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 September 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 November 10, 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 ........................................16
Signatures .............................................................................17
Alliance Bancorp of New England, Inc. 1 Third Quarter, 2000
Alliance Bancorp of New England, Inc.
Consolidated Selected Financial Data (Unaudited)
As of and for the three months As of and for the nine months
ended September 30, ended September 30,
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2000 1999 2000 1999
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For the Quarter (in thousands)
Net interest income $ 3,144 $ 2,639 $ 8,857 $ 7,545
Provision for loan losses 92 17 234 153
Service charges and other income 352 297 1,076 1,181
Net (loss) gain on securities and other assets (84) 42 (15) 195
Non-interest expense 2,168 1,942 6,411 5,781
Income before income taxes 1,152 1,019 3,273 2,987
Income tax expense 338 281 892 818
Net income $ 814 $ 738 $ 2,381 $ 2,169
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Per Share
Basic earnings $ 0.35 $ 0.32 $ 1.03 $ 0.95
Diluted earnings 0.34 0.31 1.01 0.92
Dividends declared 0.07 0.06 0.20 0.17
Book value 6.96 6.68 6.96 6.68
Common stock price:
High 9.38 12.75 9.38 12.75
Low 6.50 9.50 6.50 9.13
Close 9.13 10.13 9.13 10.13
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At Quarter End (in millions)
Total assets $ 340.9 $ 310.5 $ 340.9 $ 310.5
Total loans 221.7 187.2 221.7 187.2
Other earning assets 96.9 107.3 96.9 107.3
Deposits 272.5 244.5 272.5 244.5
Borrowings 50.1 46.5 50.1 46.5
Shareholders' equity (a) 16.2 15.4 16.2 15.4
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Operating Ratios (in percent)
Return on average assets 0.97% 0.95% 0.97% 1.00%
Return on average equity 21.18 18.06 20.69 17.19
Equity % total assets (period end) 4.76 4.95 4.76 4.95
Net interest spread (fully taxable equivalent) 3.70 3.33 3.62 3.34
Net interest margin (fully taxable equivalent) 4.15 3.79 4.05 3.81
Dividend payout ratio 20.05 18.66 19.49 17.99
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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.
Alliance Bancorp of New England, Inc. 2 Third Quarter, 2000
Alliance Bancorp of New England, Inc.
Consolidated Balance Sheets (Unaudited)
(in thousands except share data) September 30, December 31,
2000 1999
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Assets
Cash and due from banks $ 11,003 $ 18,584
Short-term investments 22,001 4,028
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Total cash and cash equivalents 33,004 22,612
Securities available for sale (at fair value) 50,232 53,156
Securities held to maturity 24,612 27,857
Residential mortgage loans 59,121 54,197
Commercial mortgage loans 67,170 52,694
Other commercial loans 41,902 34,965
Consumer loans 33,658 33,841
Government guaranteed loans 19,873 15,935
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Total loans 221,724 191,632
Less: Allowance for loan losses (3,450) (3,200)
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Net loans 218,274 188,432
Premises and equipment, net 5,759 5,587
Foreclosed assets, net 78 53
Other assets 8,943 9,240
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Total assets $ 340,902 $ 306,937
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Liabilities and Shareholders' Equity
Demand deposits $ 30,805 $ 25,707
NOW deposits 29,843 26,120
Money market deposits 34,906 35,321
Savings deposits 44,759 44,199
Time deposits 132,181 120,044
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Total deposits 272,494 251,391
Borrowings 50,111 39,575
Other liabilities 2,081 1,624
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Total liabilities 324,686 292,590
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 13,533 11,618
Accumulated other comprehensive loss, net (5,749) (5,616)
Treasury stock (200,599 shares) (3,109) (3,109)
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Total shareholders' equity 16,216 14,347
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Total liabilities and shareholders' equity $ 340,902 $ 306,937
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Alliance Bancorp of New England, Inc. Third Quarter, 2000
See accompanying notes to financial statements
3
Alliance Bancorp of New England, Inc.
Consolidated Income Statements (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
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(in thousands except share data) 2000 1999 2000 1999
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Interest Income
Loans $ 4,647 $ 3,716 $ 12,671 $ 10,828
Debt securities 1,258 1,263 3,826 3,274
Dividends on equity securities 273 303 826 892
Other earning assets 289 194 812 417
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Total interest and dividend income 6,467 5,476 18,135 15,411
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Interest Expense
Deposits 2,604 2,241 7,325 6,614
Borrowings 719 596 1,953 1,252
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Total interest expense 3,323 2,837 9,278 7,866
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3,144 2,639 8,857 7,545
Net Interest Income
Provision For Loan Losses 92 17 234 153
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Net interest income after provision for loan losses 3,052 2,622 8,623 7,392
Non-Interest Income
Service charges and other income 352 297 1,076 1,181
Net (loss) gain on securities (84) (19) 20 84
Net (loss) gain on assets - 61 (35) 111
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Total non-interest income 268 339 1,061 1,376
Non-Interest Expense
Compensation and benefits 1,205 1,031 3,499 3,013
Occupancy 175 193 525 549
Data processing services and equipment 322 232 886 690
Office and insurance 128 139 400 386
Purchased services 178 191 564 643
Other 160 156 537 500
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Total non-interest expense 2,168 1,942 6,411 5,781
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Income before income taxes 1,152 1,019 3,273 2,987
Income tax expense 338 281 892 818
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Net Income $ 814 $ 738 $ 2,381 $ 2,169
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Per Share Data
Basic earnings per share $ 0.35 $ 0.32 $ 1.03 $ 0.95
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Diluted earnings per share $ 0.34 $ 0.31 $ 1.01 $ 0.92
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Average basic shares outstanding 2,331,100 2,296,254 2,320,193 2,295,295
Average additional dilutive shares 38,243 75,195 37,728 73,141
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Average diluted shares outstanding 2,369,343 2,371,449 2,357,921 2,368,436
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Alliance Bancorp of New England, Inc. Third Quarter, 2000
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
Nine Months ended September 30 Common paid-In Retained comprehensive Treasury shareholders'
(in thousands except share data) stock capital earnings income (loss) 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 2,169 2,169
Unrealized loss on securities,
net of reclassification adjustment (4,664) (4,664)
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Comprehensive loss (2,495)
Dividends declared and paid (389) (389)
Issuance of shares pursuant to exercise
of stock options 59 59
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Balance, September 30, 1999 $ 25 $ 11,365 $ 11,003 $ (3,913) $ (3,109) $ 15,371
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2000
Balance, December 31, 1999 $ 25 $ 11,429 $ 11,618 $ (5,616) $ (3,109) $ 14,347
Comprehensive income
Net income 2,381 2,381
Unrealized loss on securities,
net of reclassification adjustment (133) (133)
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Comprehensive loss 2,248
Dividends declared and paid (466) (466)
Issuance of shares pursuant to exercise
of stock options 87 87
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Balance, September 30, 2000 $ 25 $ 11,516 $ 13,533 $ (5,749) $ (3,109) $ 16,216
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Disclosure of reclassification amount
Nine months ended September 30 (in thousands) 2000 1999
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Unrealized holding loss arising during $ (120) $ (4,609)
the period net of income tax benefit
of $65 and $2,374, respectively
Less reclassification adjustment for
gains included in net income, net of income
tax expense of $7 and $29, respectively (13) (55)
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Net unrealized loss on securities $ (133) $ (4,664)
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Alliance Bancorp of New England, Inc. Third Quarter, 2000
See accompanying notes to financial statements
5
Alliance Bancorp of New England, Inc.
Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30,
-----------------------------------
(in thousands) 2000 1999
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Operating Activities:
Net income $ 2,381 $ 2,169
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Provision for loan losses 234 153
Depreciation and amortization 446 208
Net investment security gains (20) (84)
Net asset loss (gain) 35 (111)
Increase in other liabilities 457 2,357
(Increase) decrease in loans held for sale (315) 4,698
Decrease (increase) in other assets 40 (585)
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Net cash provided by operating activities 3,258 8,805
Investing Activities:
Securities available for sale:
Proceeds from amortization and maturities 6,863 7,429
Proceeds from sales of securities 2,302 5,355
Purchases of securities (5,172) (39,098)
Securities held to maturity:
Proceeds from amortization and maturities 2,265 5,376
Net increase in loans (29,908) (7,208)
(Increase) decrease in foreclosed assets, net (25) 26
Proceeds from the sale of premises and equipment - 525
Purchases of premises and equipment (451) (1,465)
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Net cash used in investing activities (24,126) (29,060)
Financing Activities:
Net increase in interest-bearing deposits 16,005 3,443
Net increase in demand deposits 5,098 1,030
Net increase in FHLB advances 6,000 16,394
Net increase in other borrowings 4,536 6,500
Stock options exercised 87 59
Cash dividends paid (466) (389)
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Net cash provided by financing activities 31,260 27,037
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10,392 6,782
Net Change in Cash and Cash Equivalents
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 $ 33,004 $ 26,998
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Supplemental Information On Cash Payments
Interest expense $ 8,968 $ 7,520
Income tax expense 1,002 890
Supplemental Information On Non-cash Transactions
Net loans transferred to foreclosed assets 78 54
Transfer of securities from held to maturity to available for sale 1,030 -
Transfer of securities from available for sale to held to maturity - 18,688
Alliance Bancorp of New England, Inc. Third Quarter, 2000
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.
Alliance Bancorp of New England, Inc. Third Quarter, 2000
7
Note 2. Securities
Amortized Unrealized Unrealized Fair
September 30, 2000 (in thousands) Cost Gains Losses Value
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Securities available for sale
U.S. Government and agency $ 5,000 $ 31 $ (200) $ 4,831
U.S. Agency mortgage-backed 2,027 - (55) 1,972
Other debt securities 32,596 78 (4,189) 28,485
Marketable equity 14,178 126 (1,641) 12,663
Non-marketable equity 2,281 - - 2,281
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Total available for sale $ 56,082 $ 235 $ (6,085) $ 50,232
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Securities held to maturity
U.S. Government and agency $ 1,985 $ - $ (5) $ 1,980
U.S. Agency mortgage-backed 4,457 1 (43) 4,415
Other debt securities 18,170 181 (1,293) 17,058
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Total held to maturity $ 24,612 $ 182 $ (1,341) $ 23,453
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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
(in thousands) September 30, December 31,
2000 1999
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Total nonaccruing loans $ 768 $ 1,218
Accruing loans past due 90 days or more - -
Impaired loans:
Impaired loans - valuation allowance required 1,181 852
Impaired loans - no valuation allowance required 248 102
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Total impaired loans $ 1,429 $ 954
Total valuation allowance on impaired loans 151 280
Commitments to lend additional funds for impaired loans - -
Alliance Bancorp of New England, Inc. Third Quarter, 2000
8
Note 4. Allowance for Loan Losses
Nine Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 2000 1999
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Balance at beginning of year $ 3,200 $ 3,060
Charge-offs (53) (95)
Recoveries 69 32
Provision for loan losses 234 153
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Balance at end of period $ 3,450 $ 3,150
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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.
In September 2000, the FASB issued SFAS No. 140 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", a replacement
of SFAS No. 125. SFAS 140 addresses implementation issues that were identified
in applying SFAS No. 125. This statement revises the standards for accounting
for securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it carries over most of SFAS No. 125
provisions without reconsideration. SFAS No. 140 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
March 31, 2001. SFAS No. 140 is effective for recognition and reclassification
of collateral and for disclosures relating to securitization transactions and
collateral for fiscal years ending after December 15, 2000. This statement is to
be applied prospectively with certain exceptions. Other than those exceptions,
early or retroactive application is not permitted. Management does not expect
the adoption of SFAS No. 140 to have a material effect on the Company's
financial position or results of operations.
Alliance Bancorp of New England, Inc. Third Quarter, 2000
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 a 10.3% increase in earnings for the third quarter ended
September 30, 2000, with net profit totaling $814 thousand compared to $738
thousand a year earlier. Quarterly earnings per share increased to $.34 compared
to $.31 a year earlier, on a diluted basis.
Net income for the first nine months of 2000 totaled $2.38 million, a 9.8%
increase over net income of $2.17 million in the same period of 1999. Nine month
earnings per share increased to $1.01 compared to $.92 a year earlier, on a
diluted basis.
Alliance also announced an increase in the quarterly cash dividend to 7.5 cents
per share from 7.0 cents per share. Together with the increase in the first
quarter, the total increase in the quarterly dividend this year measures 25%.
Total assets increased to $341 million from $307 million in the nine months
ended September 30, 2000. This increase has been propelled by a 20.9% annualized
increase in total loans, which produced a 19.1% year-to-year increase in third
quarter net interest income.
During the most recent quarter, Tolland Bank also introduced TBK Online, its
internet banking service for both consumer and commercial customers. The Bank's
commercial service offers high end cash management tools and is unmatched by
locally based institutions.
Net interest income on a year-to-date basis increased by 17.4%, and the net
interest margin improved strongly to 4.15% in the most recent quarter, compared
to 3.79% in the third quarter of 1999. This improvement was primarily due to
growth in loans and to an increase in the average yield on loans due to higher
interest rates. Loan growth has been most pronounced in commercial loans, which
have increased at a 32.6% annualized rate during the first nine months of 2000.
This growth reflects strong economic conditions and ongoing business development
efforts. Year-to-date net interest income increased by $1.31 million, while fee
and service charge income decreased by $105 thousand (8.9%), due primarily to
unusually high loan prepayment fees in 1999. Year-to-date non-interest expense
increased by $630 thousand (10.9%) due to expansion and new offices.
Total deposits increased at an 11.2% annualized rate during the most recent nine
months, with growth concentrated in transactions accounts and time deposits.
This growth reflects the contribution of new offices and ongoing marketing
promotions. In addition to the $21 million of deposit growth, borrowings also
increased by $11 million. These sources funded loan growth and a $10 million
Alliance Bancorp of New England, Inc. Third Quarter, 2000
10
increase in cash and equivalents, with short term investments totaling $22
million as of September 30, 2000. Medium term time accounts and borrowings have
been used to fund fixed rate loan growth, and higher liquidity is being
maintained in anticipation of additional growth and interest rate increases.
Nonperforming assets totaled $0.8 million (0.25% of assets) at September 30,
2000, decreased from $1.3 million (0.42% of assets) at year-end 1999.
Shareholders' equity increased at a 17.4% annualized rate for the most recent
nine months, and book value per share totaled $6.96 at September 30, 2000. The
Company's capital remains 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.
Net Interest Income: Net interest income increased by $505 thousand (19.1%) in
the third quarter and by $1.312 million (17.4%) in the first nine months of 2000
compared to 1999. This was primarily due to a 9.7% increase in average earning
assets, together with the benefit of an increase in the fully taxable equivalent
net interest margin to 4.05% from 3.81% for the first nine months of 2000,
compared to the same period of 1999.
As noted above, the growth in earning assets was mostly due to loan growth,
primarily reflecting commercial loan growth. While higher interest rates in 2000
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 8.25% in the first nine months of 2000 compared to 7.81% in
the first nine months 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 15 months ended
September 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 the renewal of 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 $22.0 million in short term investments at September 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 $10.7 million (21.7%) in the most recent
quarter compared to the same quarter of last year, including growth of $5.5
million in average demand deposit balances. These low cost funds, primarily
sourced from new branches, have also contributed to the improved net interest
margin. The balance of $22.0 million in short term investments at September 30,
2000 was available for reinvestment in higher yielding loans and investments in
future periods.
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 $92
thousand in the most recent quarter, compared to $17 thousand in the same
quarter of 1999. The provision was $234 thousand in the first nine months of
2000, compared to $153 thousand in the same period of 1999. The allowance
increased to $3.45 million at September 30, 2000, an increase of $250 thousand
from $3.2 million at year-end 1999. Please see the later discussion on the
Allowance for Loan Losses.
Non-Interest Income: Third quarter service charge and other income was $352
thousand, compared to $297 thousand for the same quarter of 1999. The most
recent quarter included a $34 thousand increase in the cash value of bank owned
life insurance, which was purchased in the fourth quarter of 1999. Year-to-date
service charge and other income decreased by $105 thousand (8.9%) 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. Year-to-date
results in 2000 also included $235 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 $104 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
Alliance Bancorp of New England, Inc. Third Quarter, 2000
11
totaled $20 thousand during the for the year-to-date in 2000, including an $84
thousand loss recorded in the third quarter representing a writedown on a
security liquidated after quarter-end in order to reduce the duration of the
portfolio. For the year-to date, this was offset by a gain recorded in the first
quarter 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 third quarter
and first nine months of 2000 increased by $226 thousand (11.6%) and $630
thousand (10.9%), respectively, due to expansion and new offices. Compensation
related expense grew by $486 thousand (16.1%) in the first nine months of 2000.
Total full-time equivalent staff at September 30, 2000 was 106.75, compared to
95 a year earlier, representing an increase of 12.4% due to new offices and new
lending related staff. Compensation expense also included a $140 thousand
increase in medical, pension, and bonus related expense. Data processing and
equipment expense increased by $196 thousand (28.4%) due to new offices, account
growth, and higher computer systems depreciation due to upgrades installed over
the last two years. The year-to-date effective tax rate was 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 $2.248 million for the first nine months of 2000, compared to a loss
of $2.495 million for the first nine months of 1999. The results in 1999
primarily reflected a decline in the market value of available for sale
securities. The net change in accumulated net other comprehensive income for the
year-to-date in 2000 was a more modest ($133) thousand. A rebound in securities
prices in the third quarter mostly offset a decrease reported in the first half
of the year. Please see the following discussion on investment securities for
additional information about the investment portfolio.
FINANCIAL CONDITION
Cash and Cash Equivalents: Total cash and equivalents increased by $10.4 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
September 30, 2000, Alliance held $22.0 million in short term investments, which
is available to fund future loan originations and investment purchases.
Investment Securities: Total investment securities decreased by $6.2 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 $5.2
million, consisting of U.S. government agencies. Proceeds from amortization and
maturities totaled $9.1 million, also consisting principally of U.S. government
agencies. Security sales totaled $2.3 million, including an equity security
which produced the $104 realized gain. The security written down in the third
quarter and subsequently liquidated was a debt security with a book value of
$1.3 million.
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 B- rating by
Standard and Poors due to recent losses. The original cost of this security was
$1.03 million, and the unrealized loss at September 30, 2000 was $590 thousand.
Management has no present plans to sell this security, which continues to
perform in accordance with its original terms. The issuer has made management
changes and has announced other financial and operating changes intended to
maintain debt service on all of its securities, and is therefore not viewed as
impaired. The projected fixed charge for the parent of this issuer is 2.6 times.
At September 30, 2000, securities available for sale included debt securities
with a cost basis of $39.6 million and an unrealized loss of $4.3 million
(10.9%). This compares to a net unrealized loss of $3.2 million (7.8%) at
year-end 1999. The additional unrealized loss includes $590 thousand related to
the above mentioned security. It also reflects wider credit market spreads on
various securities, including primarily trust preferred securities. At September
30, 2000, equity investment securities totaled $16.5 million on a cost basis,
with a net unrealized loss of $1.5 million (9.2%), compared to a net unrealized
loss of $2.9 million (15.8%) at year-end 1999. This improvement was primarily
Alliance Bancorp of New England, Inc. Third Quarter, 2000
12
due to higher prices for some utility common equity securities. At September 30,
2000, securities held to maturity totaled $24.6 million and had a fair value of
$23.5 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 ($2.3) million at September 30, 2000, which was included in
accumulated other comprehensive loss. The total net unrealized loss on all
investment securities was $9.1 million (11.1%) at the most recent quarter-end.
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 September 30, 2000. The total book value of securities
adversely classified by the company was $3.0 million at September 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 on regulatory capital (see later Capital Resources
section) and on interest rate risk (see later Interest Rate Sensitivity
section).
Total Loans: Total loans increased by $30.1 million (15.7%) 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 $21.4 million. Nearly all of this increase was in real
estate secured loans originated by the Bank in central Connecticut. Most of this
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 $4.9 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. Purchased government guaranteed loans increased by $3.9
million in 2000. These loans were purchased as an alternative to investment
securities, based on consideration of rate, risk, and duration characteristics
in current market conditions.
Nonperforming Assets: Nonaccruing loans totaled $768 thousand at September 30,
2000 million, compared to $1.218 million at year-end 1999. Including foreclosed
assets, total nonperforming assets totaled $846 thousand and measured 0.25% of
total assets at September 30, 2000, compared to 0.42% at year-end 1999.
Allowance for Loans Losses: The allowance totaled $3.45 million (1.55% of total
loans) at September 30, 2000, compared to 1.67% of total loans at year-end 1999.
For the first nine months of 2000, gross chargeoffs totaled $53 thousand and
gross recoveries totaled $69 thousand. The allowance measured 449% of
nonaccruing loans at the most recent quarter end. Impaired loans totaled $1.4
million at September 30, 2000, compared to $1.0 million at year-end 1999. The
valuation allowance on impaired loans was $151 thousand compared to $280
thousand at the same dates, respectively. Total loans adversely classified by
the bank were $2.5 million at September 30, 2000, compared to $2.7 million at
year-end 1999. Loans which are classified as accruing and impaired are well
secured, in the process of collection and not delinquent more than 30 days.
Deposits and Borrowings: Total deposits increased by $21.1 million (8.4%) in the
first nine months of 2000. Total transactions account balances increased by $8.8
million (17.0%) due to the contribution of new offices opened in 1999, and to
ongoing promotions. Time deposit accounts increased by $12.1 million (10.1%) due
to promotions of deposits with maturities in the 1 - 3 year category. Total
borrowings increased by $10.5 million, consisting primarily of new five year
borrowings from the Federal Home Loan Bank of Boston used to fund new commercial
mortgages with similar rate maturities. Borrowings also increased 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.
Alliance Bancorp of New England, Inc. Third Quarter, 2000
13
Interest Rate Sensitivity: The one year interest rate gap at September 30, 2000
approximated $18 million (5.6% of total earning assets), unchanged from $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 along with fixed rate borrowings
to fund loan growth and increase short term investments, with an anticipated
benefit from improved spreads based on anticipated increases in interest rates.
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. Total borrowings include $10.0 million in callable Federal Home
Loan Bank 4.7% advances which become callable in the fourth quarter of 2001. It
is anticipated that these advances will be called, and therefore it is
anticipated that the one year gap will decrease by this amount in the fourth
quarter of 2000.
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, including limits on earnings at risk and
the economic value of equity at risk. The Company utilizes a simulation model to
evaluate the possible impact of interest rate shocks, with the primary focus
being on a 2.0% interest rate shock. The Company also utilizes this model to
project earnings and to evaluate changes in the value of the investment
portfolio under different interest rate assumptions. The Company closely
monitors its longer duration assets and will evaluate opportunities to shorten
the longest duration debt security investments depending on market conditions.
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,
Federal Home Loan Bank borrowings, 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. Proceeds from
issuance of trust preferred securities have been primarily utilized to provide
additional equity to the Bank. Dividends are subject to regulatory guidelines
and other matters, as is discussed more fully in the Form 10-K.
Capital Resources: During the first nine months of 2000, shareholders' equity
increased by $1.9 million (13.0%) to $16.2 million, reflecting primarily the
contribution of retained earnings. Excluding accumulated other comprehensive
income, return on average equity measured 14.9% in the most recent quarter, and
15.1% for the first nine months of 2000. Book value per share was $6.96 and
$6.21 at quarter-end and year-end, respectively. As of September 30, 2000, both
Tolland Bank and Alliance reported regulatory capital ratios consistent with the
"well capitalized" regulatory classification. The dividend payout ratio measured
19.5% for the first nine months of 2000. Total equity measured 4.8% of assets at
September 30, 2000, compared to 4.7% at year-end 1999. As noted previously, the
Company measuring the economic value of equity at risk in accordance with its
interest rate risk management policies, and considers several factors in
measuring its overall capital adequacy.
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.
Alliance Bancorp of New England, Inc. Third Quarter, 2000
14
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 September
30, 2000.
i. The Company did not file any reports on Form 8-K during
the quarter ended September 30, 2000.
Alliance Bancorp of New England, Inc. Third Quarter, 2000
15
Average Balance Sheet and Interest Rates - Fully Taxable Equivalent (FTE)
(dollars in thousands) Average Balance Rate (FTE Basis)
- ---------------------------------------------------------------------------------------------
Quarters ended September 30 2000 1999 2000 1999
- ---------------------------------------------------------------------------------------------
Loans $ 217,548 $ 188,437 8.52% 7.89%
Securities available for sale 54,995 77,930 8.38 7.90
Securities held to maturity 25,060 11,376 7.89 5.84
Other earning assets 18,750 15,061 6.69 5.09
- ---------------------------------------------------------------------------------------------
Total earning assets 316,353 292,804 8.33 7.63
Other assets 21,786 15,027
- ---------------------------------------------------------------------------------------------
Total assets $ 338,139 $ 307,831
- ---------------------------------------------------------------------------------------------
Interest bearing deposits $ 239,072 $ 221,946 4.33 4.04
Borrowings 46,602 39,595 6.14 5.97
- ---------------------------------------------------------------------------------------------
Interest bearing liabilities 285,674 261,541 4.63 4.30
Other liabilities 32,435 30,084
Shareholder's equity 20,030 16,206
- ---------------------------------------------------------------------------------------------
Total liabilities and equity $ 338,139 $ 307,831
- ---------------------------------------------------------------------------------------------
Net Interest Spread 3.70% 3.33%
Net Interest Margin 4.15% 3.79%
(dollars in thousands) Average Balance Rate (FTE Basis)
- --------------------------------------------------------------------------------------------
Nine months ended September 30 2000 1999 2000 1999
- --------------------------------------------------------------------------------------------
Loans $ 204,976 $ 184,906 8.25% 7.81%
Securities available for sale 55,717 69,720 8.15 7.72
Securities held to maturity 26,482 12,654 7.89 5.62
Other earning assets 18,516 11,304 6.37 4.92
- --------------------------------------------------------------------------------------------
Total earning assets 305,691 278,584 8.10 7.58
Other assets 20,858 12,489
- --------------------------------------------------------------------------------------------
Total assets $ 326,549 $ 291,073
- --------------------------------------------------------------------------------------------
Interest bearing deposits $ 233,472 $ 217,637 4.19 4.05
Borrowings 43,168 30,089 6.04 5.56
- --------------------------------------------------------------------------------------------
Interest bearing liabilities 276,640 247,726 4.48 4.25
Other liabilities 30,631 26,480
Shareholder's equity 19,278 16,867
- --------------------------------------------------------------------------------------------
Total liabilities and equity $ 326,549 $ 291,073
- --------------------------------------------------------------------------------------------
Net Interest Spread 3.62% 3.34%
Net Interest Margin 4.05% 3.81%
Alliance Bancorp of New England, Inc. Third Quarter, 2000
16
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: November 10, 2000 /s/ Joseph H. Rossi
-------------------
Joseph H. Rossi
President/CEO
Date: November 10, 2000 /s/ David H. Gonci
------------------
David H. Gonci
Senior Vice President/CFO
Alliance Bancorp of New England, Inc. Third Quarter, 2000
17