FORM 10-Q
- --------------------------------------------------------------------------------
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, 1998
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 6, 1998, Alliance Bancorp of New England had 2,291,953 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.......15
Part II Other Information................................................15
Table Average Balance Sheet and Interest Rates ........................16
Signatures .............................................................17
1
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,
------------------------------ -------------------------------
1998 1997 1998 1997
-------- -------- ------- -------
For the Quarter (in thousands)
Net interest income $ 2,280 $ 1,980 $ 6,539 $ 5,948
Provision for loan losses 10 379 168 516
Service charges and fees 309 289 872 834
Net gain on securities 183 430 1,071 436
Net gain (loss) on assets (25) (26) (25) (66)
Non-interest expense 1,769 1,584 5,350 4,749
Income before income taxes 968 710 2,939 1,887
Income tax expense 315 187 1,057 434
Net income $ 653 $ 523 $ 1,882 $ 1,453
-------- -------- ------- -------
Per Share
Basic earnings $ 0.28 $ 0.22 $ 0.78 $ 0.62
Diluted earnings 0.27 0.21 0.75 0.59
Dividends declared 0.05 0.03 0.12 0.10
Book value 7.59 7.30 7.59 7.30
Common stock price:
High 15.75 12.17 16.67 12.17
Low 9.75 8.69 9.75 5.75
Close 10.13 11.17 10.13 11.17
-------- -------- ------- -------
At Quarter End (in millions)
Total assets $ 252.0 $ 241.9 $ 252.0 $ 241.9
Total loans 172.3 151.1 172.3 151.1
Other earning assets 68.7 79.3 68.7 79.3
Deposits 227.3 218.3 227.3 218.3
Borrowings 5.9 4.8 5.9 4.8
Shareholders' equity 17.4 17.8 17.4 17.8
-------- -------- ------- -------
Operating Ratios (in percent)
Return on average assets 1.04% 0.88% 1.01% 0.84%
Return on average equity 15.72 12.18 13.81 11.79
Equity % total assets (period end) 6.91 7.36 6.91 7.36
Net interest spread (fully taxable equivalent) 3.57 3.23 3.38 3.35
Net interest margin (fully taxable equivalent) 4.10 3.74 3.96 3.84
Dividend payout ratio 17.55 12.89 14.92 14.11
-------- -------- ------- -------
2
Alliance Bancorp of New England, Inc.
Consolidated Balance Sheets (Unaudited)
September 30, December 31,
(in thousands except share data) 1998 1997
--------- ---------
Assets
Cash and due from banks $ 5,890 $ 6,652
Short-term investments 12,799 14,765
--------- ---------
Total cash and cash equivalents 18,689 21,417
Securities available for sale (at fair value) 38,118 43,729
Securities held to maturity 17,737 19,949
Residential mortgage loans 52,089 39,319
Commercial mortgage loans 42,166 45,511
Other commercial loans 22,700 18,270
Consumer loans 32,140 29,504
Government guaranteed loans 23,200 24,846
--------- ---------
Total loans 172,295 157,450
Less: Allowance for loan losses (3,040) (3,000)
--------- ---------
Net loans 169,255 154,450
Premises and equipment, net 4,107 4,151
Foreclosed assets, net 619 617
Other assets 3,479 2,816
--------- ---------
Total assets $ 252,004 $ 247,129
--------- ---------
Liabilities and Shareholders' Equity
Demand deposits $ 20,906 $ 21,918
NOW deposits 20,996 22,260
Money market deposits 24,002 15,447
Savings deposits 34,530 34,677
Time deposits 126,851 127,431
--------- ---------
Total deposits 227,285 221,733
Borrowings 5,873 5,739
Other liabilities 1,439 854
--------- ---------
Total liabilities 234,597 228,326
Preferred stock, ( $.01 par value; 100,000 shares
authorized, none issued) -- --
Common stock, ($.01 par value; authorized 4,000,000
shares; issued 2,492,552 in 1998
and 1,636,269 in 1997; outstanding 2,291,953 in 1998
and 1,636,269 in 1997) 25 16
Additional paid-in capital 11,306 11,073
Retained earnings 8,662 7,071
Other comprehensive income, net 523 643
Treasury stock (200,599 shares in 1998) (3,109) --
--------- ---------
Total shareholders' equity 17,407 18,803
--------- ---------
Total liabilities and shareholders' equity $ 252,004 $ 247,129
--------- ---------
See accompanying notes to consolidated financial statements.
3
Alliance Bancorp of New England, Inc.
Consolidated Income Statements (Unaudited)
Nine Months Ended
Three Months Ended September 30, September 30,
-------------------------------- -----------------------------
(in thousands except share data) 1998 1997 1998 1997
----------- ----------- ----------- -----------
Interest Income
Loans $ 3,576 $ 3,065 $ 10,131 $ 9,004
Debt Securities 635 811 1,893 2,494
Dividends on equity securities 311 256 936 805
Other earning assets 97 72 470 112
----------- ----------- ----------- -----------
Total interest and dividend income 4,619 4,204 13,430 12,415
----------- ----------- ----------- -----------
Interest Expense
Deposits 2,275 2,163 6,707 6,262
Borrowings 64 61 184 205
----------- ----------- ----------- -----------
Total interest expense 2,339 2,224 6,891 6,467
----------- ----------- ----------- -----------
Net interest income 2,280 1,980 6,539 5,948
Provision For Loan Losses 10 379 168 516
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 2,270 1,601 6,371 5,432
Non-Interest Income
Service charges and fees 309 289 872 834
Net gain on securities 183 430 1,071 436
Net loss on assets (25) (26) (25) (66)
----------- ----------- ----------- -----------
Total non-interest income 467 693 1,918 1,204
Non-Interest Expense
Compensation and benefits 856 767 2,567 2,442
Occupancy 157 138 457 435
Equipment 77 80 227 234
Data processing services 141 153 417 471
Office, FDIC, & Insurance 114 141 381 405
Problem asset related expense 22 13 168 20
Other 402 292 1,133 742
----------- ----------- ----------- -----------
Total non-interest expense 1,769 1,584 5,350 4,749
----------- ----------- ----------- -----------
Income before income taxes 968 710 2,939 1,887
Income tax expense 315 187 1,057 434
----------- ----------- ----------- -----------
Net Income $ 653 $ 523 $ 1,882 $ 1,453
----------- ----------- ----------- -----------
Per Share Data
Basic earnings per share $ .28 $ .22 $ .78 $ .62
----------- ----------- ----------- -----------
Diluted earnings per share $ .27 $ .21 $ .75 $ .59
----------- ----------- ----------- -----------
Average basic shares outstanding 2,291,953 2,395,411 2,422,623 2,361,669
Average additional dilutive shares 87,061 91,865 95,479 98,072
----------- ----------- ----------- -----------
Average diluted shares outstanding 2,379,014 2,487,276 2,518,102 2,459,741
----------- ----------- ----------- -----------
See accompanying notes to consolidated 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 Stock equity
------------- ------------- ------------ -------------- ------------- -------------
1997
- --------
Balance, December 31, 1996 $ 1,173 $ 8,918 $ 5,731 $ (233) $ 15,589
Net Income -- -- 1,453 -- 1,453
Dividends declared and paid -- (190) -- (190)
Four for three stock split
effected as a stock dividend 399 -- (399) -- --
Issuance of shares pursuant
to exercise of stock options 18 526 -- -- 544
Conversion of par value to $.01 per
share from $1.00 due to formation of
Alliance Bancorp (1,574) 1,574 -- -- --
Change in other comprehensive income, net -- -- -- 412 412
-------- -------- -------- -------- -------- --------
Balance, September 30, 1997 $ 16 $ 11,018 $ 6,595 $ 179 $ 17,808
-------- -------- -------- -------- -------- --------
1998
- --------
Balance, December 31, 1997 $ 16 $ 11,073 $ 7,071 $ 643 $ 18,803
Net Income -- -- 1,882 -- 1,882
Dividends declared and paid -- -- (282) -- (282)
Three for two stock split
effected as a stock dividend 9 -- (9) -- --
Issuance of shares pursuant to exercise
of stock options -- 233 -- -- 233
Purchase of treasury stock -- -- -- -- (3,109) (3,109)
Change in other comprehensive income, net -- -- -- (120) (120)
-------- -------- -------- -------- -------- --------
Balance, September 30, 1998 $ 25 $ 11,306 $ 8,662 $ 523 (3,109) $ 17,407
-------- -------- -------- -------- -------- --------
See accompanying notes to consolidated financial statements.
5
Alliance Bancorp of New England, Inc.
Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30,
----------------------------------
(in thousands) 1998 1997
-------- --------
Operating Activities:
Net income $ 1,882 $ 1,453
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 168 516
Depreciation and amortization 416 412
Net investment security gains (1,071) (436)
Net asset losses 25 66
Increase in other liabilities 585 375
Decrease (increase) in loans held for sale (1,026) 501
Increase (decrease) in other assets 271 (561)
-------- --------
Net cash provided by operating activities 1,250 2,326
Investing Activities:
Securities available for sale:
Proceeds from amortization and maturities 18,298 6,603
Proceeds from sales of securities 9,876 5,993
Purchases of securities (22,913) (14,466)
Securities held to maturity:
Proceeds from amortization and maturities 2,302 667
Net increase in loans (13,819) (3,241)
(Increase) decrease in foreclosed assets, net (2) 435
Purchases of premises and equipment (248) (41)
-------- --------
Net cash used in investing activities (6,506) (4,050)
Financing Activities:
Net increase in interest-bearing deposits 6,564 12,560
Net increase (decrease) in demand deposits (1,012) 93
Net increase (decrease) in FHLB advances 134 (3,611)
Net increase (decrease) in other borrowings -- (2,000)
Stock options exercised 233 544
Cash dividends paid (282) (190)
Purchase of treasury stock (3,109) --
-------- --------
Net cash provided by financing activities 2,528 7,396
-------- --------
Net Change in cash and cash equivalents (2,728) 5,672
Cash and cash equivalents at beginning of the period 21,417 12,563
-------- --------
Cash and cash equivalents at end of the period $ 18,689 $ 18,235
-------- --------
Supplemental Information On Cash Payments
Interest expense $ 6,741 $ 6,447
Income taxes 727 133
Supplemental Information On Non-cash Transactions
Net loans transferred to foreclosed assets 12 83
See accompanying notes to consolidated financial statements.
6
Notes to Consolidated Financial Statements (unaudited)
Note 1. Basis of Presentation and Principles of Business and Consolidation
The consolidated financial statements have been prepared and presented in
conformity with generally accepted accounting principles. Unless otherwise
noted, all dollar amounts presented in the financial statements and note tables
are rounded to the nearest thousand dollars, except share data. Certain prior
period amounts have been reclassified to conform with current financial
statement presentation.
Alliance Bancorp of New England, Inc. ("Alliance" or the "Company") uses the
accrual method of accounting for all material items of income and expense. The
Company is required to make certain estimates and assumptions in preparing these
statements. The most significant estimates are those necessary in determining
the allowance for loan losses, the valuation of foreclosed assets, and the
determination of fair values of financial instruments. Factors affecting these
estimates include national economic conditions, the level and trend of interest
rates, local market conditions, and real estate trends and values.
The quarterly financial statements are unaudited. However, in the opinion of
Management, all material adjustments, consisting primarily of normal recurring
accruals, necessary for a fair presentation of the financial statements have
been included. Operating results for any interim period are not necessarily
indicative of results for any other interim period or for the entire year.
Management's Discussion and Analysis of Financial Condition and Results of
Operations accompany these financial statements. These consolidated interim
financial statements and notes should be read in conjunction with the Company's
Annual Report on Form 10-K for the year ended December 31, 1997.
The Company is a one bank holding company, chartered in Delaware. Its bank
subsidiary is Tolland Bank ("the Bank"), a Connecticut chartered savings bank
with deposits insured up to applicable limits by the Federal Deposit Insurance
Corporation ("FDIC"). The Bank provides consumer and commercial banking services
from its seven offices located in Tolland County, Connecticut. Tolland Bank
maintains a wholly owned forclosed asset liquidation subsidiary named Asset
Recovery Systems, Inc. ("ARS"). The consolidated financial statements include
the Company, the Bank, and ARS. All significant intercompany accounts and
transactions have been eliminated in consolidation.
On June 17, 1997, the Company declared a four-for-three common stock split
effected as a 33.33% stock dividend which was paid on July 17, 1997. All per
share information has been retroactively adjusted to reflect this stock
dividend. Additionally, as of October 3, 1997, the Company restated Common Stock
and Additional Paid-In Capital to reflect a change in the par value of common
stock from $1.00 to $.01 in conjunction with the completion of the formation of
Alliance Bancorp of New England, Inc. as the holding company for Tolland Bank.
On April 28, 1998, the Company declared a three-for-two common stock split
effected as a 50.0% stock dividend which was paid on May 26, 1998. The financial
statements as of September 30, 1998 include the effects of this split, and all
per share information has been retroactively adjusted to reflect this stock
dividend for all periods in the statements. The stock dividend was recorded
based on the $.01 par value of the common stock. After the stock split, common
stock par value totaled $25 thousand, an increase of $9 thousand from year-end
1997.
7
Note 2. Securities
Amortized Unrealized Unrealized Fair
September 30, 1998 (in thousands) Cost Gains Losses Value
---- ----- ------ -----
Securities available for sale
U.S. Government and agency $14,752 $ 54 $ (77) $14,729
U.S. Agency mortgage-backed 2,645 33 -- 2,678
Other debt securities 991 13 -- 1,004
Marketable equity 17,774 1,116 (59) 18,831
FHLB stock 876 -- -- 876
------- ------ ----- -------
Total available for sale $37,038 $1,216 $(136) $38,118
------- ------ ----- -------
Securities held to maturity
U.S. Government and agency $ 2,919 $ 85 $ (1) $ 3,003
U.S. Agency mortgage-backed 13,219 68 (12) 13,275
Other debt securities 1,599 52 -- 1,651
------- ------ ----- -------
Total held to maturity $17,737 $ 205 $ (13) $17,929
------- ------ ----- -------
Amortized Unrealized Unrealized Fair
December 31, 1997 (in thousands) Cost Gains Losses Value
---- ----- ------ -----
Securities available for sale
U.S. Government and agency $18,081 $ 27 $(217) $17,891
U.S. Agency mortgage-backed 5,366 27 (2) 5,391
Other debt securities 1,312 9 -- 1,321
Marketable equity 16,710 1,586 -- 18,296
FHLBB stock 830 -- -- 830
------- ------ ----- -------
Total available for sale $42,299 $1,649 $(219) $43,729
------- ------ ----- -------
Securities held to maturity
U.S. Government and agency $ 2,901 $ 45 $ (5) $ 2,941
U.S. Agency mortgage-backed 15,214 48 (38) 15,224
Other debt securities 1,834 25 (3) 1,856
------- ------ ----- -------
Total held to maturity $19,949 $ 118 $ (46) $20,021
------- ------ ----- -------
Note 3. Nonperforming Loans
September 30, December 31
(in thousands) 1998 1997
------------- -----------
Total nonaccruing loans $ 468 $2,133
Accruing loans past due 90 days or more -- 86
Impaired loans:
Impaired loans - valuation allowance required 413 1,607
Impaired loans - no valuation allowance required 398 1,576
------ ------
Total impaired loans $ 811 $3,183
Total valuation allowance on impaired loans 110 340
Restructured loans, all of which are performing 13 502
8
Note 4. Allowance for Loan Losses
Nine Months Ended Year Ended
September 30, December 31,
(in thousands) 1998 1997
------------- ------------
Beginning balance $ 3,000 $ 2,850
Charge-offs:
Residential mortgages (130) (108)
Consumer (135) (366)
Commercial (51) (294)
------- -------
Total Charge-offs (316) (768)
------- -------
Recoveries:
Residential mortgages -- 11
Consumer 45 45
Commercial 143 33
------- -------
Total Recoveries 188 89
------- -------
Net Charge-offs (128) (679)
Provision for losses 168 829
------- -------
Ending balance $ 3,040 $ 3,000
------- -------
Note 5. Comprehensive Income
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") 130, Reporting Comprehensive Income, as of January 1, 1998.
SFAS 130 establishes standards for the reporting and display of comprehensive
income and its components (such as changes in unrealized investment gains and
losses). Comprehensive income includes net income and any changes in equity from
non-owner sources that are not included in the income statement. The purpose of
reporting comprehensive income is to report a measure of all changes in equity
of an enterprise that result from recognized transactions and other economic
events of the period other than transactions with owners in their capacity as
owners. Application of SFAS 130 has not impacted the amounts previously reported
for net income or effected the comparability of previously issued financial
statements.
The following table summarizes comprehensive income:
Three Months Ended September Nine Months Ended
30, September 30,
----------------------- --------------------------
(in thousands) 1998 1997 1998 1997
------- ------- ------- -------
Net income $ 653 $ 523 $ 1,882 $ 1,453
Other comprehensive income, net of tax:
Unrealized gains on investments
Unrealized holding gain arising during the period
net of income tax expense of $120 and $10
(three months) and $356 and $465 (nine months)
for 1998 and 1997, respectively 174 15 512 669
Less reclassification adjustment for gains included
in net income net of income tax expense of
$75 and $176 (three months) and $439 and
$179 (nine months ) for 1998 and 1997, respectively 108 254 (632) (257)
------- ------- ------- -------
Other comprehensive income 282 269 (120) 412
------- ------- ------- -------
Comprehensive income $ 935 $ 792 $ 1,762 $ 1,865
------- ------- ------- -------
Note 6. Purchase of Treasury Stock
On July 1, 1998 the Company purchased 200,599 common shares from an
institutional shareholder in a privately negotiated transaction totaling $3.1
million. The shares are being held as treasury stock.
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 changes in general market interest rates, general economic
conditions, legislative/regulatory changes, fluctuations of interest rates,
changes in the quality or composition of the Company's loan and investment
portfolios, deposit flows, competition, demand for financial services in the
Company's markets, and changes in the accounting principles, policies, and
guidelines. These factors should be considered in evaluating the forward-looking
statements, and undue reliance should not be placed on such statements.
SUMMARY
Alliance Bancorp of New England, Inc. reported a 25% increase in net income to
$653 thousand for the third quarter ended September 30, 1998 compared to net
income of $523 thousand in last year's third quarter ($.27 vs. $.21 per share on
a diluted basis). Net income for the first nine months of 1998 totaled $1.882
million compared to $1.453 million in the same period of 1997 ($.75 vs. $.59 per
share on a diluted basis). Also, the directors declared a regular quarterly cash
dividend of five cents per share payable on November 24, 1998 to shareholders of
record at the close of business November 10, 1998.
Higher earnings in 1998 are attributable to higher net interest income, a lower
provision for loan losses, and higher non-interest income. Net interest income
increased by 15% during the third quarter and by 10% for the year to date,
compared to the same periods in 1997. These gains resulted both from growth in
earning assets and from an improvement in the net interest margin to 4.10% in
the most recent quarter, compared to 3.74% in the third quarter of 1997. The
higher net interest margin includes the impact of $69 thousand of recovered loan
interest income in the third quarter. The lower provision for loan losses
coincides with lower year to date net loan charge-offs and lower levels of
problem assets. For the first nine months, gains in non-interest income included
higher net service charge income and gains on securities. Securities gains
reflect an ongoing process of active investment portfolio management, including
realizing the benefits of the strongly improving market valuations.
Non-interest expense increased by 13% in 1998 due to higher compensation expense
and miscellaneous other expense. Compensation expense has increased due to staff
additions related to growth in the commercial lending department and to branch
expansion. Growth in other expense included higher problem asset expense related
to the disposition of nonperforming assets, which declined to $1.1 million from
$2.7 million at the beginning of the year. Other expense increases related to
increased loan volume, computer system upgrades, and other charges related to
branch expansion. The effective tax rate increased due to a second quarter
charge related to an increase in the deferred tax asset valuation allowance as a
result of tax planning changes anticipated for 1999. The company has initiated
steps toward the formation of a passive investment subsidiary in accordance with
changes in Connecticut tax statutes, resulting in an expected reduction in the
effective tax rate beginning in 1999.
At September 30, the Company had total assets of $252 million, a 2.0% increase
from the beginning of the year. Total loans were $172.3 million, increasing 9.4%
during the last nine months. Total deposits were $227.3 million, increasing 2.5%
from the beginning of the year. Shareholders' equity totaled $17.4 million,
representing a book value per share of $7.59. The Company had announced on July
2, 1998 the purchase of 200,599 shares of treasury stock at a total cost of $3.1
million. The Company's capital remains in excess of all regulatory requirements.
10
Return on shareholders' equity measured 15.72% for the third quarter and 13.81%
for the first nine months of 1998, compared to 12.18% and 11.79% for the same
periods of 1997.
Continued improvement in earnings is consistent with the fundamental
improvements the Company has made to its business. In recent months, the Company
has announced the opening of a new branch in Hebron and plans for a new branch
in South Windsor. In each case, banking consolidations have provided an
attractive opportunity to enter new markets which are natural extensions of the
Company's current territory. Additionally, the Company has announced that Robert
Ciraco has joined the bank as Senior Vice President to contribute both to
mortgage and commercial lending activities. Despite recent changes in credit
markets, the Company continues to build new loan volume as the foundation for
growth in net income.
RESULTS OF OPERATIONS
Net Interest Income: Net interest income increased by $300 thousand (15.2%) in
the third quarter and $591 thousand (9.9%) in the first nine months of 1998
compared to the same period of 1997. This is primarily due to increases of 12.9%
and 10.9% in average loans over the same periods. Loan growth has primarily been
in residential mortgages and consumer loans, reflecting active loan promotions
in the Company's primary markets.
The fully taxable equivalent (FTE) net interest margin was 4.10% for the third
quarter of 1998, up from 3.89% for the first six months of 1998 and from 3.74%
for the first nine months of 1997. The margin for the most recent quarter
included $69 thousand of recovered loan interest, which contributed about 0.12%
to the margin for the quarter. Growth in the margin also reflected the benefit
of an increase in the net interest spread to 3.38% for the first nine months of
1998, compared to 3.35% for the same period of 1997. This included the benefit
of a higher proportion of fixed rate assets in 1998, with a generally higher
interest rate and with less sensitivity to falling interest rates which have
characterized the environment in 1998. This benefit has been offset in part by a
higher level of short term investments held in 1998.
Provision for Loan Losses: The provision is made to maintain the allowance for
loan losses at a level deemed adequate by management. The provision in the most
recent quarter was a comparatively low $10 thousand, and was equal to net
chargeoffs for the quarter. The provision decreased from $379 thousand in the
same quarter of 1997. That provision had reflected a higher impairment reserve
on one collateralized commercial loan, which was substantially resolved in the
second quarter of 1998. Please see further discussion below regarding the
allowance for loan losses.
Non-Interest Income: Service charge and fee income increased by $20 thousand
(6.9%) and by $38 thousand (4.6%) in the third quarter and first nine months of
1998, compared to the same periods of 1997. This increase was due to higher
commercial loan fees, primarily representing recoveries of penalties. 1998
non-interest income also included net gains on the sale of securities totaling
$183 thousand for the third quarter and $1.071 million for the first nine months
of the year. Investment gains reflected an ongoing process of active investment
portfolio management, including realizing the benefits of improving market
valuations. Losses on assets related to writedowns or liquidation losses on
foreclosed properties.
Non-Interest Expense: Total non-interest expense increased by $185 thousand
(11.7%) for the third quarter and by $601 thousand (12.7%) for the first nine
months of 1998, compared to the same periods in 1997. Most categories of
overhead expense were flat or down due to ongoing cost containment. Compensation
growth for the first nine months totaled $125 thousand, including $193 thousand
in full time salary growth, partially offset by $96 thousand in higher salary
deferrals on loan originations. The increase in problem asset related expense
included the effect of collection expense recoveries in 1997 related to two
commercial loan situations, which did not repeat in 1998. The increase in other
expense was primarily due to costs related to expansion programs, including loan
originations costs related to new loan products, systems upgrades, legal costs
and leasehold expense charges related to the planned move and expansion of a
Tolland branch office, and consulting and director fees.
11
Income Tax Expense: Income tax expense in the second quarter of 1998 included a
charge of approximately $105 thousand related to an increase in the deferred tax
asset valuation allowance as a result of tax planning changes anticipated for
1999. The company has initiated steps toward the formation of a passive
investment subsidiary in accordance with changes in Connecticut tax statutes,
resulting in an expected reduction in the effective tax rate beginning in 1999.
Net of this charge, the effective tax rate measured 32.5% and 32.4% in the third
quarter and first nine months of 1998, compared to 26.3% and 23.0% in the same
periods of 1997. The increase in the effective tax rate was due to a lower
percentage of income eligible for the dividend received deduction because most
asset growth was in loan accounts. Additionally, 1997 results included a
reduction in the valuation allowance on the deferred tax asset totaling $130
thousand in the first nine months of the year, which did not repeat in 1998.
Comprehensive Income: The notes to the financial statements include a discussion
of comprehensive income in accordance with SFAS 130. For the first nine months
of 1998, comprehensive income was $1.762 million, compared to $1.865 million in
the same period of 1997. In addition to net income recorded in the Income
Statement, comprehensive income includes the net effect of unrealized gains on
securities available for sale.
FINANCIAL CONDITION
Cash and Cash Equivalents: Short term investments decreased by $2.0 million in
1998 due to loan growth in the second and third quarters. The $12.8 million
balance at September 30, 1998 was being held in anticipation of further loan and
investment growth.
Investment Securities: Available for sale (AFS) securities at September 30, 1998
were $38.1 million, compared to $43.7 million at year-end 1997. Due to decreases
in interest rates, callable U.S. Agency securities were called at par in the
second quarter. These were replaced with similar securities which were called in
September. During the first nine months of 1998, the total book value of
securities sold was $9.8 million, consisting of equity securities, which were
replaced with other equity securities. The FTE yield on AFS securities increased
to 7.76% in the first nine months of 1998, compared to 7.54% for the same period
of 1997. The holding gain on AFS securities totaled $721 thousand (1.65% of fair
value) during the first nine months of 1998. Total gains of $1.071 million were
realized through the sale of securities for the first nine months of 1998. The
net unrealized gain on AFS securities stood at $1.1 million at September 30,
1998, compared to $1.4 million at year-end 1997. For the first nine months of
1998, held to maturity (HTM) securities declined by $2.2 million to $17.7
million as a result of amortization and prepayments. The yield on HTM securities
measured 5.89% over this time, compared to 5.93% for the same period of 1997.
Total Loans: Total loans increased by $14.8 million (9.4%) during the first nine
months of 1998. The increases were primarily in residential mortgages and
consumer loans, reflecting active loan promotions in the Company's primary
markets. These promotions included mortgage promotions, home equity line
promotions, and promotions of the Company's new free refinance mortgage product.
The Company continues to sell the majority of its residential mortgage
originations. The balance of commercial mortgages and loans, and of government
guaranteed loans, was affected by higher amounts of prepayments in the low
interest rate environment that developed in 1998.
Nonperforming Assets: Total nonperforming assets decreased to $1.1 million from
$2.7 million at the beginning of the year. At September 30, 1998, the ratio of
nonperforming assets to total assets measured 0.44%, compared to 1.11% at
year-end 1997. The decrease was due to the collection of the Company's three
largest nonaccruing loans. Nonaccruing loans totaled $468 thousand at September
30, 1998. Restructured loans totaled $13 thousand at that date.
Allowance for Loan Losses: The allowance for loan losses totaled $3.04 million
(1.76% of total loans) at September 30, 1998, compared to $3.0 million (1.91% of
total loans) at the previous year-end. The allowance measured 650% of
nonaccruing loans at the most recent quarter end, compared to 141% at year-end
1997. Annualized net loan charge-offs measured 0.10% of average loans for the
first nine months of 1998, compared to 0.46% for the year 1997. For 1998, gross
charge-offs totaled $316 thousand and gross recoveries totaled $188 thousand.
12
Deposits and Borrowings: Total deposits increased by $5.6 million (2.5%) during
the first nine months of 1998, reflecting continued growth in money market
deposit accounts as a result of ongoing promotions of this competitive product.
Total borrowings were approximately unchanged at September 30, 1998 compared to
the previous year-end.
Interest Rate Sensitivity: The Company's one year interest rate sensitivity gap
was approximately $(25) million as of September 30, 1998. This gap was
previously a positive $20 million gap at year end 1997 and has changed to a
negative gap due to the higher level of fixed rate loan originations, growth in
money market deposits, and the shorter term of new time account maturities in
the low interest rate market that has developed in 1998. The negative gap means
that interest sensitive liabilities exceed interest sensitive assets within the
one year time horizon. The gap measured about 10.5% of total earning assets at
September 30, 1998.
Liquidity and Cash Flows: For the first nine months of 1998, the primary sources
of funds for Tolland Bank were growth in money market deposits and run-off of
investments; the primary uses of funds were growth in residential mortgages and
consumer loans. Short term investments, borrowings, time deposits, and money
market accounts are the primary sources of liquidity for additional balance
sheet growth. Securities available for sale and government guaranteed loan
certificates provide additional sources of liquidity. The Company's primary
source of funds is dividends from the Bank and its primary use of funds is
dividends to shareholders. The declaration of cash dividends is dependent on a
number of factors, including regulatory limitations, and the Bank's operating
results and financial conditions. During the third quarter, Tolland Bank
provided a $3.1 million dividend to the Company, which was used to fund a
treasury stock purchase.
Capital Resources: During the first nine months of 1998, shareholders' equity
decreased by $1.4 million (7.4%) to $17.4 million, representing a book value per
share of $7.59. The decrease in shareholders' equity was due to the $3.1 million
purchase of treasury stock in the third quarter, partially offset by $1.6
million in retained earnings during the year. Equity totaled 6.91% of total
assets at September 30, 1998 compared to 7.61% at year-end 1997. The Company's
capital remained in excess of all regulatory requirements. At September 30,
1998, Tolland Bank reported Tier 1 Capital totaling $16.3 million, a Tier 1
Capital Ratio of 6.6%, and a Risk Based Capital Ratio of 11.6%.
Year 2000 Considerations: The Company has established a Year 2000 project plan
to address systems and facilities changes necessary to properly recognize dates
after 1999, and has assigned implementation responsibilities and has established
management and Board reporting processes. All of the Company's significant
information technology systems are provided under contract with major national
banking systems providers who are progressing under their own Year 2000 plans.
Most significant systems changes are scheduled to be completed by December 31,
1998. The Company's plan follows the five step approach required by its
regulators: Awareness, Assessment, Modification, Verification, and
Implementation. The Company has arranged for temporary consulting help and has
purchased diagnostic software to assist with this project. The Company's project
also addresses its other suppliers, customers, and other constituents, as well
as remediation and business resumption contingency plans. The costs of the
project, which are not expected to be significant, and the date on which the
Company plans to complete the Year 2000 modifications are based on management's
best estimates, which were derived utilizing numerous assumptions of future
events including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those plans. Further, all disclosure concerning Year 2000 Considerations should
be considered "Year 2000 Readiness Disclosure" pursuant to the Year 2000
Information and Readiness Disclosure Act. The Year 2000 modification information
provided herein should be read in connection with the Year 2000 Information and
Readiness Disclosure Act which, among other things, mandates that certain Year
2000 readiness disclosures may not be used in litigation.The primary uncertainty
facing the Company is the ability of third party systems providers to identify
and modify software as planned. Specific factors that might cause material
differences from plans include, but are not limited to, the availability and
cost of personnel trained in this area, the ability to locate and correct all
relevant computer codes, and similar uncertainties.
13
Additional information about the Company's Year 2000 status at September 30,
1998 was as follows:
Readiness: The Company's plans include both information technology ("IT") and
non-IT systems. Most of the Company's primary Year 2000 exposures relate to IT
systems, primarily to the vendor of its account processing systems. This is a
large national banking systems vendor. As of the date of this report, this
vendor has completed the remediation and implementation steps for the account
processing systems, and has achieved satisfactory test results in several rounds
of client tests, including a test day in which the Company participated. The
Company plans additional testing processes. The Company currently anticipates
that its major IT vendors will comply with federal regulatory guidelines for
Year 2000 readiness.
Costs: The Company has not incurred material costs related to its Year 2000
program. The Company is being charged approximately $25 thousand by its account
processing vendor for testing arrangements, which is being billed over twelve
months. The Company has accelerated certain capital expenditure plans, totaling
approximately $150 thousand, related to computer upgrades, which are planned for
the second half of 1998 and the first quarter of 1999. Additionally, the Company
will evaluate capital expenditures totaling approximately $50 thousand related
to general contingency capabilities.
Risks: The most significant risk anticipated by the Company is the possibility
of interruptions to its account processing systems. Due to the progress
described above, the Company does not presently foresee any material
interruptions to these systems. The next most significant risk relates to
interruptions in the payment processing systems, which are integrated with the
Company's account processing systems. The Company is working with its payment
processing vendors, the most significant of which are reported to be making
satisfactory progress in complying with federal regulatory guidelines for Year
2000 readiness. These guidelines include the completion of remediation and the
initiation of testing in 1998. The Company is also exposed to various non-IT
systematic risks which it cannot fully monitor and test.
Contingency Plans: The Company has taken actions to comply with federal
regulatory requirements for Year 2000 contingency planning. The Company has
established a contingency planning committee representing all of its major
functional areas. The Company has established a contingency plan timetable and
developed risk analyses for its high priority business functions; during the
fourth quarter of 1998, the Company will be developing contingency timetables
and action plans in accordance with federal regulatory guidelines. The Company
has taken steps to increase its available staffing as necessary to respond to
Year 2000 contingencies.
Recently Issued Accounting Standards:
In June 1997, the FASB issued SFAS No. 131, "Financial Reporting for Segments of
a Business Enterprise." SFAS No. 131 was developed jointly by the FASB and the
Accounting Standards Board of the Canadian Institute of Chartered Accountants in
response to requests from financial statement users for additional and better
segment information. This statement is effective for periods beginning after
December 15, 1997. In the initial year of application, comparative information
for earlier years is to be restated, unless it is impractical to do so. The
Company does not anticipate that SFAS No. 131 will significantly impact the
composition of its current operating statements which are consistent with the
management approach.
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
in the statement of condition 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. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999 with earlier
adoption permitted. Upon initial application, hedging relationships must be
designated anew and documented pursuant to the provisions of the statement.
Management has not yet evaluated the impact of the implementation of SFAS No.
133.
14
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, 1997 filed March 27, 1998. There have been no material
changes in reported market risks faced by the Company since the end of 1997.
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, 1998. On July 29, 1998, the Company filed a report on
Form 8-K. The report disclosed under Item 5 - Other Events
the repurchase of a block of its outstanding common stock
from an institutional holder in a privately negotiated
transaction.
15
Average Balance Sheet and Interest Rates - Fully Taxable Equivalent (FTE)
(dollars in thousands) Average Balance Rate (FTE Basis)
----------------------- ----------------
Quarters ended September 30 1998 1997 1998 1997
--------- --------- ---- ----
Loans $ 169,475 $ 150,118 8.41% 8.14%
Securities available for sale 42,613 49,585 7.75 7.15
Securities held to maturity 18,195 20,251 5.89 5.90
Other earning assets 7,226 5,194 5.49 5.47
--------- ---------
Total earning assets 237,509 225,148 8.01 7.66
Other assets 11,711 11,496
--------- ---------
Total assets $ 249,220 $ 236,644
--------- ---------
Interest bearing deposits $ 205,562 $ 195,442 4.39 4.39
Borrowings 3,697 3,833 6.83 6.26
--------- ---------
Interest bearing liabilities 209,259 199,275 4.44 4.43
Other liabilities 23,479 20,193
Shareholder's equity 16,482 17,176
--------- ---------
Total liabilities and equity $ 249,220 $ 236,644
--------- ---------
Net Interest Spread 3.57% 3.23%
Net Interest Margin 4.10% 3.74%
(dollars in thousands) Average Balance Rate (FTE Basis)
----------------------- ----------------
Quarters ended September 30 1998 1997 1998 1997
--------- --------- ---- ----
Loans $ 163,379 $ 147,360 8.28% 8.16%
Securities available for sale 42,565 49,201 7.76 7.54
Securities held to maturity 18,952 20,430 5.89 5.93
Other earning assets 11,608 3,083 5.42 4.81
--------- ---------
Total earning assets 236,504 220,074 7.85 7.77
Other assets 11,490 10,973
--------- ---------
Total assets $ 247,994 $ 231,047
--------- ---------
Interest bearing deposits $ 202,883 $ 191,582 4.42 4.37
Borrowings 3,723 4,402 6.60 6.21
--------- ---------
Interest bearing liabilities 206,606 195,984 4.47 4.42
Other liabilities 23,163 18,631
Shareholder's equity 18,225 16,432
--------- ---------
Total liabilities and equity $ 247,994 $ 231,047
--------- ---------
Net Interest Spread 3.38% 3.35%
Net Interest Margin 3.96% 3.84%
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 11, 1998 /s/ Joseph H. Rossi
------------------------
Joseph H. Rossi
President/CEO
Date: November 11, 1998 /s/ David H. Gonci
------------------------
David H. Gonci
Senior Vice President/CFO
17