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, 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 November 2, 1999, Alliance Bancorp of New England had 2,300,286 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.......................16
Part II Other Information................................................................16
Table Average Balance Sheet and Interest Rates ........................................17
Signatures .............................................................................18
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,
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1999 1998 1999 1998
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For the Quarter (in thousands)
Net interest income $ 2,639 $ 2,280 $ 7,545 $ 6,539
Provision for loan losses 17 10 153 168
Service charges and fees 297 309 1,181 872
Net gain (loss) on securities (19) 183 84 1,071
Net gain (loss) on assets 61 (25) 111 (25)
Non-interest expense 1,942 1,769 5,781 5,350
Income before income taxes 1,019 968 2,987 2,939
Income tax expense 281 315 818 1,057
Net income $ 738 $ 653 $ 2,169 $ 1,882
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Per Share
Basic earnings $ 0.32 $ 0.28 $ 0.95 $ 0.78
Diluted earnings 0.31 0.27 0.92 0.75
Dividends declared 0.06 0.05 0.17 0.12
Book value 6.68 7.59 6.68 7.59
Common stock price:
High 12.75 15.75 12.75 16.67
Low 9.50 9.75 9.13 9.75
Close 10.13 10.13 10.13 10.13
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At Quarter End (in millions)
Total assets $ 310.5 $ 252.0 $ 310.5 $ 252.0
Total loans 187.2 172.3 187.2 172.3
Other earning assets 107.3 68.7 107.3 68.7
Deposits 244.5 227.3 244.5 227.3
Borrowings 46.5 5.9 46.5 5.9
Shareholders' equity 15.4 17.4 15.4 17.4
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Operating Ratios (in percent)
Return on average assets 0.95% 1.04% 1.00% 1.01%
Return on average equity 18.06 15.72 17.19 13.81
Equity % total assets (period end) 4.95 6.91 4.95 6.91
Net interest spread (fully taxable equivalent) 3.33 3.57 3.34 3.38
Net interest margin (fully taxable equivalent) 3.79 4.10 3.81 3.96
Dividend payout ratio 18.66 17.55 17.99 14.92
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2
Alliance Bancorp of New England, Inc.
Consolidated Balance Sheets (Unaudited)
September 30, December 31,
(in thousands except share data) 1999 1998
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Assets
Cash and due from banks $ 7,448 $ 6,760
Short-term investments 19,550 13,456
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Total cash and cash equivalents 26,998 20,216
Securities available for sale (at fair value) 59,020 58,556
Securities held to maturity 28,750 15,431
Residential mortgage loans 53,613 57,555
Commercial mortgage loans 52,614 46,724
Other commercial loans 27,861 25,105
Consumer loans 35,168 32,515
Government guaranteed loans 17,926 22,827
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Total loans 187,182 184,726
Less: Allowance for loan losses (3,150) (3,060)
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Net loans 184,032 181,666
Premises and equipment, net 5,076 4,276
Foreclosed assets, net 54 80
Other assets 6,550 3,356
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Total assets $ 310,480 $ 283,581
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Liabilities and Shareholders' Equity
Demand deposits $ 26,358 $ 25,328
NOW deposits 24,715 25,155
Money market deposits 35,344 29,585
Savings deposits 42,758 37,238
Time deposits 115,283 122,679
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Total deposits 244,458 239,985
Borrowings 46,504 23,610
Other liabilities 4,147 1,790
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Total liabilities 295,109 265,385
Preferred stock, ($.01 par value; 100,000 shares
authorized, none issued) - -
Common stock, ($.01 par value; authorized 4,000,000
shares; issued 2,500,885 in 1999
and 2,492,552 in 1998; outstanding 2,300,286 in 1999
and 2,291,953 in 1998) 25 25
Additional paid-in capital 11,365 11,306
Retained earnings 11,003 9,223
Accumulated other comprehensive income (loss), net (3,913) 751
Treasury stock (200,599 shares) (3,109) (3,109)
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Total shareholders' equity 15,371 18,196
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Total liabilities and shareholders' equity $ 310,480 $ 283,581
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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) 1999 1998 1999 1998
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Interest Income
Loans $ 3,716 $ 3,576 $ 10,828 $ 10,131
Debt securities 1,263 635 3,274 1,893
Dividends on equity securities 303 311 892 936
Other earning assets 194 97 417 470
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Total interest and dividend income 5,476 4,619 15,411 13,430
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Interest Expense
Deposits 2,241 2,275 6,614 6,707
Borrowings 596 64 1,252 184
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Total interest expense 2,837 2,339 7,866 6,891
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Net interest income 2,639 2,280 7,545 6,539
Provision For Loan Losses 17 10 153 168
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Net interest income after provision for loan losses 2,622 2,270 7,392 6,371
Non-Interest Income
Service charges and fees 297 309 1,181 872
Net gain (loss) on securities (19) 183 84 1,071
Net gain (loss) on assets 61 (25) 111 (25)
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Total non-interest income 339 467 1,376 1,918
Non-Interest Expense
Compensation and benefits 1,031 856 3,013 2,567
Occupancy 193 157 549 457
Equipment 61 77 202 227
Data processing services 171 141 488 417
Office, FDIC, & Insurance 139 114 386 381
Problem asset related expense 34 22 80 168
Other 313 402 1,063 1,133
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Total non-interest expense 1,942 1,769 5,781 5,350
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Income before income taxes 1,019 968 2,987 2,939
Income tax expense 281 315 818 1,057
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Net Income $ 738 $ 653 $ 2,169 $ 1,882
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Per Share Data
Basic earnings per share $ 0.32 $ 0.28 $ 0.95 $ 0.78
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Diluted earnings per share $ 0.31 $ 0.27 $ 0.92 $ 0.75
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Average basic shares outstanding 2,296,254 2,291,953 2,295,295 2,422,623
Average additional dilutive shares 75,195 87,061 73,141 95,479
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Average diluted shares outstanding 2,371,449 2,379,014 2,368,436 2,518,102
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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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1998
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Balance, December 31, 1997 $ 16 $ 11,073 $ 7,071 $ 643 $ 18,803
Comprehensive income
Net income 1,882 1,882
Unrealized gain (loss) on
securities, net of
reclassification adjustment (120) (120)
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)
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Balance, September 30, 1998 $ 25 $ 11,306 $ 8,662 $ 523 $ (3,109) $ 17,407
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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 2,169 2,169
Unrealized gain (loss) on
securities, net of
reclassification adjustment (4,664) (4,664)
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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Disclosure of reclassification amount
Nine months ended September 30 (in thousands) 1999 1998
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Unrealized holding gain (loss) arising during
the period net of income tax benefit (expense)
of $2,374 and $365, respectively $ (4,609) $ 512
Less reclassification adjustment for
gains (losses) included in net income net of income
tax expense of $29 and $439, respectively (55) (632)
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Net unrealized gains (losses) on securities $ (4,664) $ (120)
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5
Alliance Bancorp of New England, Inc.
Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30,
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(in thousands) 1999 1998
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Operating Activities:
Net income $ 2,169 $ 1,882
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Provision for loan losses 153 168
Depreciation and amortization 208 416
Net investment security gains (84) (1,071)
Net asset (gains) losses (111) 25
Increase in other liabilities 2,357 585
Decrease (increase) in loans held for sale 4,698 (1,026)
Increase (decrease) in other assets (585) 271
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Net cash provided by (used in) operating activities 8,805 1,250
Investing Activities:
Securities available for sale:
Proceeds from amortization and maturities 7,429 18,298
Proceeds from sales of securities 5,355 9,876
Purchases of securities (39,098) (22,913)
Securities held to maturity:
Proceeds from amortization and maturities 5,376 2,302
Net increase in loans (7,208) (13,819)
(Increase) decrease in foreclosed assets, net 26 (2)
Proceeds from the sale of premises and equipment 525 -
Purchases of premises and equipment (1,465) (248)
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Net cash provided by investing activities (29,060) (6,506)
Financing Activities:
Net increase in interest-bearing deposits 3,443 6,564
Increase (decrease) in demand deposits 1,030 (1,012)
Increase (decrease) in FHLB advances 16,394 134
Net increase in other borrowings 6,500 -
Stock options exercised 59 233
Cash dividends paid (389) (282)
Purchase of treasury stock - (3,109)
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Net cash provided by financing activities 27,037 2,528
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Net Change in cash and cash equivalents 6,782 (2,728)
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 $ 26,998 $ 18,689
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Supplemental Information On Cash Payments
Interest expense $ 7,520 $ 6,741
Income tax expense 890 727
Supplemental Information On Non-Cash Transactions
Transfer of securities from available for sale to held to maturity 18,688 -
Net loans transferred to foreclosed assets 54 12
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 nine 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"). In the second quarter of
1999, the Company established Alliance Capital Trust I ("the Trust"), a Delaware
statutory business trust, in connection with its issuance of a capital trust
preferred security. The consolidated financial statements include the Company,
the Trust, 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
September 30, 1999 (in thousands) Cost Gains Losses Value
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Securities available for sale
U.S. Government and agency $ 6,751 $ - $ (250) $ 6,501
U.S. Agency mortgage-backed 3,163 - (12) 3,151
Other debt securities 32,606 215 (2,209) 30,612
Marketable equity 18,108 201 (1,536) 16,773
Non-marketable equity 1,983 - - 1,983
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Total available for sale $ 62,611 $ 416 $ (4,007) $ 59,020
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Securities held to maturity
U.S. Government and agency $ 1,966 $ 19 $ - $ 1,985
U.S. Agency mortgage-backed 7,533 6 (56) 7,483
Other debt securities 19,251 29 (254) 19,026
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Total held to maturity $ 28,750 $ 54 $ (310) $ 28,494
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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
Non-marketable equity 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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During the quarter ending September 30, 1999, securities with a fair value of
$18,688,000 were transferred to held to maturity from available for sale. At the
time of transfer, the gross book value of these securities was $20,963,000, and
the net unrealized transfer loss was $2,275,000. The transferred unrealized loss
is amortized over the lives of the securities and is included as a reduction to
accumulated other comprehensive income in shareholders' equity.
Note 3. Nonperforming Loans
September 30, December 31,
(in thousands) 1999 1998
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Total nonaccruing loans $ 614 $ 574
Accruing loans past due 90 days or more - -
Impaired loans:
Impaired loans - valuation allowance required 949 420
Impaired loans - no valuation allowance required 27 252
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Total impaired loans $ 976 $ 672
Total valuation allowance on impaired loans 318 110
Commitments to lend additional funds for impaired loans - -
8
Note 4. Allowance for Loan Losses
Nine Months Ended Year Ended
September 30, December 31,
(in thousands) 1999 1998
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Beginning balance $ 3,060 $ 3,000
Charge-offs (95) (401)
Recoveries 32 282
Provision for losses 153 179
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Ending balance $ 3,150 $ 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, as amended by SFAS 137, is effective for years beginning after June
15, 2000. 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
Alliance reported a 13.0% increase in earnings for the third quarter ended
September 30, 1999, with net profit totaling $738 thousand compared to $653
thousand a year earlier. Quarterly earnings per share increased by 14.8% to $.31
compared to $.27 a year earlier, on a diluted basis. Net income for the first
nine months of 1999 totaled $2.17 million, a 15.2% increase over net income of
$1.88 million in the same period of 1998. Nine month earnings per share
increased in 1999 by 22.7% to $.92 compared to $.75 a year earlier, on a diluted
basis. The Company declared a quarterly cash dividend of $.06 per share during
the most recent quarter, bringing total dividends declared to $.17 per share for
the year to date. The quarterly dividend had been increased by 20% from $.05
cents per share in the second quarter.
Growth in net interest income continued to provide the basis for earnings
improvement. Net interest income in the third quarter increased by 15.7% from
the third quarter of last year, and by 18.7% (annualized) from the second
quarter of this year. In the third quarter, the Bank opened its new South
Windsor office and broke ground for its new Hyde Avenue office, serving Tolland
and Vernon. The market's response to these new offices in South Windsor and
Hebron has been encouraging. Average transaction account balances increased by
5.7% in the most recent quarter, compared to the previous quarter. This growth
reflects the contribution of new offices, together with the results of a
checking account promotion which was initiated in June. The Bank has experienced
strong growth in both personal and business transaction account balances.
Net interest income has benefited from growth in loans and investments. Loan
growth has been focused on commercial loans, which increased by $8.6 million
during 1999, producing an annualized growth rate of 16.8%. The third quarter net
interest margin of 3.79% (on a fully taxable equivalent basis) was near the
3.81% average for the first nine months of 1999. The increase in net interest
income for the first nine months of 1999 more than offset the contribution from
securities gains in 1998 compared to 1999. Fee income declined by 3.9% in the
most recent quarter, compared to the same quarter of 1998, due to lower
refinancing volume in the mortgage markets as a result of recent interest rate
increases. Non-interest expense increased by 9.8% in the most recent quarter,
and by 8.1% for the year-to-date in 1999 compared to the same periods in 1998.
Higher expenses relate primarily to new offices, including staff, occupancy,
systems, and promotional expenses. The effective income tax rate was 27.4% in
1999, including the benefit of the formation of a passive investment
corporation, together with the ongoing federal income tax benefit of the
dividends received deduction on investment securities.
At September 30, 1999, Alliance had total assets of $310.5 million, $26.9
million (9.5%) higher than at year-end 1998. Total loans were $187.2 million, up
$2.5 million (1.3%), while total deposits were $244.4 million, up $4.5 million
(1.9%) over the same period. During the third quarter, the Company transferred
$21.0 million of investment securities from available for sale to held to
maturity. Shareholders' equity at September 30, 1999 totaled $15.4 million,
decreasing from year-end 1998 due to changes in accumulated other comprehensive
income (loss) as a result of changes in the market value of investment
securities available for sale. Excluding these changes, return on equity
measured 16.0% in the most recent quarter. The Company's capital remains in
excess of all regulatory requirements. Regulatory capital includes $3.5 million
in cumulative trust preferred securities which were issued on June 30, 1999.
10
RESULTS OF OPERATIONS
Net Interest Income: Net interest income increased by $359 thousand (15.7%) and
by $1.006 million (15.4%) in the third quarter and first nine months of 1999,
compared to the same periods of 1998. This growth primarily resulted from growth
in loans and investment securities. While both deposit and borrowing increases
funded this growth, deposit interest expense declined in 1999 compared to 1998,
due to the promotion of lower cost deposits together with a shortening of time
account maturities which reflects consumers' liquidity preference in the
generally low interest rate environment that has prevailed.
Most of the loan growth took place in 1998, including growth in all major
categories of primary market loans. This growth resulted from the Company's
increased marketing activities, and it benefited from the improving economic
conditions in the Connecticut markets. Loan growth has continued at a slower
pace in 1999, and management has emphasized commercial loan growth in order to
maximize interest revenues and to improve market share in this important market.
Deposit growth has been significant in both years, and includes the benefit of
the new Hebron office (which opened near the end of the third quarter of 1998),
the South Windsor office (which opened near the end of the most recent quarter),
and deposit account promotions.
The net interest margin had improved throughout 1998, climbing over 4.00% in the
second half of the year. The margin declined to 3.77% in the first quarter of
1999, reflecting the impact of loan refinancings and securities calls which
accelerated in the second half of 1998 due to generally low prevailing interest
rates. The net interest margin partially rebounded in the second quarter of
1999, rising to 3.84%, and then declining to 3.79% in the most recent quarter.
For the first nine months of 1999, the net interest margin measured 3.81%
compared to 3.96% in 1998. The cost of interest bearing deposits declined to
4.04% in the most recent quarter, compared to 4.39% in the same quarter of 1998,
reflecting the lower cost deposit mix which the Company achieved as noted above.
The yield on loans decreased to 7.89% from 8.41% during this same period,
reflecting prime rate decreases and the impact of fixed rate loan refinancings.
Due to these factors, the net interest spread decreased to 3.33% from 3.57%
during this period. The net interest spread in the most recent quarter was
little different from the 3.34% spread for the 1999 year-to-date.
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 $153
thousand in the first nine months of 1999, compared to $168 thousand in the
first nine months of 1998. Please see the later discussion on the Allowance for
Loan Losses.
Non-Interest Income: Service charges and fees increased in 1999, with the
increase measuring $309 thousand (35.4%) for the first nine months of 1999
compared to the first nine months of 1998. Of this amount, approximately $250
thousand represented prepayment fees on two fixed rate commercial loans which
refinanced to lower rates. Residential mortgage secondary market fees increased
by $19 thousand due to a decrease in the balance of loans held for sale since
year-end 1998. Debit card income increased by $28 thousand due to higher volume
and margins.
Net gains on securities decreased by $987 thousand to $84 thousand for the first
nine months of 1999 compared to $1.071 million in the same period of 1998.
Investment gains reflect an ongoing process of active investment portfolio
management, including realizing the benefits of improving market valuations.
During 1999, market valuations decreased, which contributed to the decrease in
net gains realized. Please see the later discussion of comprehensive income. In
1999, the Company also recorded a $111 thousand net gain on the sale of assets,
related primarily to the sale of the Company's Tolland Stage Road premises in
Tolland.
11
Non-Interest Expense and Tax Expense: Total expense increased by $173 thousand
(9.8%) in the third quarter and by $431 thousand (8.1%) in the first nine months
of 1999 compared to 1998. Compensation and benefits increased $175 thousand and
$446 thousand, respectively, during these periods. This reflected staff
increases related to the expansion of business activities, along with the
effects of higher average salaries. This increase was also the result of a $137
thousand decrease in deferred loan originations costs due to lower loan
originations in 1999. Increases in other expense categories were generally due
to business expansion, while problem asset related expenses decreased due to the
resolution of most problem assets in 1998. The effect of the establishment of a
passive investment corporation was to eliminate consolidated state income tax
expense in 1999, which is expected to be an ongoing benefit. The effective tax
rate measured 27.4% for the first nine months of 1999, compared to 36.0% for the
same period of 1998.
Comprehensive Income: Comprehensive income (loss) includes changes (after tax)
in the market valuation of investment securities available for sale.
Comprehensive income was ($2.495) million in the first nine months of 1999,
compared to $1.762 million in the first nine months of 1998. The results for
1999 include a decline in the market value of available for sale securities of
$4.664 million. Please see the following discussion on investment securities.
The unrealized loss on securities is stated net of a $2.4 million income tax
benefit which is included in the deferred tax asset which is a component of
other assets on the balance sheet.
FINANCIAL CONDITION
Cash and Cash Equivalents: Short term investments increased by $6.1 million
during the first nine months of 1999, due to increased borrowings, including
$3.5 million in trust preferred securities which closed on June 30. The $19.6
million balance at September 30, 1999 was being held in anticipation of further
loan and investment growth.
Investment Securities: Securities held to maturity (HTM) increased by $13.3
million in the first nine months of 1999 to $21.0 million, including $20.9
million of securities transferred from available for sale (AFS) during the third
quarter of 1999. This transfer was made in September, 1999 and followed a
management review of investment purchases in 1999. Securities transferred were
corporate debt securities. The change in the HTM balance also included the
effects of $5.4 million in amortization and maturities of HTM securities during
the first nine months of 1999. After the transfer of securities to held to
maturity, AFS securities totaled $59.0 million at the most recent quarter-end,
an increase of $0.5 million since year-end 1998.
For the first nine months of 1999, total securities purchases were $39.1
million, total amortization and maturities were $12.8 million, and total
securities sales were $5.4 million. Securities purchases were primarily publicly
traded investment grade corporate debt securities, including trust preferred
securities of insurance and financial companies, and bonds issued by real estate
investment trusts. Securities purchases included $2.0 million in securities
which had not settled and the settlement liability was included in other
liabilities on the balance sheet. A total of $10.0 million in government and
agency securities matured or were called during the period. Total AFS holding
losses for the first nine months of 1999 were $7.2 million, or about 10.4% of
the average value of the portfolio during this period. These changes reflect an
increase in long term interest rates during 1999, along with changes in market
valuations of utilities stocks. At September 30, 1999, the total net unrealized
loss on AFS securities was $3.6 million (5.7% of amortized cost), compared to a
net unrealized gain of $1.4 million (2.4% of amortized cost) at year-end 1998.
Additionally, accumulated other comprehensive income includes $2.3 million
representing the unamortized balance of the unrealized loss on securities
transferred to held to maturity.
At September 30, 1999, the book value of total securities was $87.8 million,
including corporate debt securities totaling $46.7 million, equity securities
totaling $18.8 million, and government agency and mortgage backed securities
totaling $22.3 million. Most corporate debt and marketable equity securities
were in the top four rating/ranking categories of major rating agencies. The
average maturity of debt securities at September 30, 1999 was about 24 years.
The average fully taxable equivalent yield on AFS securities increased to 7.90%
in the most recent quarter, compared to 7.75% in the same quarter of 1998.
12
Total Loans: Total loans increased by $2.5 million (1.3%) to $187.2 million in
the first nine months of 1999. Excluding government guaranteed loans (purchased
in the secondary market) and residential mortgage loans held for sale, total
loans increased by $12.1 million in the first nine months of 1999, representing
a 10.3% annualized rate of growth. This growth was concentrated in commercial
mortgages and other commercial loans. These represent loans originated by the
Company in the central Connecticut market area. The Company also recorded growth
in residential mortgages and consumer loans. Mortgage growth was offset by a
$4.7 million decrease in the balance of loans held for sale since year-end 1998.
The Company did not purchase government guaranteed loans during the first nine
months of 1999, and the balance of these loans decreased by $4.9 million due to
amortization and prepayments. The yield on loans decreased to 7.89% in the most
recent quarter, from 8.41% in the same quarter of 1998. This change included the
effect of a 75 basis point decrease in the prime rate of interest in the second
half of 1998, together with the impact of lower fixed rates on new loan
originations and on refinancings. During 1999, 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
installment loans combined with the flexibility and tax benefits associated with
home equity lines.
Nonperforming Loans: Nonaccruing loans totaled $614 thousand at September 30,
1999, compared to $574 thousand at year-end 1998. The increase included both
residential mortgages and commercial loans. Total impaired loans increased to
$976 thousand from $672 thousand over this time. The balance of foreclosed
assets decreased to $54 thousand from $80 thousand during this time. Total
nonperforming assets measured 0.22% of total assets at September 30, 1999.
Allowance for Loan Losses: The allowance for loan losses increased to $3.15
million at September 30, 1999, compared to $3.06 million at year-end 1998. The
allowance included an increase in the valuation allowance on impaired loans to
$318 thousand from $110 thousand. For the first nine months of 1999, gross
chargeoffs totaled $95 thousand and gross recoveries totaled $32 thousand. The
allowance measured 1.68% of total loans at September 30, 1999, compared to 1.66%
at year-end 1998. For the same dates, the allowance covered nonaccruing loans by
a ratio of 513%, compared to 533% at year-end 1998.
Deposits and Borrowings: Total deposits increased by $4.5 million (1.9%) to
$244.5 million for the first nine months of 1999. Increases were recorded
primarily in money market and savings accounts. Money market growth reflects the
continuing demand for this tiered rate product. Savings growth includes balances
from the Company's new branches in Hebron and South Windsor. Time deposits
decreased by $7.4 million in 1999, due primarily to run-off in the third quarter
of maturing two and three year accounts from promotions in previous years. As
previously noted, the Company began a promotion of transaction accounts near the
end of the second quarter of 1999, leading to a 5.7% increase in average
transactions account balances as compared to the previous quarter. During the
second quarter, the Company borrowed $12.5 million in medium term callable loans
from the Federal Home Loan Bank of Boston (FHLBB). These loans were priced at an
interest rate of 5.84%, with a ten year maturity and FHLBB call options in the
3-5 year range. Additionally, on June 30, 1999, the Company closed on a $3.5
million capital trust preferred security placement, priced at 9.40%, with a
thirty year term and a ten year call provision. While this security is included
in total borrowings, this obligation is classified as Tier One capital for
Alliance, and $3.0 million in proceeds were downstreamed as common equity into
Tolland Bank, increasing the Tier One capital of the Bank by that amount.
Interest Rate Sensitivity: The one year interest rate gap had been ($22) million
at year-end 1998, reflecting a liability sensitivity equal to 8% of earning
assets. This liability sensitivity increased with a one year gap of ($39)
million (15% of earning assets) at March 31, 1999. The Company normally targets
a one year gap position which is near breakeven. Liability sensitivity was
allowed to increase due to customer demand and market related factors, along
with investment opportunities. During the second quarter, the company undertook
initiatives to reduce this liability sensitivity in case interest rates
increased, as they did near the end of the quarter. The one year gap was reduced
to ($16) million as of June 30, 1999. This reduction was in part due to
borrowings and time account promotions. Additionally, the Company entered into a
$10 million two year interest rate swap with a correspondent bank, paying a
fixed rate and receiving a variable rate. This swap is intended to offset some
of the rate sensitivity of the Company's money market accounts. Core deposit
growth in new offices also provides an ongoing source of incremental funds which
are less rate sensitive. As of September 30, 1999, the one year gap was ($15)
million, or 6% of earning assets. The Bank's one year interest rate sensitivity
analysis includes savings and NOW account balances totaling $30 million as
interest sensitive; the rates on these accounts have been generally stable for
several years. The five year interest rate gap increased to $90 million at
September 30, 1999 from $63 million at year-end 1998, as intermediate term
liabilities were used to fund an increase in loans and investments repricing
over five years.
13
Liquidity and Cash Flows: The primary use of funds during the first nine months
of 1999 was growth in investments and in loans, and the primary sources of funds
were growth in deposits and borrowings. 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 semi-annual interest payments for
the trust preferred securities. The Company issued a $3.5 million capital trust
preferred security in the second quarter. These funds were primarily used to
provide $3.0 million in common equity to the Company's subsidiary, Tolland Bank.
Dividends from the Bank will provide funds for the semi-annual interest payments
due under this obligation.
Capital Resources: During the first nine months of 1999, shareholder's equity
decreased by $2.8 million (15.5%) due to the change in accumulated other
comprehensive income discussed earlier. Retained earnings increased by $1.8
million (19.3%), reflecting net income of $2.169 million less dividend payments
of $389 thousand. Shareholders' equity measured 4.95% of assets at September 30,
1999, and book value per common share was $6.68 at that date. As previously
noted, the trust preferred security transaction resulted in a $3.5 million
addition to Tier 1 regulatory capital for the Company, and an addition of $3.0
million of regulatory capital for the Bank. The Company's Tier 1 Leverage
Capital Ratio stood at 6.9% at September 30, 1999 and the Risk Based Capital
Ratio stood at 10.3%. Capital ratios for the Company and Tolland Bank were in
excess of all applicable regulatory requirements at September 30, 1999, and the
Company met the requirements to be classified as well capitalized in accordance
with regulatory capital requirements.
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.
Significant systems changes by those providers have been reported to be
completed. The Company has not identified any mission critical vendors who
appear to be at material risk of not achieving Year 2000 requirements.
The Company's plan follows the five step approach required by its regulators:
Awareness, Assessment, Modification, Verification, and Implementation. As of
September 30, 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. In some cases, the
Company has placed substantial reliance on third parties for completion of the
five step readiness process, including verification and implementation. The
Company has not encountered any material issues or developments regarding the
Year 2000 readiness of mission critical systems, equipment, and functions in its
operating and financial environment.
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.
14
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 September 30,
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. The Company
contracts with one company for its core accounting, check processing, and
electronic funds transfer systems. This provider has provided Year 2000
readiness certification and documentation demonstrating compliance with the
regulatory readiness process for all mission critical functionality used by the
Company. The Company has completed its own testing of all mission critical
systems. The Company currently anticipates that its major IT vendors will comply
with federal regulatory guidelines for Year 2000 readiness.
Costs: The Company has been charged approximately $25 thousand by its account
processing vendor for testing arrangements. Additionally, the Company has
incurred various indirect non-material costs in implementing its project plan,
including consulting fees and software expense. Year 2000 related capital
expenditures through the first nine months of 1999 were approximately $100
thousand, and as of that date the Company had completed substantially all of the
capital item acquisitions required by the Company's project plan.
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 of
mission critical systems and testing of these systems. 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. As a result of the risks and uncertainties associated with the
Year 2000 issue, particularly with respect to vendors and service providers and
other third parties, the Company is unable to predict the extent of potential
Year 2000 failures that could result, nor quantify the potential impact such
failures could have on the Company's results of operations and financial
condition.
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 which has been
approved by the Company's Board. The Company has tested and validated portions
of its contingency plan, and further testing and validation is ongoing in the
fourth quarter. The Company has taken steps to increase its available staffing
as necessary to respond to Year 2000 contingencies. The Company has also taken
other measures to increase the availability of key operating resources, and has
put in place plans to deal with potentially increased liquidity and borrowing
needs during the fourth quarter of 1999 and the first quarter of 2000.
15
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. The
impact of changes in interest rates during 1999 on the values of investment
securities has been discussed in Item 2 and in Note 2 to the financial
statements. It is estimated that the fair value of loans, which had exceeded
carrying value at December 31, 1998 due to the decrease in rates, was less than
or equal to carrying value due to the increase in rates as of September 30,
1999. Also, an estimate of the fair value of deposits was about $6 million in
excess of book value as of September 30, 1999.
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, 1999.
i. On July 19, 1999, the Company filed a report on Form 8-K
reporting, under Item 5, that it had issued $3.5 million in
Trust Preferred Securities through a wholly owned
subsidiary, Alliance Capital Trust I.
16
Average Balance Sheet and Interest Rates - Fully Taxable Equivalent (FTE)
(dollars in thousands) Average Balance Rate (FTE Basis)
- ------------------------------------------------------------------------------------------------------------------------------
Quarters ended September 30 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
Loans $ 188,437 $ 169,475 7.89% 8.41%
Securities available for sale 77,930 42,613 7.90 7.75
Securities held to maturity 11,376 18,195 5.84 5.89
Other earning assets 15,061 7,226 5.09 5.49
- ------------------------------------------------------------------------------------------------------------------------------
Total earning assets 292,804 237,509 7.63 8.01
Other assets 15,027 11,711
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $ 307,831 $ 249,220
- ------------------------------------------------------------------------------------------------------------------------------
Interest bearing deposits $ 221,946 $ 205,562 4.04 4.39
Borrowings 39,595 3,697 5.97 6.83
- ------------------------------------------------------------------------------------------------------------------------------
Interest bearing liabilities 261,541 209,259 4.30 4.44
Other liabilities 30,084 23,479
Shareholder's equity 16,206 16,482
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 307,831 $ 249,220
- ------------------------------------------------------------------------------------------------------------------------------
Net Interest Spread 3.33% 3.57%
Net Interest Margin 3.79% 4.10%
(dollars in thousands) Average Balance Rate (FTE Basis)
- ------------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
Loans $ 184,906 $ 163,379 7.81% 8.28%
Securities available for sale 69,720 42,565 7.72 7.76
Securities held to maturity 12,654 18,952 5.62 5.89
Other earning assets 11,304 11,608 4.92 5.42
- ------------------------------------------------------------------------------------------------------------------------------
Total earning assets 278,584 236,504 7.58 7.85
Other assets 12,489 11,490
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $ 291,073 $ 247,994
- ------------------------------------------------------------------------------------------------------------------------------
Interest bearing deposits $ 217,637 $ 202,883 4.05 4.42
Borrowings 30,089 3,723 5.56 6.60
- ------------------------------------------------------------------------------------------------------------------------------
Interest bearing liabilities 247,726 206,606 4.25 4.47
Other liabilities 26,480 23,163
Shareholder's equity 16,867 18,225
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 291,073 $ 247,994
- ------------------------------------------------------------------------------------------------------------------------------
Net Interest Spread 3.34% 3.38%
Net Interest Margin 3.81% 3.96%
17
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, 1999 /s/ Joseph H. Rossi
-------------------
Joseph H. Rossi
President/CEO
Date: November 10, 1999 /s/ David H. Gonci
------------------
David H. Gonci
Senior Vice President/CFO
18