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 March 31, 1999
Commission File Number 001-13405
ALLIANCE BANCORP OF NEW ENGLAND, INC.
Incorporated in the State of Delaware
IRS Employer Identification Number 06-1495617
Address and Telephone:
348 Hartford Turnpike, Vernon, Connecticut 06066, (860) 875-2500
Securities registered pursuant to Section 12(b) of the Act: Common Stock -- $.01
par value, which is registered on the American Stock Exchange.
Alliance Bancorp of New England (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days.
As of May 5, 1999, Alliance Bancorp of New England had 2,295,286 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 ended March 31,
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1999 1998
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For the Quarter (in thousands)
Net interest income $2,386 $2,088
Provision for loan losses 125 145
Service charges and fees 421 247
Net gain on securities 104 435
Net gain on assets 50 -
Non-interest expense 1,878 1,744
Income before income taxes 958 881
Income tax expense 258 279
Net income $ 700 $ 602
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Per Share
Basic earnings $ .31 $ .24
Diluted earnings .30 .23
Dividends declared .05 .03
Book value 7.25 7.91
Common stock price:
High 12.38 14.24
Low 9.62 10.92
Close 9.75 14.00
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At Quarter End (in millions)
Total assets $281.8 $247.3
Total loans 182.4 158.4
Other earning assets 86.0 78.4
Deposits 237.9 220.7
Borrowings 25.6 5.7
Shareholders' equity 16.6 19.7
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Operating Ratios (in percent)
Return on average assets 1.02% 1.00%
Return on average equity 15.80 13.13
Equity % total assets (period end) 5.91 7.97
Net interest spread (fully taxable equivalent) 3.28 3.26
Net interest margin (fully taxable equivalent) 3.77 3.83
Dividend payout ratio 16.40 13.79
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2
Alliance Bancorp of New England, Inc.
Consolidated Balance Sheets (Unaudited)
March 31, December 31,
(in thousands except share data) 1999 1998
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Assets
Cash and due from banks $ 7,865 $ 6,760
Short-term investments 9,479 13,456
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Total cash and cash equivalents 17,344 20,216
Securities available for sale (at fair value) 63,356 58,556
Securities held to maturity 13,176 15,431
Residential mortgage loans 53,865 57,555
Commercial mortgage loans 50,074 46,724
Other commercial loans 24,507 25,105
Consumer loans 32,908 32,515
Government guaranteed loans 21,017 22,827
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Total loans 182,371 184,726
Less: Allowance for loan losses (3,200) (3,060)
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Net loans 179,171 181,666
Premises and equipment, net 4,226 4,276
Foreclosed assets, net 80 80
Other assets 4,417 3,356
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Total assets $281,770 $283,581
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Liabilities and Shareholders' Equity
Demand deposits $ 21,426 $ 25,328
NOW deposits 25,429 25,155
Money market deposits 31,859 29,585
Savings deposits 39,371 37,238
Time deposits 119,782 122,679
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Total deposits 237,867 239,985
Borrowings 25,576 23,610
Other liabilities 1,678 1,790
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Total liabilities 265,121 265,385
Preferred stock, ( $.01 par value; 100,000 shares
authorized, none issued) - -
Common stock, ($.01 par value; authorized 4,000,000
shares; issued 2,495,885 in 1999
and 2,492,552 in 1998; outstanding 2,295,286 in 1999
and 2,291,953 in 1998) 25 25
Additional paid-in capital 11,330 11,306
Retained earnings 9,809 9,223
Accumulated other comprehensive income (loss), net (1,406) 751
Treasury stock (200,599 shares) (3,109) (3,109)
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Total shareholders' equity 16,649 18,196
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Total liabilities and shareholders' equity $ 281,770 $ 283,581
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See accompanying notes to financial statements
3
Alliance Bancorp of New England, Inc.
Consolidated Income Statements (Unaudited)
Three Months Ended
March 31,
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(in thousands except share data) 1999 1998
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Interest Income
Loans $ 3,543 $ 3,188
Debt securities 936 642
Dividends on equity securities 290 315
Other earning assets 92 207
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Total interest and dividend income 4,861 4,352
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Interest Expense
Deposits 2,176 2,205
Borrowings 299 59
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Total interest expense 2,475 2,264
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Net interest income 2,386 2,088
Provision For Loan Losses 125 145
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Net interest income after provision for loan losses 2,261 1,943
Non-Interest Income
Service charges and fees 421 247
Net gain on securities 104 435
Net gain on assets 50 -
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Total non-interest income 575 682
Non-Interest Expense
Compensation and benefits 1,014 877
Occupancy 180 154
Equipment 69 75
Data processing services 167 144
Office, FDIC, & Insurance 123 140
Problem asset related expense 29 66
Other 296 288
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Total non-interest expense 1,878 1,744
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Income before income taxes 958 881
Income tax expense 258 279
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Net Income $ 700 $ 602
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Per Share Data
Basic earnings per share $ .31 $ .24
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Diluted earnings per share $ .30 $ .23
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Average basic shares outstanding 2,294,084 2,490,775
Average additional dilutive shares 78,542 89,302
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Average diluted shares outstanding 2,372,626 2,580,077
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See accompanying notes to financial statements
4
Alliance Bancorp of New England, Inc.
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
Accumulated
Additional other Total
Three Months ended March 31 Common paid-In Retained comprehensive Treasury shareholders'
(in thousands except share data) stock capital earnings income Stock equity
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1998
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Balance, December 31, 1997 $16 $11,073 $7,071 $ 643 $18,803
Comprehensive income
Net income 602 602
Unrealized gain on securities,
net of reclassification adjustment 153 153
Dividends declared and paid (82) (82)
Issuance of shares pursuant
to exercise of stock options 233 233
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Balance, March 31, 1998 $16 $11,306 $7,591 $ 796 $19,709
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1999
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Balance, December 31, 1998 $25 $11,306 $9,223 $ 751 $ (3,109) $18,196
Comprehensive income
Net income 700 700
Unrealized gain on securities,
net of reclassification adjustment (2,157) (2,157)
Dividends declared and paid (114) (114)
Issuance of shares pursuant to exercise
of stock options 24 24
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Balance, March 31, 1999 $25 $11,330 $9,809 $(1,406) $ (3,109) $16,649
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Disclosure of reclassification amount
Three months ended March 31 (in thousands) 1999 1998
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Unrealized holding gain (loss) arising during
the period net of income tax expense (benefit)
of ($1,076) and $258, respectively $(2,088) $ 410
Less reclassification adjustment for
gains included in net income net of income
tax expense of $35 and $178, respectively (69) (257)
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Net unrealized gains on securities $(2,157) $ 153
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See accompanying notes to financial statements
5
Alliance Bancorp of New England, Inc.
Consolidated Statements of Cash Flows (Unaudited)
Three months ended March 31,
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(in thousands) 1999 1998
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Operating Activities:
Net income $ 700 $ 602
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Provision for loan losses 125 145
Depreciation and amortization 128 139
Net investment security gains (104) (435)
Net asset gains (50) -
(Decrease) increase in other liabilities (112) 343
Decrease (increase) in loans held for sale 3,782 (1,138)
(Increase) decrease in other assets (54) 19
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Net cash provided by (used in) operating activities 4,415 (325)
Investing Activities:
Securities available for sale:
Proceeds from amortization and maturities 1,609 12,669
Proceeds from sales of securities 2,852 2,705
Purchases of securities (12,570) (10,122)
Securities held to maturity:
Proceeds from amortization and maturities 2,255 618
Net (increase) decrease in loans (1,436) 53
Increase in foreclosed assets, net - (152)
Proceeds from the sale of premises and equipment 464 -
Purchases of premises and equipment (219) (32)
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Net cash (used in) provided by investing activities (7,045) 5,739
Financing Activities:
Net increase in interest-bearing deposits 1,784 640
Net decrease in demand deposits (3,902) (1,650)
Net decrease in FHLB advances (34) (31)
Net increase in other borrowings 2,000 -
Stock options exercised 24 233
Cash dividends paid (114) (82)
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Net cash provided by financing activities (242) (890)
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Net Change in cash and cash equivalents (2,872) 4,524
Cash and cash equivalents at beginning of the period 20,216 21,417
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Cash and cash equivalents at end of the period $17,344 $25,941
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Supplemental Information On Cash Payments
Interest expense $ 2,450 $ 2,247
Income tax expense 235 180
Supplemental Information On Non-cash Transactions
Net loans transferred to foreclosed assets - 153
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 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, 1998.
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 eight offices located in Tolland County, Connecticut. Tolland Bank
maintains a wholly owned passive investment subsidiary named Tolland Investment
Corporation, and maintains a wholly owned foreclosed asset liquidation
subsidiary named Asset Recovery Systems, Inc. ("ARS"). The consolidated
financial statements include the Company, the Bank, and the Bank's subsidiaries.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
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. All per share
information has been retroactively adjusted to reflect this stock dividend for
all periods in the statements.
7
Note 2. Securities
Amortized Unrealized Unrealized Fair
March 31, 1999 (in thousands) Cost Gains Losses Value
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Securities available for sale
U.S. Government and agency $13,748 $ 20 $ (67) $13,701
U.S. Agency mortgage-backed 1,741 7 (10) 1,738
Other debt securities 31,155 62 (1,100) 30,117
Marketable equity 17,564 437 (1,382) 16,619
FHLB stock 1,181 - - 1,181
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Total available for sale $65,389 $ 526 $(2,559) $63,356
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Securities held to maturity
U.S. Government and agency $ 1,957 $ 61 $ - $ 2,018
U.S. Agency mortgage-backed 10,167 26 (14) 10,179
Other debt securities 1,052 27 - 1,079
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Total held to maturity $13,176 $ 114 $ (14) $13,276
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Amortized Unrealized Unrealized Fair
December 31, 1998 (in thousands) Cost Gains Losses Value
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Securities available for sale
U.S. Government and agency $16,694 $ 34 $ (82) $16,646
U.S. Agency mortgage-backed 2,312 22 (1) 2,333
Other debt securities 19,265 476 (26) 19,715
Marketable equity 17,724 1,107 (150) 18,681
FHLBB stock 1,181 - - 1,181
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Total available for sale $57,176 $1,639 $ (259) $58,556
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Securities held to maturity
U.S. Government and agency $ 1,952 $ 65 $ - $ 2,017
U.S. Agency mortgage-backed 12,095 22 (28) 12,089
Other debt securities 1,384 29 - 1,413
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Total held to maturity $15,431 $ 116 $ (28) $15,519
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Note 3. Nonperforming Loans
March 31, December 31,
(in thousands) 1999 1998
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Total nonaccruing loans $960 $574
Accruing loans past due 90 days or more - -
Impaired loans:
Impaired loans - valuation allowance required 831 420
Impaired loans - no valuation allowance required 28 252
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Total impaired loans $859 $672
Total valuation allowance on impaired loans 289 110
Commitments to lend additional funds for impaired loans - -
8
Note 4. Allowance for Loan Losses
Three Months Ended Year Ended
March 31, December 31,
(in thousands) 1999 1998
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Beginning balance $3,060 $3,000
Charge-offs (9) (401)
Recoveries 24 282
Provision for losses 125 179
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Ending balance $3,200 $3,060
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Note 5. New Accounting Standards
In June 1998, the FASB issued SFAS 133, Accounting for Derivative Instruments
and Hedging Activities. SFAS 133 establishes accounting and reporting standards
for derivative instruments and for hedging activities. It requires that
companies record all derivatives as either assets or liabilities on the balance
sheet and measure those instruments at fair value. The manner in which the
companies are to record gains and losses resulting from changes in the values of
those derivatives depends on the use of the derivative and whether it qualifies
for hedge accounting. For qualifying hedges, the recognition of changes in the
value of both the hedge and the hedged item are recorded in earnings in the same
period. Changes in the fair value of derivatives that do not qualify for hedge
accounting are included in earnings in the period of the change. SFAS 133 also
allows a one-time reclassification of held to maturity securities. This
statement is effective for years beginning after June 15, 1999. The Company does
not believe that the adoption of this statement will have a material impact on
its financial position or results of operations.
9
ITEM 2 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS
Special Note Regarding Forward-Looking Statements
This report contains certain "forward-looking statements." These forward-looking
statements, which are included in Management's Discussion and Analysis, describe
future plans or strategies and include the Company's expectations of future
financial results. The words "believe," expect," "anticipate," "estimate,"
"project" and similar expressions identify forward-looking statements. The
Company's ability to predict results or the effect of future plans or strategies
or qualitative or quantitative changes based on market risk exposure is
inherently uncertain. Factors which could affect actual results include but are
not limited to 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
The Company reported a 16.3% increase in earnings for the first quarter ended
March 31, 1999, with net profit totaling $700 thousand compared to $602 thousand
a year earlier. Quarterly earnings per share increased by 30.4% to $.30 compared
to $.23 a year earlier, on a diluted basis.
The Company has replaced earnings contributed from securities gains in 1998 with
recurring interest and fee income in 1999. As a result of additions to both
loans and investment securities, interest and fee income have increased by
approximately 20%. The Company continues to follow its plan to build its ongoing
earnings stream through growth in earning assets, coupled with higher sales of
products and services to its retail and commercial customers. During the first
quarter, the Company opened its new permanent office in Hebron, and the Company
moved forward with plans to break ground for its new office in South Windsor.
Additionally, the Company has invested in a new office facility at 215 Merrow
Road for its Tolland customers. The Company continues to record strong growth in
new products. Higher earnings have provided the basis for a 20% increase in the
quarterly cash dividend to shareholders.
Net interest income grew during the quarter, increasing by $298 thousand (14.3%)
to $2.386 million, equaling the increase in average earning assets in the first
quarter of 1999 compared to the same period of 1998. This growth included a 21%
increase in average regular loans and a 26% increase in average investment
securities, along with a 50% decrease in average short term investments. The
increase in net interest income largely offset a $331 thousand decrease in gains
on the sale of investment securities, due to a lower volume of securities sold
in the first quarter of 1999.
Service charges and fees increased significantly totaling $421 thousand in the
quarter ended March 31, 1999, increasing 70.4% over the results for 1998. This
improvement included increases in most major categories of service charges and
fees. The largest increase was in secondary market income, reflecting a higher
volume of activity in 1999. Loan related fees also increased due to higher loan
prepayment fees.
Non-interest expense increased by $134 thousand (7.7%) due primarily to higher
staff and occupancy related expenses related to growth and expansion of the
Bank. Total expenses benefited from a decrease in problem asset related
expenses, reflecting the resolution of most major problem assets in 1998. The
effective income tax rate decreased to 26.9% in 1999, from 31.7% in the first
quarter of 1998. This reflected the state income tax impact of the formation of
a passive investment corporation in the most recent quarter, together with the
ongoing federal income tax benefit of the dividends received deduction on
investment securities.
10
Earnings growth was also reflected in the return on assets, which improved to
1.02%, and the return on shareholders' equity, which improved to 15.80%. While
the net interest spread improved slightly to 3.28%, the net interest margin
decreased to 3.77% due to a higher reliance on interest bearing funds to support
growth in earning assets.
Total assets measured $281.8 million at March 31, 1999. Total regular loans,
excluding government guaranteed loans and residential mortgages held for sale,
were $159.8 million at March 31, 1999, an increase of 2.1% from year-end 1998.
Total deposits were $237.9 million at March 31, 1999, a decrease of 0.9% due to
higher transactions balances held by depositors at year-end 1998.
Shareholders' equity totaled $16.6 million, representing a book value per share
of $7.25. Shareholders' equity decreased from year-end 1998 due to a decrease in
accumulated other comprehensive income, as a result of changes in the market
value of equity securities available for sale. During the most recent quarter,
the Company declared and paid a $0.05 per share cash dividend. A treasury stock
purchase in July, 1998 totaling $3.1 million also affected comparisons to the
first quarter of 1998, including earnings per share and book value per share.
The Company's capital remains in excess of all regulatory requirements.
RESULTS OF OPERATIONS
Net Interest Income: As noted above, net interest income increased by 14.3% due
to growth in loans and securities. Since year-end 1998, loan growth has
primarily been in the commercial portfolio (commercial mortgages and loans),
which grew at a 15.3% annualized rate in the first quarter of 1999. The $3.7
million decrease in residential mortgages was due to an equal decrease in
mortgages held for sale. Growth in investment securities has been in investment
grade corporate bonds, which are classified as available for sale. Total
securities available for sale increased by $4.8 million during the most recent
quarter.
The fully taxable equivalent net interest margin had increased from 3.83% in the
first quarter of 1998, to 4.14% in the fourth quarter of 1998. These results
included the benefit of lower nonaccruing loans as well as collection of
previously nonaccrued interest related to the liquidation of problem loans.
During the first quarter of 1999, the net interest margin declined to 3.77%.
This reflects the effects of lower interest rates, which accelerated prepayments
and contributed to lower yields on funds reinvested, and on new growth in
earning assets. The tax equivalent yield declined in most major categories of
earning assets in the most recent quarter, compared to the fourth quarter of
1998, and the total tax equivalent yield on earning assets decreased from 7.96%
in the fourth quarter of 1998 to 7.52% in the first quarter of 1999.
The yield on interest bearing liabilities decreased in the last two quarters due
to the repricing of time deposits in the lower rate environment, along with
growth in lower cost money market and savings accounts. The lower cost of time
deposits also reflected a shortening in the duration of the portfolio, as
customers preferred to keep maturities shorter in the lower rate environment.
The yield on interest bearing liabilities declined from 4.48% in the first
quarter of 1998 to 4.34% in the fourth quarter of 1998 and to 4.24% in the first
quarter of 1999. The reduction in the cost of funds partially offset the impact
of the decline in earning asset yields on the overall net interest margin.
As a result of the decrease in the net interest margin, total net interest
income declined by 4.1% in the first quarter of 1999, compared to the fourth
quarter of 1998. However, the 4.10% net interest margin in the fourth quarter of
1998 was unusually high. Compared to the third quarter of 1998, net interest
income in the most recent quarter increased by 4.6%, reflecting the general
quarterly trend of net interest income during the past year.
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 $125
thousand in the most recent quarter, compared to $145 thousand in the same
quarter of 1998. During the most recent quarter, the allowance was increased
from $3.06 million to $3.20 million due to an increase in the valuation
allowance on impaired loans. Please see the later discussion on the Allowance
for Loan Losses.
11
Non-Interest Income: First quarter service charge and fee income was $421
thousand, an increase of $174 thousand (70.4%) from the same period of 1998.
This increase included $68 thousand in higher prepayment fees and $70 thousand
in higher secondary market income. The prepayment fees were primarily related to
commercial loan prepayment activity. The secondary market income reflected
higher secondary market sales of residential mortgage loans, including the
effects of the reduction in the loans held for sale noted previously.
During the first quarter of 1999, the Company recorded $104 thousand in net
gains realized on the sale of investment securities, compared to $435 thousand
recorded in the same quarter of 1998. Investment gains reflect an ongoing
process of active investment portfolio management, including realizing the
benefits of improving market valuations. During the most recent quarter, market
valuations decreased, which contributed to the decrease in net gains realized.
Please see the later discussion of comprehensive income. In the first quarter,
the Company also recorded a $50 thousand net gain on the sale of assets.
Non-Interest Expense and Tax Expense: As previously noted, the $134 thousand
(7.7%) increase in non-interest expense was primarily due to a $137 thousand
increase in staff related expense. This reflected staff increases related to
expansion of business activities, along with the effects of higher average
salaries. Occupancy and data processing expense increased due to new offices and
increased business activity. The earlier summary also noted the contribution of
lower problem asset related expense and lower income tax expense. The effect of
the establishment of a passive investment corporation was to eliminate
consolidated state income tax expense, which is expected to be an ongoing
benefit.
Comprehensive Income: Comprehensive income includes changes (after tax) in the
market valuation of investment securities available for sale. Comprehensive
income was ($1.457) million in the most recent quarter, compared to $755
thousand in the same period of 1998. The results for 1999 include a ($2.157)
million reclassification adjustment for net unrealized gains on securities.
Please see the following discussion on investment securities.
FINANCIAL CONDITION
Cash and Cash Equivalents: Short term investments decreased by $4.0 million
during the quarter due to purchases of investment securities available for sale.
Investment Securities: Securities held to maturity (HTM) decreased by $2.3
million due to amortization and maturities. Securities available for sale (AFS)
increased by $4.8 million. Total purchases of AFS securities were $12.6 million,
and total amortization and sales were $4.5 million. Total holding losses for the
period were $3.2 million, or about 5.3% of the fair value of the portfolio as of
year-end 1998. Holding losses on marketable equity securities were $1.8 million
(9.6% of year-end 1998 fair value), and holding losses on debt securities were
$1.4 million (3.6% of year-end 1998 fair value). These changes reflect an
increase in long term interest rates in the most recent quarter, along with
changes in market valuations of utilities stocks. At March 31, 1999, the total
net unrealized loss on AFS securities was $2.0 million (3.1% of amortized cost),
compared to a net unrealized gain of $1.4 million (2.4% of amortized cost) at
year-end 1998.
Total Loans: Total loans decreased by $2.4 million to $182.4 million. As
previously noted, this decrease reflected loan prepayments and a reduction in
residential mortgage loans held for sale, and was partially offset by growth in
commercial mortgage loans and consumer loans. During the quarter, the Company
introduced its new Equity Select home equity line of credit, which allows
borrowers to establish fixed rate amortizing loans within the line to finance
specific purchases. This product is relatively new to the marketplace, and it
offers the convenience of instalment loans combined with the flexibility and tax
benefits associated with home equity lines.
Nonperforming Assets: Nonaccruing loans increased to $960 thousand at March 31,
1999 compared to $574 thousand at year-end 1998. This increase was primarily in
several commercial loans which are under consideration for modifications.
Foreclosed assets remained at $80 thousand. Total nonperforming assets measured
0.37% of total assets at March 31, 1999.
12
Allowance for Loan Losses: The allowance for loan losses totaled $3.2 million
(1.75% of total loans) at March 31, 1999, compared to $3.060 million (1.66% of
total loans) at year-end 1998. During the most recent quarter, gross charge-offs
were $9 thousand and gross recoveries were $24 thousand. The allowance measured
333% of nonaccruing loans at the end of the quarter. The valuation allowance on
impaired loans increased by $179 thousand to $289 thousand at March 31, 1999 as
a result of the increase in nonaccruing loans.
Deposits and Borrowings: Total deposits decreased by $2.1 million (0.9%) to
$237.9 million during the most recent quarter. This decrease was primarily due
to a $3.9 million decline in demand deposit balances from high levels at
year-end 1998. The Company recorded growth of $2.3 million (7.7%) in money
market deposit balances and $2.1 million (5.7%) in savings account balances
during the quarter. This growth more than offset the $2.9 million (2.4%)
decrease in higher cost time deposit balances during this period. Total interest
bearing deposits increased by $1.8 million during the quarter, due to growth in
the new Hebron office. Borrowings increased by $2.0 million as a result of short
term borrowings outstanding at March 31, 1999.
Interest Rate Sensitivity: The one year interest rate gap increased to a
liability sensitive position of $39 million (15% of earning assets) at March 31,
1999, compared to $22 million in liability sensitivity (8% of earning assets) at
year-end 1998. This $17 million increase in liability sensitivity primarily
reflected the $12.6 million purchase of fixed rate AFS investment securities
with funds partially provided from short term investments, maturities and
prepayments on loans and investments, and growth in money market and savings
deposits. Included in this gap measurement are about $28 million in savings and
NOW account balances which are included as variable within one year but which
have been generally stable for several years. The Company normally targets a one
year gap position which is near breakeven. Liability sensitivity has been
allowed to increase due to customer demand and market related factors, along
with investment opportunities in the first quarter. Core deposit growth in new
offices and promotion of longer term time deposits are expected to mitigate
additional liability sensitivity in future periods.
Liquidity and Cash Flows: As noted above, the Bank's primary use of funds during
the quarter was the purchase of long term fixed rate AFS investment securities,
and its primary sources of funds were the liquidation of short term investments
and growth in money market and savings account balances. 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.
Capital Resources: During the most recent quarter, shareholders' equity
decreased by $1.5 million to $16.6 million as a result of the accumulated other
comprehensive loss related to the change in fair value of AFS investment
securities. Retained earnings increased by $586 thousand due to the contribution
of net income for the quarter. Total equity measured 5.9% of total assets at
March 31, 1999, compared to 6.4% at year-end 1998. The Tier 1 capital ratio
measured 6.0% and the Risk Based Capital Ratio measured 9.5% at March 31, 1999.
Capital ratios for the Company and Tolland Bank were in excess of all applicable
regulatory requirements at March 31, 1999.
Year 2000 Considerations
All disclosure concerning Year 2000 Considerations should be considered "Year
2000 Readiness Disclosure" pursuant to the Year 2000 Information and Readiness
Disclosure Act. The Year 2000 modification information provided herein should be
read in connection with the Year 2000 Information and Readiness Disclosure Act
which, among other things, mandates that certain Year 2000 readiness disclosures
may not be used in litigation.
The Company has established a Year 2000 project plan to address systems and
facilities changes necessary to properly recognize dates after 1999, 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 by those providers have been reported to be
completed.
The Company's plan follows the five step approach required by its regulators:
Awareness, Assessment, Modification, Verification, and Implementation. As of
13
March 31, 1999, the Company believes that its progress under its plan was
satisfactory in accordance with plan objectives. The Company expects to complete
its plan in accordance with regulatory guidelines. The Company's project also
addresses its other suppliers, customers, and other constituents, as well as
remediation and business resumption contingency plans.
The Company has arranged for temporary consulting help and has purchased
diagnostic software to assist with this project. The costs of the project, which
are not expected to be significant, and the dates in the Company's plans 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.
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. Additional
information about the Company's Year 2000 status at March 31, 1999 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. Additionally, this vendor has reported
that it has substantially completed remediation, testing, and implementation
actions for substantially all of the major processing systems which it is
providing to the Company. The Company has substantially completed its own
testing of these systems, and its plan calls for further testing and evaluation
of these systems through the first half of 1999. 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 through June, 1999. The Company has budgeted further computer and
equipment upgrades totaling up to $200 thousand in 1999, which include
expenditures related to the execution of the Company's Year 2000 program.
Additionally, the Company will evaluate capital expenditures totaling up to
approximately $50 thousand related to general contingency capabilities. Actual
Year 2000 related capital expenditures through March 31, 1999 were about $10
thousand.
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 substantial completion of
remediation of mission critical systems and the initiation of testing in 1998
and completion of testing of these systems by June 30, 1999. The Company is also
exposed to various non-IT systematic risks which it cannot fully monitor and
test, including the supply of electric power, telecommunications services, and
postal services.
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; in the first
half of 1999, 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.
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, 1998 filed March 29, 1999. There have been no material
changes in reported market risks faced by the Company since the end of 1998.
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 March 31,
1999.
The Company did not file any reports on Form 8-K during the
quarter ended March 31, 1999.
15
Average Balance Sheet and Interest Rates - Fully Taxable Equivalent (FTE)
(dollars in thousands) Average Balance Rate (FTE Basis)
- ------------------------------------------------------------------------------------------------------------------------
Quarters ended March 31 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
Loans $182,652 $157,134 7.81% 8.16%
Securities available for sale 63,498 42,971 7.35 7.74
Securities held to maturity 14,336 19,657 5.51 5.91
Other earning assets 7,791 15,203 5.23 5.82
- ------------------------------------------------------------------------------------------------------------------------
Total earning assets 268,277 234,965 7.52 7.74
Other assets 10,076 9,599
- ------------------------------------------------------------------------------------------------------------------------
Total assets $278,353 $244,564
- ------------------------------------------------------------------------------------------------------------------------
Interest bearing deposits $213,334 $201,018 4.14 4.45
Borrowings 23,610 3,763 5.14 6.39
- ------------------------------------------------------------------------------------------------------------------------
Interest bearing liabilities 236,944 204,781 4.24 4.48
Other liabilities 23,449 21,521
Shareholder's equity 17,960 18,262
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $278,353 $244,564
- ------------------------------------------------------------------------------------------------------------------------
Net Interest Spread 3.28% 3.26%
Net Interest Margin 3.77% 3.83%
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: May 12, 1999 /s/ Joseph H. Rossi
-------------------
Joseph H. Rossi
President/CEO
Date: May 12, 1999 /s/ David H. Gonci
------------------
David H. Gonci
Senior Vice President/CFO
17