
security. It also reflects wider credit market spreads on various securities,
including primarily trust preferred securities. At June 30, 2000, equity
securities totaled $17.5 million on a cost basis, with a net unrealized loss of
$2.5 million (14.6%), compared to a net unrealized loss of $2.9 million (15.8%)
at year-end 1999. This improvement was primarily due to higher prices for some
utility common equity securities. At June 30, 2000, securities held to maturity
totaled $25.5 million and had a fair value of $24.2 million, compared to book
and fair values of $27.9 million and $27.2 million at year-end 1999. The
additional unrealized loss in held to maturity securities also reflects wider
spreads in the market for trust preferred securities. The book value of held to
maturity securities is net of a transfer adjustment totaling $3.2 million at
June 20, 2000, which was included in accumulated other comprehensive loss. The
total net unrealized loss on all investment securities was $10.6 million (12.1%)
at the most recent quarter-end, compared to $8.4 million (9.4%) at year-end
1999.
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 June 30, 2000. The total book value of securities adversely
classified by the company was $2.0 million at June 30, 2000. 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).
Total Loans: Total loans increased by $21.1 million (11.0%) during 2000,
compared to year-end 1999. Increases were recorded in all categories except
consumer loans. As previously noted, most of the increase was in commercial
loans, which increased by $15.9 million. Nearly all of this increase was in real
estate secured loans
12
originated by the Bank in central Connecticut. About $10.5 million of the
increase was in loans with a medium term adjustable rate, typically five year
ARMs resetting at a spread of 250 - 300 basis points over the Federal Home Loan
Bank borrowing rate, and a final maturity of 10 years. Most of the rest of the
increase in commercial loans was in construction related loans, including
subdivisions, hotels, and other commercial properties. Most construction
loans are backed by permanent takeouts, including some takeout commitments
provided by the bank. Residential mortgage loans increased by $4.1 million in
2000. While residential mortgage originations have declined in 2000 due to
higher interest rates, a greater portion has been retained by the bank instead
of being sold in the secondary markets.
Nonperforming Assets: Nonaccruing loans totaled $976 thousand at June 30, 2000
million, compared to $1.218 million at year-end 1999. Including foreclosed
assets, total nonperforming assets measured 0.33% of total assets at June 30,
2000, compared to 0.44% at year-end 1999.
Allowance for Loans Losses: The allowance totaled $3.35 million (1.57% of total
loans) at June 30, 2000, compared to 1.67% of total loans at year-end 1999. For
the first half of 2000, gross chargeoffs totaled $53 thousand and gross
recoveries totaled $61 thousand. The allowance measured 343% of nonaccruing
loans at the most recent quarter end. Impaired loans totaled $1.4 million at
June 30, 2000, compared to $1.0 million at year-end 1999. The valuation
allowance on impaired loans was $254 thousand compared to $280 thousand at the
same dates, respectively. The unallocated portion of the allowance stood at $621
thousand at June 30, 2000 (18.5% of the total allowance), compared to $467
thousand (14.6% of the total) at year-end 1999. Total loans adversely classified
by the bank were $2.2 million at June 30, 2000, compared to $2.7 million at
year-end 1999.
Deposits and Borrowings: Total deposits increased by $14.6 million (5.8%) in the
first half of 2000. The balance increased in all categories, reflecting ongoing
promotions and the contribution of new offices opened in 1999. The average
balance of transaction accounts increased by $2.2 million (3.7%) in the second
quarter of 2000, compared to the fourth quarter of 1999. Savings account growth
has benefited from promotions offered in new offices. Time deposit growth
benefited from pricing promotions of accounts with maturities in the 2-3 year
period in anticipation of interest rate increases. Borrowings increased
primarily due to the issuance of the $3.5 million capital trust security
previously mentioned. This brings total outstanding capital trust obligations to
$7.0 million.
Interest Rate Sensitivity: The one year interest rate gap decreased to $12
million (3.9% of total earning assets), compared to $18.0 million (6.5% of
earning assets, adjusted for Year 2000 liquidity) at year-end 1999. Alliance has
attempted to maintain a positive one year gap, utilizing time account growth in
the 1-3 year maturity range to fund variable rate assets, in order to benefit
from improved spreads based on anticipated increases in interest rates. Alliance
continues to monitor its interest rate sensitivity in accordance with
established policy limits. These limits are unchanged in 2000 and the Company
has remained within its policy limits. The one year interest rate gap reached a
high of 9% of earning assets, near the limit of 10%, at March 31, 2000 but has
declined as anticipated due to loan originations in the second quarter. The one
year gap totaled $28 million at March 31, 2000, including the benefit of a $10
million interest rate swap which matures in June, 2001 which therefore fell
within the one year time horizon at June 30, 2000.
Liquidity and Cash Flows: The Bank's primary use of funds during 2000 has been
the origination of new loans. The primary sources of funds were deposit growth
and the issuance of the trust preferred security. Borrowings, time deposits, and
money market accounts are the primary sources of liquidity for additional
balance sheet growth. Short term investments, securities available for sale, and
government guaranteed loan certificates provide additional sources of liquidity.
The Company's primary source of funds is dividends from the Bank, and its
primary use of funds is dividends to shareholders and to trust preferred
security holders.
Capital Resources: During the first half of 2000, shareholders' equity increased
by $0.6 million (3.9%) to $14.9 million, reflecting the contribution of retained
earnings and other comprehensive income. Excluding accumulated other
comprehensive income, return on average equity measured 15.3% in the most recent
quarter, and 15.1% for the first half of 2000. Total equity measured 4.57% of
assets at June 30, 2000, compared to 4.7% at year-end 1999. Book value per share
was $6.39 and $6.21 on the same dates, respectively. As of June 30, 2000, both
Tolland Bank and Alliance reported regulatory capital ratios consistent with the
"well capitalized" regulatory classification. The dividend payout ratio measured
19.21% for the first six months of 2000. Average diluted
13
shares outstanding decreased by 18,869 shares for the first six months of 2000
compared to fiscal year-end 1999 due to a decrease in the average share price.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See discussion and analysis of quantitative and qualitative disclosures about
market risk provided in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999 filed March 30, 2000. There have been no material
changes in reported market risks faced by the Company since the end of 1999. See
also the discussion of Interest Rate Sensitivity in Item 2 of this Form 10Q.
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is not involved in any material legal proceedings
other than ordinary routine litigation incidental to its business.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
-----------------------------------------
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
Item 5. OTHER INFORMATION
None.
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibit index
The exhibits listed below are included in this report or are
incorporated herein by reference to the identified document
previously filed with the Securities and Exchange Commission
as set forth parenthetically.
27 Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter ended
June 30, 2000.
i. On April 10, 2000, the Company filed a report on Form 8-K
reporting, under Item 5, that it had issued $3.5 million
in Trust Preferred Securities through a wholly owned
subsidiary, Alliance Capital Trust II.
14
Average Balance Sheet and Interest Rates - Fully Taxable Equivalent (FTE)
(dollars in thousands) Average Balance Rate (FTE Basis)
- ------------------------------------------------------------------------------------------------------------------------------
Quarters ended June 30 2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------
Loans $ 203,730 $ 183,624 8.06% 7.80%
Securities available for sale 55,267 67,341 8.04 7.98
Securities held to maturity 26,851 12,281 7.90 5.54
Other earning assets 18,800 10,926 7.73 4.85
- ------------------------------------------------------------------------------------------------------------------------------
Total earning assets 304,648 274,172 8.07 7.60
Other assets 20,584 12,308
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $ 325,232 $ 286,480
- ------------------------------------------------------------------------------------------------------------------------------
Interest bearing deposits $ 233,319 $ 217,535 4.16 4.05
Borrowings 43,008 26,888 6.16 5.31
- ------------------------------------------------------------------------------------------------------------------------------
Interest bearing liabilities 276,327 244,423 4.47 4.20
Other liabilities 33,116 25,603
Shareholder's equity 15,789 16,454
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 325,232 $ 286,480
- ------------------------------------------------------------------------------------------------------------------------------
Net Interest Spread 3.60% 3.40%
Net Interest Margin 4.02% 3.86%
(dollars in thousands) Average Balance Rate (FTE Basis)
- ------------------------------------------------------------------------------------------------------------------------------
Six months ended June 30 2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------
Loans $ 198,620 $ 183,111 8.10% 7.83%
Securities available for sale 56,084 65,546 8.16 7.68
Securities held to maturity 27,201 13,303 7.88 5.52
Other earning assets 18,397 9,397 6.20 4.79
- ------------------------------------------------------------------------------------------------------------------------------
Total earning assets 300,302 271,357 7.98 7.55
Other assets 20,388 11,198
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $ 320,690 $ 282,555
- ------------------------------------------------------------------------------------------------------------------------------
Interest bearing deposits $ 230,642 $ 215,446 4.12 4.09
Borrowings 41,432 25,258 5.99 5.23
- ------------------------------------------------------------------------------------------------------------------------------
Interest bearing liabilities 272,074 240,704 4.40 4.21
Other liabilities 33,203 24,648
Shareholder's equity 15,413 17,203
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 320,690 $ 282,555
- ------------------------------------------------------------------------------------------------------------------------------
Net Interest Spread 3.58% 3.34%
Net Interest Margin 4.00% 3.82%
15
Signatures
Pursuant to the requirements to Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
ALLIANCE BANCORP OF NEW ENGLAND, INC.
Date: August 10, 2000 /s/ Joseph H. Rossi
-------------------
Joseph H. Rossi
President/CEO
Date: August 10, 2000 /s/ David H. Gonci
------------------
David H. Gonci
Senior Vice President/CFO
16