ALLIANCE BANCORP OF NEW ENGLAND INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q

	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended September 30, 2003

	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-13405

ALLIANCE BANCORP OF NEW ENGLAND, INC.
(Exact name of registrant as specified in its charter)

Delaware			06-1495617

(State of incorporation)			(I.R.S. Employer Identification No.)

348 Hartford Turnpike, Vernon, Connecticut			06066

(Address of principal executive offices)			(Zip Code)

(860) 875-2500
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES X NO

The number of shares of the registrant’s Common Stock outstanding as of November 8, 2003 was 2,696,432 shares.

Available on the web at www.alliancebancorp.com

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FORM 10-Q TABLE OF CONTENTS		Page


PART I	Financial Information
	Item 1. Financial Statements (Unaudited)	3
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	23
	Item 4. Controls and Procedures	23


PART II	Other Information
	Item 1. Legal Proceedings	24
	Item 2. Changes in Securities and Use of Proceeds	24
	Item 3. Defaults Upon Senior Securities	24
	Item 4. Submission of Matters to a Vote of Security Holders	24
	Item 5. Other Information	24
	Item 6. Exhibits and Reports on Form 8-K	24


SIGNATURES		25

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Alliance Bancorp of New England, Inc.
Consolidated Balance Sheets (Unaudited)

(in thousands, except share data)		September 30, 2003			December 31, 2002

Assets
Cash and due from banks	$	15,119		$	13,941
Short-term investments		6,024			4,520

Total cash and cash equivalents		21,143			18,461

Securities available for sale (at fair value)		103,145			87,812

Securities held to maturity (fair value of $5,984 in 2002)		–			5,372

Loans held for sale		3,722			11,942

Residential mortgage loans		95,993			78,717
Commercial mortgage loans		91,758			94,692
Other commercial loans		39,565			39,550
Consumer loans		36,371			39,547
Government guaranteed loans		19,753			25,756

Total loans		283,440			278,262
Less: Allowance for loan losses		(4,120	)		(4,050	)

Net loans		279,320			274,212

Premises and equipment, net		5,873			5,104
Accrued interest income receivable		2,110			2,417
Cash surrender value of life insurance		6,423			6,207
Other assets		1,986			2,987

Total assets	$	423,722		$	414,514


Liabilities and Shareholders’ Equity
Demand deposits	$	37,134		$	35,600
NOW deposits		40,561			39,091
Money market deposits		41,412			43,964
Savings deposits		82,082			77,605
Time deposits		126,197			134,572

Total deposits		327,386			330,832

Borrowings		60,056			54,510
Other liabilities		6,406			3,622

Total liabilities		393,848			388,964

Preferred stock, $0.01 par value; 100,000 shares authorized, none issued		–			–
Common stock, $0.01 par value; authorized 4,000,000 shares; issued 2,879,103 in 2003 and 2,868,105 in 2002; outstanding 2,678,504 in 2003 and 2,667,506 in 2002		29			29
Additional paid-in capital		12,873			12,791
Retained earnings		20,184			19,183
Accumulated other comprehensive loss, net		(103	)		(3,344	)
Treasury stock (200,599 shares)		(3,109	)		(3,109	)

Total shareholders’ equity		29,874			25,550

Total liabilities and shareholders’ equity	$	423,722		$	414,514

See accompanying notes to consolidated financial statements.

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Alliance Bancorp of New England, Inc.
Consolidated Statements of Operations (Unaudited)

		Three Months Ended September 30,					Nine Months Ended September 30,

(in thousands, except share data)		2003			2002		2003			2002

Interest and Dividend Income
Loans	$	4,170		$	4,439	$	12,979		$	13,403
Debt securities		762			1,244		2,364			3,836
Dividends on equity securities		185			218		573			609
Other interest and dividend income		99			119		439			251

Total interest and dividend income		5,216			6,020		16,355			18,099

Interest Expense
Deposits		1,452			2,144		4,675			6,440
Borrowings		852			786		2,515			2,306

Total interest expense		2,304			2,930		7,190			8,746


Net Interest Income		2,912			3,090		9,165			9,353

Provision For Loan Losses		13			64		65			301

Net interest income after provision for loan losses		2,899			3,026		9,100			9,052
Non-Interest Income
Service charges and other income		1,021			743		3,007			1,789
Net (loss) gain on securities and other assets		(504	)		8		(570	)		311

Total non-interest income		517			751		2,437			2,100
Non-Interest Expense
Compensation and benefits		1,559			1,434		4,795			4,186
Occupancy		189			183		579			519
Data processing services and equipment		289			307		875			927
Office and insurance		124			153		440			444
Purchased services		394			300		987			833
Merger related		748			–		818			–
Other		161			193		436			580

Total non-interest expense		3,464			2,570		8,930			7,489

(Loss) income before income taxes		(48	)		1,207		2,607			3,663
Income tax expense		191			346		1,004			1,087

Net (Loss) Income	$	(239	)	$	861	$	1,603		$	2,576

Share Data
Basic (loss) earnings per share	$	(0.09	)	$	0.33	$	0.59		$	1.00

Diluted (loss) earnings per share	$	(0.09	)	$	0.32	$	0.57		$	0.95


Average basic shares outstanding		2,696,458			2,588,660		2,695,515			2,577,466
Average additional dilutive shares		–			141,379		116,494			128,538

Average diluted shares		2,696,458			2,730,039		2,812,009			2,706,004

See accompanying notes to consolidated financial statements.

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Alliance Bancorp of New England, Inc.
Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

(in thousands, except share data)		Common stock		Additional paid-In capital		Retained earnings			Accumulated other comprehensive loss			Treasury stock			Total

2002 Balance, December 31, 2001	$	25	$	11,577	$	16,473		$	(2,877	)	$	(3,109	)	$	22,089
Comprehensive income
Net income						2,576									2,576
Unrealized loss on securities, net of reclassification adjustment									(524	)					(524	)

Comprehensive income															2,052
Dividends declared ($0.211 per share)						(544	)								(544	)
Stock split effected in the form of a stock dividend		3				(10	)								(7	)
Exercise of stock options				132											132

Balance, September 30, 2002	$	28	$	11,709	$	18,495		$	(3,401	)	$	(3,109	)	$	23,722


2003 Balance, December 31, 2002	$	29	$	12,791	$	19,183		$	(3,344	)	$	(3,109	)	$	25,550
Comprehensive income
Net income						1,603									1,603
Unrealized gains on securities, net of reclassification adjustment									3,241						3,241

Comprehensive income															4,844
Dividends declared ($0.225 per share)						(602	)								(602	)
Directors’ deferred stock compensation				31											31
Exercise of stock options				38											38
Tax benefit from exercise of stock options				13											13

Balance, September 30, 2003	$	29	$	12,873	$	20,184		$	(103	)	$	(3,109	)	$	29,874

Disclosure of reclassification amount

Nine months ended September 30 (in thousands)		2003		2002

Unrealized holding gains (losses) arising during the period, net of income tax effect of ($994) and $206, respectively	$	2,865	$	(400	)
Reclassification adjustment for losses (gains) included in net income, net of income tax effect of ($194) and $65, respectively		376		(124	)

Net unrealized gains (losses) on securities	$	3,241	$	(524	)

See accompanying notes to consolidated financial statements.

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Alliance Bancorp of New England, Inc.
Consolidated Statements of Cash Flows (Unaudited)

		Nine months ended September 30,

(in thousands)		2003			2002

Operating Activities:
Net income	$	1,603		$	2,576
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		65			301
Depreciation and amortization		495			523
Net losses (gains) on securities and other assets		570			(1,100	)
Loans originated for sale		(82,021	)		(14,925	)
Proceeds from loans sold		90,241			13,723
Increase in other liabilities		2,784			1,935
Decrease in accrued interest income receivable		307			523
Decrease in other assets		333			186

Net cash provided by operating activities		14,377			3,742

Investing Activities:
Securities available for sale:
Proceeds from repayments and maturities		16,511			10,315
Proceeds from sales		7,316			27,270
Proceeds from calls		8,430			9,000
Purchases of securities		(39,473	)		(33,979	)
Securities held to maturity:
Proceeds from amortization and maturities		286			2,251
Proceeds from calls		–			1,000
Net increase in total loans		(5,206	)		(14,821	)
Purchases of premises and equipment		(1,095	)		(83	)
Proceeds from the sale of premises and equipment		–			211

Net cash (used) provided by investing activities		(13,231	)		1,164

Financing Activities:
Net (decrease) increase in interest-bearing deposits		(4,980	)		25,564
Net increase in demand deposits		1,534			6,234
Proceeds from FHLBB advances		96,498			14,570
Principal repayments of FHLBB advances		(90,952	)		(18,039	)
Net decrease in other borrowings		–			(2,100	)
Exercise of stock options		38			132
Cash dividends paid		(602	)		(551	)

Net cash provided by financing activities		1,536			25,810

Net Increase in Cash and Cash Equivalents		2,682			30,716
Cash and cash equivalents at beginning of the period		18,461			15,314

Cash and cash equivalents at end of the period	$	21,143		$	46,030



Supplemental Information on Cash Payments
Interest	$	7,200		$	8,750
Income taxes		1,090			1,500

Supplemental Information on Non-cash Transactions
Securities transferred to available for sale		5,087			3,166

See accompanying notes to consolidated financial statements.

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Notes to Consolidated Financial Statements (unaudited)

Note 1. Basis of Presentation and Principles of Business and Consolidation

Principles of Business and Consolidation. Alliance Bancorp of New England, Inc. (“Alliance” or the “Company”) is a one bank holding company, chartered in Delaware. Alliance owns 100% of the stock of Tolland Bank (the “Bank”), a Connecticut chartered savings bank. Alliance also wholly owns Alliance Capital Trust I (Trust I) and Alliance Capital Trust II (Trust II). These Trusts have issued trust preferred securities which are included in borrowings in the consolidated balance sheets.

Tolland Bank provides consumer and commercial banking services from its nine offices located in and around Tolland County, Connecticut. A tenth office in Enfield is under construction with an opening scheduled in the fourth quarter of 2003. The Bank also provides non-deposit financial products in association with third parties. The Bank’s deposits are insured up to applicable limits by the Federal Deposit Insurance Corporation (“FDIC”). The Bank wholly owns a passive investment company, Tolland Investment Corporation (“TIC”), chartered in Connecticut to own and service real estate secured loans. The Bank also wholly owns a Connecticut chartered corporation named Asset Recovery Systems, Inc. (“ARS”) which is a foreclosed asset liquidation subsidiary.

The consolidated financial statements include Alliance, the Bank, Trust I, Trust II, TIC, and ARS. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company and its subsidiaries have no significant transactions with entities in which they hold an investment interest, except for Bankers Bank Northeast (a mutually owned correspondent bank) and the Federal Home Loan Bank of Boston. Transactions with these entities are generally limited to correspondent banking, and borrowing transactions; income includes dividends received from these entities.

Basis of Preparation and Presentation. The consolidated financial statements have been prepared and presented in conformity with accounting principles generally accepted in the United States of America. Unless otherwise noted, all dollar amounts presented in the financial statements and note tables are rounded to the nearest thousand dollars, except share data. All share and per share data for prior periods has been adjusted to reflect the eleven-for-ten stock split effected in the form of a 10% stock dividend distributed in May 2002. Certain prior period amounts have been reclassified to conform with current financial statement presentation. The Company uses the accrual method of accounting for all material items of income and expense.

Significant Estimates. Management is required to make certain estimates and assumptions in preparing the Company’s consolidated financial statements. The most significant estimates are those related to assessing the allowance for loan losses, including the identification and valuation of impaired loans; determining and measuring other-than-temporary declines in the fair value of securities; estimating securities fair values in determining accumulated other comprehensive income (loss); and establishing the deferred tax asset valuation allowance. Factors affecting these estimates include national and local economic conditions, the level and trend of interest rates, real estate trends and values, securities market trends and values, and financial ratings methodologies.

Note 2. Stock Options

The Company measures the compensation cost for its stock option plans using the intrinsic value method prescribed by Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations including FASB Interpretation No. 44. No compensation cost is recognized because, at the grant date, the exercise price of the options is equal to the fair market value of the Company’s common stock. When options are exercised, new shares are issued with proceeds credited to common stock and to additional
paid-in capital, including, for non-qualifying options, the related income tax benefit.

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The table below summarizes pro forma net income and earnings per share data as if the fair value method of accounting in SFAS No. 123, Accounting for Stock-Based Compensation, had been applied to all awards granted. Under this method, compensation cost of stock options is measured at the grant date based on the fair market value of the award and is recognized over the service period.

		Three months ended September 30,					Nine months ended September 30,

(in thousands, except share data)		2003			2002		2003		2002

Net (loss) income, as reported	$	(239	)	$	861	$	1,603	$	2,576
Deduct total stock-based compensation expense determined under the fair-value-based method, net of related tax effects		–			–		–		(25	)

Pro forma net (loss) income	$	(239	)	$	861	$	1,603	$	2,551


Basic (loss) earnings per share
As reported	$	(0.09	)	$	0.33	$	0.59	$	1.00
Pro forma		(0.09	)		0.33		0.59		0.99
Diluted (loss) earnings per share
As reported		(0.09	)		0.32		0.57		0.95
Pro forma		(0.09	)		0.32		0.57		0.94

There were 9,240 stock options granted in the first nine months of 2002. None were granted in 2003. The fair value of options granted was estimated using the Black-Scholes option-pricing model in accordance with the weighted-average assumptions indicated below. The resulting weighted-average fair value was $2.47 in 2002.

Assumptions used for grants made in the nine months ended September 30	2003	2002

Expected dividend yield	–	2.	00%
Expected volatility	–	30.	63%
Risk free interest rate	–	3.	59%
Expected life (years)	–	8.	0

Note 3. Securities

Information concerning the securities portfolio is summarized below as of September 30, 2003 and December 31, 2002.

September 30, 2003 (in thousands)		Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value

Securities available for sale
U.S. Government and agency debt	$	27,005	$	277	$	–		$	27,282
U.S. Agency mortgage-backed debt		31,959		138		(159	)		31,938
Other mortgage-backed		14		–		–			14
Trust preferred		17,527		1,210		(253	)		18,484
Other corporate debt		10,393		254		(418	)		10,229
Marketable equity		13,100		176		(972	)		12,304
Non-marketable equity		2,894		–		–			2,894

Total available for sale	$	102,892	$	2,055	$	(1,802	)	$	103,145

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December 31, 2002 (in thousands)		Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value

Securities available for sale
U.S. Government and agency debt	$	26,167	$	159	$	–		$	26,326
U.S. Agency mortgage-backed debt		13,615		160		–			13,775
Trust preferred		17,551		229		(782	)		16,998
Other corporate debt		15,841		207		(1,771	)		14,277
Marketable equity		15,758		188		(2,295	)		13,651
Non-marketable equity		2,785		–		–			2,785

Total available for sale	$	91,717	$	943	$	(4,848	)	$	87,812

Securities held to maturity
U.S. Government and agency debt	$	1,047	$	65	$	–		$	1,112
U.S. Agency mortgage-backed debt		850		20		–			870
Other mortgage-backed debt		259		8		–			267
Other corporate debt		3,216		530		(11	)		3,735

Total held to maturity	$	5,372	$	623	$	(11	)	$	5,984

During the first quarter of 2003, the held to maturity category was eliminated and the entire portfolio was transferred to available for sale. Subsequent to the transfer, all purchases of investment securities have been categorized as available for sale and the same treatment will be applied to all purchases for the foreseeable future. Ten securities with an amortized cost totaling $5,100,000 were transferred to available for sale from held to maturity. The transfer resulted in an additional unrealized gain of $415,000 (net of income taxes of $214,000) which was recorded as a decrease in the accumulated other comprehensive loss.

During the first nine months of 2002, three securities with an amortized cost of $3,170,000 and an unrealized loss of $1,160,000 were transferred from held to maturity to available for sale due to declines in the issuers’ credit ratings.

Writedowns for other-than-temporary impairment losses on securities were $504,000 and $788,000 in the three months ended September 30, 2003 and 2002, respectively, and $1,168,000 and $788,000 in the nine months ended September 30, 2003 and 2002, respectively. These losses are included in Net (loss) gain on securities and other assets in the consolidated statements of operations.

Note 4. Nonperforming Loans

Following is information about the Company’s nonaccruing loans and impaired loans.

(in thousands)		September 30, 2003		December 31, 2002

Total nonaccruing loans	$	3,682	$	2,433
Accruing loans past due 90 days or more		1,111		185

Impaired loans:
Valuation allowance required	$	230	$	774
No valuation allowance required		2,880		989

Total impaired loans	$	3,110	$	1,763

Total valuation allowance on impaired loans	$	104	$	127
Commitments to lend additional funds to borrowers with impaired loans		–		–

Note 5. Allowance for Loan Losses

Changes in the allowance for loan losses were as follows:

		Nine months ended September 30,

(in thousands)		2003			2002

Balance at beginning of period	$	4,050		$	3,700
Charge-offs		(29	)		(47	)
Recoveries		34			46
Provision for loan losses		65			301

Balance at end of period	$	4,120		$	4,000

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Note 6. Standby Letters of Credit

The Company had outstanding standby letters of credit of $2,024,000 and $1,987,000 at September 30, 2003 and December 31, 2002, respectively. Most of the Company’s outstanding standby letters of credit are performance standby letters of credit within the scope of FASB Interpretation No. 45 (“FIN 45”). These are irrevocable undertakings by the Company, as guarantor, to make payments in the event a specified third party fails to perform under a nonfinancial contractual obligation. Most of the Company’s performance standby letters of credit arise in connection with lending relationships and have terms of one year or less. The maximum potential future payments the Company could be required to make equals the face amount of the letters of credit referred to above. FIN 45 also requires the recognition, at fair value, of a liability by a guarantor at the inception of certain guarantees issued or modified after December 31, 2002. The Company’s recognized liability for performance standby letters of credit was insignificant at September 30, 2003.

Note 7. Recent Accounting Developments

In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized and depreciated as part of the carrying amount of the long-lived asset. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The adoption of this statement did not have a material impact on the consolidated financial statements.

In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51, which establishes accounting guidance for consolidation of variable interest entities (VIE) that function to support the activities of the primary beneficiary. The primary beneficiary of a VIE entity is the entity that absorbs a majority of the VIE’s expected losses, receives a majority of the VIE’s expected residual returns, or both, as a result of ownership, controlling interest, contractual relationship or other business relationship with a VIE. Prior to the implementation of FIN 46, VIEs were generally consolidated by an enterprise when the enterprise had a controlling financial interest through ownership of a majority of voting interest in the entity. The provisions of FIN 46 were effective immediately for all arrangements entered into after January 31, 2003, and are otherwise effective in the first interim or annual period ending after December 15, 2003. In its current form, FIN 46 may require the Company to re-characterize the trust preferred securities issued by its two wholly owned subsidiary business trusts (Trust I and Trust II) in future financial statements. Such
re-characterization is not expected to affect the carrying amount of the liability reported in the consolidated financial statements or the recognition of related funding costs as interest expense.

In July 2003, the Board of Governors of the Federal Reserve System issued a supervisory letter instructing bank holding companies to continue to include the trust preferred securities in their Tier I capital for regulatory capital purposes until notice is given to the contrary. The Federal Reserve intends to review the regulatory implications of any accounting treatment changes and, if necessary or warranted, provide further appropriate guidance. There can be no assurance that the Federal Reserve will continue to allow institutions to include trust preferred securities in Tier I capital for regulatory capital purposes. As of September 30, 2003, if the Company is not allowed to include its $7.0 million of trust preferred securities issued by Trust I or Trust II within Tier I capital, the Company would still exceed the regulatory required minimums for capital adequacy purposes.

In April 2003, FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under FASB Statement No. 133.This statement did not have a material impact on the Company’s consolidated financial statements.

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In May 2003, FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. As originally issued, this statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. However, the effective date of the statement’s provisions related to the classification and measurement of certain mandatorily redeemable non-controlling interests (such as a consolidated subsidiary’s trust preferred securities) has been deferred indefinitely by the FASB, pending further Board action. The adoption of this statement is not expected to have a material impact on the Company’s consolidated financial statements.

Note 8. Other Accounting Policies

Securities. It is the Company’s intent that purchases of investment securities will be accounted for as available for sale for the foreseeable future. Trading securities, if any, are securities bought principally for the purpose of selling them in the near term. Unrealized gains and losses on trading securities are included in earnings. Securities not classified as trading securities are classified as available for sale securities and reported at fair value, with unrealized net gains or losses excluded from earnings and reported in a separate component of shareholders’ equity (accumulated other comprehensive income or loss), net of applicable taxes.

Earnings Per Share. Earnings per share are computed in accordance with SFAS No. 128, Earnings Per Share. Basic earnings per share are calculated by dividing net income by weighted average shares outstanding, plus shares issuable under the Directors’ Deferred Compensation Plan. Average additional dilutive shares are an incremental number of shares reflecting the potential dilution that could occur if outstanding stock options were converted into common stock using the treasury stock method. Dilutive shares also include all shares in the Stock Option Income Deferral Plan.

Directors’ Retirement Plan. The Tolland Bank Directors’ Retirement Plan provides payments to former directors upon retirement from the board. The Company accrues costs related to this plan over the period of service, based on various actuarial assumptions including normal director retirement expectations.

Note 9. Pending Merger Agreement

On July 16, 2003, Alliance announced that it had signed a definitive agreement to merge with New Haven Savings Bank (NHSB), pursuant to which NHSB will acquire all of the outstanding shares of Alliance. Separately, NHSB announced its intention to convert from a mutual savings bank to a stock savings bank and simultaneously merge with Alliance and Connecticut Bancshares, Inc., holding company for the Savings Bank of Manchester. The combined bank intends to operate under the name “NewAlliance Bank,” a subsidiary of the newly formed holding company, “NewAlliance Bancshares.”

Under the terms of the merger agreement, Alliance shareholders will be entitled to receive $25 per share in the form of stock issued at the conversion price, cash, or a combination thereof, subject to election and allocation procedures that are intended to ensure that, in the aggregate, at least 75% of Alliance’s shares will be exchanged for stock of the new holding company and no more than 25% will be exchanged for cash.

The transactions are expected to be completed in the first quarter of 2004. NHSB has adopted a plan for conversion to convert to a public company simultaneously with the acquisitions. As part of the conversion, NHSB formed a new holding company, NewAlliance Bancshares, and will conduct a subscription offering of its common stock to eligible depositors and others under applicable law. Remaining shares are expected to be offered for sale to the community and the general public. The conversion is subject to approval from the FDIC, the Connecticut Banking Commissioner and NHSB’s Corporators. NHSB Corporators approved the plan of conversion on September 8, 2003. The acquisition is contingent on the approvals of shareholders of the Company, the FDIC, the Federal Reserve Board, and the Connecticut Banking Commissioner.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION: Alliance Bancorp of New England, Inc. (“Alliance” or the “Company”) is the holding company for Tolland Bank (the “Bank”). The consolidated financial statements and related notes should be read in conjunction with this discussion. This discussion and analysis updates, and should be read in conjunction with, Management’s Discussion and Analysis included in the 2002 Annual Report on Form 10-K filed by Alliance on March 31, 2003. In the following discussion, income statement comparisons are against the same period of the previous year and balance sheet comparisons are against the previous fiscal year-end, unless otherwise noted. All share and per share data for the nine months ended September 30, 2002 has been adjusted to reflect the eleven-for-ten stock split effected in the form of a 10% stock dividend distributed on May 21, 2002.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS: This filing 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,” “plan”, “create”, “utilize”, “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 accounting principles. These factors should be considered in evaluating the forward–looking statements, and undue reliance should not be placed on such statements.

DISCUSSION OF CRITICAL ACCOUNTING POLICIES: The material estimates made by Management in preparing the Company’s consolidated financial statements are summarized in Note 1 to the consolidated financial statements in the most recent annual report, which should be read in conjunction with this discussion and analysis. Further discussion of the two most critical accounting estimates and their impact on the consolidated financial statements is as follows:

Loan Loss Allowance: The allowance for loan losses is based on Management’s assessment of both short and long term risk factors. Loan loss experience has been cyclical since 1990, with earlier periods of relatively high credit losses followed by much lower levels of losses in recent years. The adequacy of the allowance for loan losses is sensitive to the assessment of impaired loans and their related reserves which, in turn, is linked to the level, trend, and collateral protection of commercial substandard loans. Commercial real estate collateral values and collateral liquidity can decline quickly, particularly if accompanied by rising interest rates from current very low levels. Banking industry loan performance in general has been very strong for several years, and consensus economic forecasts do not predict destabilizing factors. However, such factors could nonetheless emerge under more adverse conditions, with a negative effect on the adequacy of the Company’s loan loss allowance.

Securities Impairment: Alliance has a portfolio of corporate debt and equity securities, all of which were purchased under investment grade guidelines. Corporate credit ratings and interest spreads have deteriorated at a nearly record rate due to factors including corporate governance issues, the impact of terrorist attacks in 2001, and the end of the decade of unprecedented economic growth in the nineties. Alliance’s portfolio includes several insurance company securities, and many large and traditionally strong insurers have repeatedly announced unexpected reserve increases and other reductions to surplus. The portfolio also includes utility company common stocks. The market index for these stocks declined by about 26% in 2002, after performing satisfactorily for several years. These market conditions have resulted in writedowns of certain debt and equity securities in recent years. The remaining unrealized losses on Alliance’s securities in these sectors are viewed as temporary, but continued unfavorable developments could change management’s view and result in future writedowns.

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SUMMARY

Alliance reported a net loss of $239 thousand ($0.09 per share) in the third quarter of 2003, compared to net income of $861 thousand ($0.32 per diluted share) in the third quarter of 2002. During the third quarter of 2003, Alliance recorded $748 thousand in charges for professional fees related to its pending merger with New Haven Savings Bank.

For the first nine months of 2003, Alliance reported net income of $1.60 million ($0.57 per share), compared to earnings of $2.58 million ($0.95 per diluted share) for the same period in 2002. Alliance announced a quarterly dividend of 7.5 cents per share, payable on November 25, 2003 to shareholders of record at the close of November 11, 2003.

Quarterly results were affected by the charges related to the merger and a security writedown, as well as by a tighter net interest margin resulting from continuing low interest rates. Third quarter results benefited from the large pipeline of mortgage loans that had built up before mortgage rates turned up sharply at the beginning of the quarter. The Company increased its loan and investment portfolios in order to help offset the impact of tighter margins. For the first six months of 2003, net income had increased by $127 thousand (7%) due primarily to the benefit of higher residential mortgage secondary market income. The nine month results declined due to the loss in the third quarter. Total assets increased to $424 million at September 30, 2003 from $415 million at December 31, 2002. Increases in residential mortgage loans and investment securities were partially offset by declines in other loan categories.

Net interest income decreased by $178 thousand (6%) in the third quarter and by $188 thousand (2%) in the first nine months of 2003, compared to the same periods in 2002. This was caused by a decline in the net interest margin to 3.00% in the third quarter of 2003 from 3.31% in the same period of 2002 due to lower interest rates. This tightening was partially mitigated by growth in total loans for the first nine months of 2003 to $279 million from $274 million at December 31, 2002. This growth was due mainly to a significant increase in residential mortgages to $96 million from $79 million at December 31, 2002, which benefited from strong demand and improvements in the Company’s origination process and product structure.

The provision for loan losses declined by $51 thousand for the third quarter and by $236 thousand for the year-to-date, reflecting lower commercial loan growth. Net loan recoveries of $5 thousand were recorded in the first nine months of 2003, compared to net charge-offs of $1 thousand in the same period of 2002. The loan loss allowance measured 1.56% of total regular loans at September 30, 2003, compared to 1.60% at the previous year-end. Nonperforming assets totaled $3.7 million (0.87% of total assets) at quarter-end, up from $3.2 million (0.78% of assets) one year ago due primarily to one commercial loan relationship. There were no foreclosed assets recorded during the first nine months of 2003.

Non-interest income decreased by $234 thousand (31%) in the third quarter due to a $504 thousand writedown on an investment security which was partially offset by a $278 thousand increase in service charges and other income. For the nine month period, non-interest income increased by $337 thousand (16%) due to a $1.22 million increase in service charges and other income, which was partially offset by an $881 thousand decrease in net gains/losses on securites and other assets. Growth in service charges and other income was primarily due to higher secondary market income related to the higher volume of residential mortgage originations and sales. Service charges and other income for the first nine months also benefited from a $209 thousand increase in non deposit investment product commissions and a $124 thousand increase in loan prepayment fees.

During the third quarter, Alliance recorded a $504 thousand securities loss representing the writedown of one equity security, a utility common stock, which was deemed to be impaired on an other than temporary basis. This unrealized loss had previously been recorded in accumulated other comprehensive income, and the third quarter charge therefore did not reduce shareholders’ equity. For the first nine months of 2003, Alliance recorded a net securities loss of $570 thousand, including gross gains of $1.11 million and gross losses of $1.68 million. Securities gains were recorded on the sale and redemption of $6 million in corporate securities which were viewed as fully valued. The securities loss also included a debt security issued by a mutual insurance company which was written down by $1.17 million to estimated fair value

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in the first half of the year. During the first quarter of 2003, Alliance eliminated the held to maturity classification of investment securities, which had decreased to a balance of $5 million at year-end 2002. These securities were transferred to the available for sale category, where security purchases will be recorded for the foreseeable future.

Non-interest expense increased by $894 thousand (35%) in the third quarter and by $1.44 million (19%) in the first nine months of 2003 compared to 2002. Total merger related expenses were $748 thousand in the third quarter and $818 thousand for the first nine months of 2003, consisting principally of legal and investment banking services. For the nine month period, total compensation related costs increased by $609 thousand (15%) due primarily to higher business volumes, including a $443 thousand increase in commissions and temporary help, along with a $111 thousand increase in pension expense. All other expenses increased by a net amount of $14 thousand. Full time equivalent staff totaled 107 at quarter-end, compared to 109 at year-end 2002. For the first nine months of 2003, the efficiency ratio (excluding merger related expenses) improved to 65.2% compared to 65.5% in the same period of 2002 despite the impact of lower interest spreads. Due to the non-deductibility of certain merger related expenses, the effective income tax rate increased to 39% for the first nine months of 2003, compared to 30% in the same period of 2002.

Shareholders’ equity totaled $29.9 million at quarter-end versus $25.6 million at the end of the 2002 fiscal year and measured 7.1% of total assets, up from 6.2% at year-end 2002. This included the benefit from the net appreciation of investment securities, reflecting the impact of lower interest rates and improved corporate spreads. The Company’s capital remained in excess of all regulatory requirements and continued to exceed the requirement for the highest regulatory capital category of “Well Capitalized”.

Alliance is giving increasing effort to working with New Haven Savings Bank in planning the rapid integration of our companies following the completion of our merger, targeted for the first quarter of 2004. It was announced at the end of the third quarter that the combined bank intends to operate under the name “NewAlliance Bank” a subsidiary of the holding company, “NewAlliance Bancshares”, when the initial public offering is completed simultaneously with the completion of the merger.

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Consolidated Selected Financial Data (Unaudited)

		As of and for the three months ended September 30,						As of and for the nine months ended September 30,

		2003			2002			2003			2002

For the Period (in thousands)
Net interest income	$	2,912		$	3,090		$	9,165		$	9,353
Provision for loan losses		13			64			65			301
Service charges and other income		1,021			743			3,007			1,789
Net (loss) gain on securities and other assets		(504	)		8			(570	)		311
Non-interest expense		3,464			2,570			8,930			7,489
Net (loss) income	$	(239	)	$	861		$	1,603		$	2,576

Per Share
(Loss) earnings – basic	$	(0.09	)	$	0.33		$	0.59		$	1.00
(Loss) earnings – diluted		(0.09	)		0.32			0.57			0.95
Dividends declared		0.07	5		0.07	5		0.22	5		0.21	1
Book value		11.15			9.16			11.15			9.16
Common stock price:
High		33.75			15.70			33.75			15.70
Low		23.05			12.94			18.51			10.68
Close		33.34			15.30			33.34			15.30

At Period End (in millions)
Total assets	$	423.7		$	414.4		$	423.7		$	414.4
Total loans		283.4			269.3			283.4			269.3
Other earning assets		112.9			120.5			112.9			120.5
Deposits		327.4			335.2			327.4			335.2
Borrowings		60.1			51.5			60.1			51.5
Shareholders’ equity		29.9			23.7			29.9			23.7

Operating Ratios
Return on average equity		(3.10	)%		14.47	%		7.59	%		15.05	%
Return on average assets		(0.22	)		0.83			0.51			0.87
Net interest margin		3.00			3.31			3.18			3.44
Efficiency ratio		67.50			65.24			65.16			65.51
Equity/total assets		7.05			5.72			7.05			5.72
Dividend payout ratio		n/a			22.57			37.60			21.19

Loan Related Ratios
Net charge-offs/average regular loans		0.00	%		0.02	%		0.00	%		0.00	%
Loan loss allowance/regular loans		1.56			1.62			1.56			1.62
Nonperforming assets/total assets		0.87			0.78			0.87			0.78

Growth (in percent)
Net income		n/a			4.9	%		(37.8	)%		4.4	%
Regular loans		8.1	%		21.7			5.9			11.3
Deposits		(10.2	)		5.5			(1.4	)		14.0

(1) All share and per share data for the nine months ended September 30, 2002 has been adjusted to reflect the eleven-for-ten stock split effected in the form of a 10% stock dividend distributed in May 2002.
(2) The efficiency ratio is non-interest expense divided by the sum of net interest income (fully taxable equivalent) and service charges and other income. The efficiency ratio excludes merger related expenses. Return, margin and charge-off ratios are annualized based on average balances for the period. The net interest margin is fully taxable equivalent.
(3) Regular loans are total loans excluding government guaranteed loans.
(4) Growth of net income is compared to the same period in the prior year. Growth was not applicable in the three months ended September 30, 2003 due to the net loss. Growth of regular loans and deposits is compared to beginning of the period, annualized.

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RESULTS OF OPERATIONS

Average Balance Sheets and Interest Rates – Fully Taxable Equivalent (FTE)

The following table sets forth, for the periods indicated, the average balances and their associated average interest rates. Average balances are based on average daily balances. The balance and yield on all securities is based on amortized cost and not on fair value.

(dollars in thousands)		Average Balance			Rate (FTE Basis)

Quarters ended September 30		2003		2002	2003		2002

Residential mortgage loans	$	91,622	$	64,130	5.71	%	6.84	%
Commercial mortgage loans		91,850		90,868	6.81		7.65
Other commercial loans		37,683		38,696	6.04		6.49
Consumer loans		36,485		41,088	4.11		4.99
Government guaranteed loans		20,274		26,845	6.80		6.44

Total loans		277,914		261,627	5.99		6.70
Securities		95,594		96,033	4.26		6.49
All other earning assets		26,709		28,364	1.62		1.95

Total earning assets		400,217		386,024	5.29		6.32
Other assets		27,631		23,921

Total assets	$	427,848	$	409,945


NOW deposits	$	40,463	$	35,105	0.36	%	0.91	%
Money market deposits		46,535		49,800	1.22		2.02
Savings deposits		81,669		72,535	0.80		1.92
Time deposits		128,249		139,597	3.43		4.15

Total interest bearing deposits		296,916		297,037	1.94		2.86
Borrowings		58,476		50,674	5.78		6.16

Interest bearing liabilities		355,392		347,711	2.58		3.34
Demand deposits		40,354		35,542
Other liabilities		2,481		1,110
Shareholders’ equity		29,621		25,582

Total liabilities and equity	$	427,848	$	409,945

Net Interest Spread					2.71	%	2.98	%
Net Interest Margin					3.00	%	3.31	%

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(dollars in thousands)		Average Balance			Rate (FTE Basis)

Nine months ended September 30		2003		2002	2003		2002

Residential mortgage loans	$	85,649	$	61,889	6.09	%	6.98	%
Commercial mortgage loans		93,822		89,100	6.99		7.79
Other commercial loans		39,119		38,887	6.22		6.57
Consumer loans		37,903		40,530	4.30		5.23
Government guaranteed loans		22,730		28,160	6.52		6.66

Total loans		279,223		258,566	6.20		6.87
Securities		92,057		89,091	4.63		7.05
All other earning assets		24,242		20,836	2.56		1.67

Total earning assets		395,522		368,493	5.61		6.58
Other assets		27,694		29,586

Total assets	$	423,216	$	398,079


NOW deposits	$	39,502	$	35,755	0.40	%	0.93	%
Money market deposits		45,544		44,484	1.34		2.07
Savings deposits		80,162		70,716	0.95		1.99
Time deposits		131,067		137,104	3.60		4.34

Total interest bearing deposits		296,275		288,059	2.11		2.99
Borrowings		58,163		50,004	5.78		6.17

Interest bearing liabilities		354,438		338,063	2.71		3.46
Demand deposits		37,910		32,697
Other liabilities		2,049		1,975
Shareholders’ equity		28,819		25,344

Total liabilities and equity	$	423,216	$	398,079

Net Interest Spread					2.90	%	3.12	%
Net Interest Margin					3.18	%	3.44	%

FTE basis net interest income presents earnings on tax-advantaged securities on a basis equivalent to yields on fully-taxable securities. A tax rate of 40% was used to compute the tax-equivalent adjustment for all periods presented. A reconciliation of net interest income follows:

		Three months ended September 30,				Nine months ended September 30,

(in thousands)		2003		2002		2003		2002

Net interest income as reported in the consolidated statements of operations	$	2,912	$	3,090	$	9,165	$	9,353
Tax-equivalent adjustment		91		106		277		289

FTE basis	$	3,003	$	3,196	$	9,442	$	9,642

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RESULTS OF OPERATIONS – THREE MONTH AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003 VERSUS SEPTEMBER 30, 2002

Net Interest Income: Net interest income decreased by $178 thousand (6%) in the third quarter and by $188 thousand (2%) in the first nine months of 2003, compared to the same periods in 2002. Net interest income had been nearly flat for the first six months of 2003, with growth in earning assets offsetting margin compression. There was further margin compression in the third quarter, and year-to-year growth in average earning assets declined to 4% in the third quarter, compared to 7% in the first six months of the year.

Interest rates continued to decline in 2003, following the steep declines in 2002. Short term treasury rates declined by about 0.35% in the first six months, while the ten year treasury rate declined by about 0.80% to a low of 3.11% near the end of the second quarter. The plunge in rates in the second quarter fueled demand for refinancings. A recovery in the stock market, together with the low interest rates, also muted the unusually strong deposit demand experienced in recent years. The slower deposit growth constrained opportunities to offset lower yields with higher volume. In the third quarter, long term interest rates rebounded, closing the quarter around the 4.00% level. Application volumes declined, although loan originations and payoffs remained heavy due to the lengthy processing pipelines at June 30. Alliance is asset sensitive, and net interest income tends to decline during periods of comparatively low interest rates such as those which have been experienced in 2003. Please also see the Interest Rate Sensitivity section of this Discussion and Analysis.

Average earning assets increased by $27 million (7%) for the nine month period. This growth was concentrated in average residential mortgages, which increased by $24 million (38%). Decreases of $5 million each in average short term investments and average government guaranteed loans were mostly offset by an $8 million increase in average loans held for sale. Average total commercial mortgages and loans increased by $5 million (4%), while average consumer loans decreased by $3 million (6%). Average interest bearing liabilities grew by $16 million (5%), with the increase concentrated in a $9 million (13%) increase in savings accounts. An $8 million (16%) increase in average borrowings offset a $6 million (4%) decrease in average time accounts. Total transactions accounts (demand deposit and NOW) increased by $9 million (13%).

For the first nine months of 2003, most asset yields and liability costs continued to decrease due to the ongoing effects of lower interest rates. The yield on earning assets fell to 5.29% in the third quarter, from 6.32% in the same quarter of 2002. The greatest decrease was in the securities yield, which declined to 4.26% from 6.49%, reflecting securities sales and runoff, followed by reinvestment into shorter duration government agency and mortgage backed securities. The cost of liabilities has also declined steadily, but more slowly than the yield on assets, due to the low prevailing level of interest rates. The cost of interest bearing liabilities measured 2.58% in the third quarter of 2003, compared to 3.34% in the same quarter of 2002. These changes produced a decline in the net interest margin to 3.00% in the third quarter of 2003 from 3.31% in the same period of 2002. The net interest margin improved to 3.09% in the month of September, reflecting the benefit of loan and security growth booked near the end of the quarter.

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 $65 thousand for the first nine months of the year, compared to $301 thousand in the same period of the prior year. During the third quarter of 2003 the provision was $13 thousand versus $64 thousand for the 2002 period. The higher provisioning in 2002 related to growth in commercial loans and to an increase in the impairment reserve on one loan. The allowance totaled $4.12 million, or 1.56% of regular loans at September 30, 2003, which was down slightly from 1.60% at the previous year-end due to the higher proportion of lower risk residential mortgages in 2003.

Non-Interest Income. Non-interest income decreased by $234 thousand (31%) in the third quarter due to a $504 thousand writedown on an investment security which was partially offset by a $278 thousand increase in service charges and other income. For the nine month period, non-interest income increased by $337 thousand (16%) due to a $1.22 million increase in service charges and other income, which was partially offset by an $881 thousand decrease in net gains/losses on securites and other assets.

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Service charges and other income grew by $278 thousand (37%) in the third quarter and by $1.22 million (68%) in the first nine months of 2003. This growth was mostly produced by secondary market income, (consisting principally of gains on sale of loans) which grew by $297 thousand (410%) and $1.01 million (568%) during these periods. The very low long term interest rates in the second quarter caused a surge in residential mortgage refinancings into long term fixed rate mortgages, most of which were sold to the secondary market. Proceeds from loans sold totaled $90 million for the first nine months of 2003, compared to $14 million for the same period in 2002. The volume of new applications declined in the third quarter after the sharp increase in long-term interest rates, but loan sales remained strong due to the pipeline of mortgages in process at the beginning of the quarter. Alliance also benefited from a $213 thousand increase in non deposit investment product commissions. Under a new third party agreement, Alliance records these commissions on a gross basis, rather than on a net basis. The higher income reflected this new commission structure, together with an increase in sales volume. Additionally, Alliance recorded a $124 thousand increase in loan prepayment fees, primarily related to commercial loan refinancings. Excluding the above, all other service charges and other income decreased by $124 thousand (8%) for the first nine months of 2003. This reflected a $102 thousand decrease in annuity sales income and lower checking account overdraft volumes.

For the first nine months of 2003, Alliance recorded a net securities loss of $570 thousand, including gross gains of $1.11 million and gross losses of $1.68 million. As previously noted, the losses were due to writedowns of $1.17 million in the first half of the year of an insurance company debt security and a $504 thousand third quarter writedown of an electric utility common stock. The gains were realized on the sale of fully valued corporate debt and equity securities which reflected the benefit of lower interest rates and improved corporate spreads. For the third quarter the loss was $504 thousand versus a gain of $8 thousand for the third quarter of 2002.

Non-Interest Expense and Income Tax Expense. Non-interest expense increased by $894 thousand (35%) in the third quarter and by $1.44 million (19%) in the first nine months of 2003 compared to 2002. These increases were mainly due to merger related expenses and compensation expenses. All other expenses increased by a net amount of $14 thousand. Total merger related expenses were $748 thousand in the third quarter and $818 thousand for the first nine months of 2003, consisting principally of legal and investment banking services. Compensation related expenses increased by $125 thousand (9%) for the third quarter and $609 thousand (15%) for the first nine months due primarily to higher business volumes. The nine month results included a $443 thousand increase in commissions and temporary help, along with a $111 thousand increase in pension expense. Full time equivalent staff totaled 107 at quarter-end, compared to 109 at year-end 2002. For the first nine months of 2003, the efficiency ratio (excluding merger related expenses) improved to 65.2% compared to 65.6% in the same period of 2002 despite the impact of lower interest spreads. Certain merger related expenses have been treated as non deductible for purposes of the financial statement tax provision. As a result, the effective income tax rate increased to 39% for the first nine months of 2003, compared to 30% in the same period of 2002. The effective income tax rate benefits from the dividends received deduction on equity securities, accrued increases in cash surrender value of life insurance, and the state income tax benefit of Alliance’s passive investment corporation.

Comprehensive Income. Comprehensive income includes changes (after tax) in the unrealized market gains and losses of investment securities available for sale. Comprehensive income was $4.84 million in the first nine months of 2003, compared to $2.05 million in the same period last year. The net unrealized loss on securities declined substantially in 2003 due to lower interest rates, improved market spreads on corporate debt securities, and the writedown of corporate securities discussed previously. Please see the following discussion on investment securities.

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FINANCIAL CONDITION – SEPTEMBER 30, 2003 VERSUS DECEMBER 31, 2002

Cash and Cash Equivalents. Total cash and equivalents increased by $3 million to $21 million at September 30, 2003. Total cash and equivalents had increased to $39 million at June 30, 2003. Most of this increase was reinvested into higher yielding loans and investment securities during the third quarter.

Investment Securities. As previously noted, during the first quarter of 2003, Alliance eliminated the category of securities held to maturity and transferred the outstanding balance of these securities to the available for sale category. This represented a change in intent regarding the entire balance of securities held to maturity, which consisted of ten securities with an amortized cost of $5.1 million. Subsequent to the transfer, all purchases of investment securities have been categorized as available for sale and the same treatment will be applied to all purchases for the foreseeable future.

Total investment securities increased by $10 million (11%) during the first nine months of 2003. This growth was booked to help offset runoff of government guaranteed loans ($6 million) and a decrease in the balance of loans held for sale ($8 million). Securities purchases totaled
$39 million during this period and consisted entirely of U.S. government agency and mortgage backed securities with interest rates fixed for no more than four years, and in most cases for no more than three years. Other liabilities included $5 million representing securities purchased and not settled at September 30, 2003.

At September 30, 2003, total securities of $103 million included government agency and mortgage backed securities totaling $59 million (57%). All of these securities were rated AA or AAA. Corporate debt and equity securities totaled $41 million (40%) and investments in Federal Home Loan Bank and Bankers Bank Northeast totaled $3 million (3%). All of the corporate securities had ratings by Moodys and/or Standard & Poors, except for $8 million in utility common stocks, all of which were ranked B or above by Standard & Poors and a $2.5 million ultrashort bond fund. Excluding non-investment grade rated securities (discussed below), the rated corporate debt securities had an average rating of BBB+ at September 30, 2003. This decreased from A- previously due to maturing corporate securities which were replaced with government agency securities.

The securities portfolio includes six corporate debt securities which are rated non-investment grade. Four of these securities, with a net amortized cost of $4.6 million were rated in the BB- to BB+ range with a total unrealized loss of $0.4 million (8% of amortized cost). Two securities were defaulted and had been written down to a net balance of $0.6 million at September 30, 2003; these two securities were being held without accrual of interest. The equity security portfolio had a net unrealized loss of $0.8 million, concentrated in two utility common equity securities. Management’s assessment was that these declines are temporary and the prices of these securities are expected to improve over a reasonable period of time.

The total investment securities portfolio had a $0.3 million net unrealized gain as of September 30, 2003, measuring 0.2% of amortized cost, compared to a net unrealized loss of $3.3 million at year-end 2002, measuring 3.3% of amortized cost. This improvement was due to generally lower interest rates, improved spreads on corporate securities, and the writedowns of corporate securities.

The average balance of investment securities increased by $3 million (3%) for the nine months ended 2003, compared to 2002. The third quarter yield declined to 4.26% in 2003 from 6.49% in 2002, reflecting securities sales and runoff, and by reinvestment into shorter duration government agency and mortgage backed securities.

Total Loans. Total loans increased by $5 million (2%) to $283 million for the first nine months of 2003. Total regular loans increased by
$11 million (4%) to $264 million. The growth was mostly in residential mortgage loans, which increased by $17 million (22%). Alliance actively promoted its fee-free mortgage refinance loans, with fixed rates in the 3-15 year range. Additionally, in the third quarter, Alliance retained for portfolio some conforming residential mortgages with similar interest rate characteristics. As previously noted, prepayment speeds of many loan types accelerated sharply in the second quarter until long term rates increased after quarter end. During the first nine months of 2003, Alliance closed $97 million of conforming residential mortgages, plus an additional $24 million of fee-free refinance

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mortgages. Total commercial and consumer loans decreased by $6 million (4%) in the first nine months, reflecting the impact of accelerated prepayments and a slow economy. Growth in commercial loan demand did not develop as anticipated. The balance of residential mortgage loans held for sale declined to $4 million at September 30, 2003, reflecting the lower pipeline of loans in process at that time.

The average balance of total loans increased by $21 million (8%) for the first nine months of 2003, compared to 2002. The third quarter yield on total loans decreased to 5.99% in 2003 from 6.70% in 2002 due to the continuing effects of prime rate decreases and to ongoing refinances at lower interest rates.

Nonperforming Assets. Nonperforming assets totaled $3.7 million (0.87% of total assets) at quarter-end, up from $2.4 million (0.59% of assets) at year end 2002, due primarily to one $2.2 million commercial loan relationship. Alliance initiated foreclosure proceedings on this owner occupied commercial mortgage at the end of the third quarter. There were no properties acquired through foreclosure during the first nine months of 2003.

Allowance for Loan Losses. The allowance totaled $4.12 million (1.56% of regular loans) at September 30, 2003, compared to $4.05 million (1.60% of regular loans) at year-end 2002. The allowance increased due to growth in residential mortgages, but the ratio of the allowance to total regular loans decreased due to the higher proportion of lower risk residential mortgages in 2003. Alliance recorded $5 thousand in net loan recoveries during the first nine months of 2003.

Deposits and Borrowings. Total deposits decreased by $9 million (3%) in the third quarter and by $3 million (1%) for the first nine months of 2003. Lower interest rates and an improvement in the stock market are believed to have contributed to this change. All non maturity deposit account types had increased during the first half of the year, but decreased in the third quarter, except for savings accounts, which continued to increase in the third quarter and registered total growth of $4 million (6%) for the year-to-date 2003. Time accounts continued to decline, as some maturing longer term account balances were withdrawn in the current low rate environment. For the year-to-date 2003, time accounts decreased by $8 million (6%). For the first nine months of the year, average deposits increased by $13 million (4%). The third quarter cost of interest bearing deposits decreased to 1.94% in 2003 from 2.86% in 2002, reflecting lower rates on all major account types. Alliance plans to open its tenth branch in the fourth quarter of 2003, with new deposit growth planned as a result of this expansion. Total borrowings increased by $6 million from December 31, 2002, including some medium term Federal Home Loan Bank (FHLB) borrowings which were used to offset time account runoff. An additional $2 million of short term FHLB borrowings were outstanding at September 30, 2003.

Interest Rate Sensitivity. Alliance’s interest rate sensitivity was not significantly changed at September 30, 2003, compared to the previous year-end. The one year interest rate gap remained at 10% of earning assets, which is the policy limit. Net interest income at risk was 12% and (9%) based on upward and downward rate changes evaluated in the model; the policy limit is 10% and the overlimit in an upward rate environment was viewed as minor. Equity at risk was 9% and (15%) based on upward and downward rate changes evaluated in the model; the policy limit is 15%. Alliance believes that income and equity value would increase in a rising rate environment and decrease in a decreasing rate environment, primarily due to rate adjustments in its portfolio of prime based commercial and consumer loans. With interest rates at comparatively low levels and widely forecasted to increase, Alliance generally seeks to limit the acquisition of new long term fixed rate assets in order to improve equity at risk in a rising rate environment. Due to the low and volatile nature of the interest rate environment, uncertainty in the modeling process has increased. Loan prepayment speeds had accelerated in the second quarter due to the unusually low rate environment, but were estimated to be slowing at the end of the third quarter due to the increase in long term rates in the third quarter. Future deposit flows also reflect uncertainties related to the competitiveness of other financial products in a possible rising rate environment.

Liquidity and Cash Flows. Tolland Bank’s primary net use of funds in the first nine months of 2003 was the purchase of investment securities. These purchases were funded by sales and runoff from other investment securities and government guaranteed loans, together with a decrease in loans held for sale.

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Alliance increased FHLB borrowings to fund loan growth and offset runoff of maturing time accounts. Short term investments increased by a relatively small $2 million to $6 million. Borrowings and time deposits are the primary sources of liquidity for additional balance sheet growth, along with deposits from the new Enfield branch. Short term investments and securities available for sale provide additional sources of liquidity. Further, the portfolio of government guaranteed loans represents a readily marketable pool of assets, although management has no present intent to sell these assets. Alliance’s primary source of funds is dividends received from Tolland Bank, and its primary use of funds is dividends paid to shareholders and to trust preferred security holders. Additionally, due to the planned merger, another use of funds by Alliance is merger related expenses and an anticipated source of funds in the fourth quarter of 2003 will be proceeds from the exercise of stock options in accordance with the merger agreement.

Capital Resources. Shareholders’ equity increased by $4 million to $30 million during the first nine months of 2003, benefiting from the comparatively high comprehensive income. Total equity measured 7.1% of assets at September 30, which was up from 6.2% at year-end 2002. At September 30, both Alliance and Tolland Bank continued to be capitalized in accordance with the “Well Capitalized” regulatory classification.

As discussed in Note 1 to the Alliance Consolidated Financial Statements, the adoption of FASB Interpretation No. 46 was required beginning in the third quarter of 2003, but was then postponed to December 31, 2003. This may affect the financial reporting in the consolidated financial statements for Alliance’s two statutory business trusts that have issued trust preferred securities totaling $7 million, and their continued qualification as Tier I capital for Alliance under regulatory definitions. These financial reporting and regulatory determinations are currently under review and Alliance expects that its capital will remain in excess of all regulatory requirements.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See the 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, 2002 filed on March 31, 2003. See also the discussion of Interest Rate Sensitivity in Item 2 of this Form 10-Q.

ITEM 4. CONTROLS AND PROCEDURES

Based on their evaluation as of September 30, 2003, the Company’s Chief Executive Officer, Joseph H. Rossi and Chief Financial Officer, David H. Gonci, concluded the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. There were no changes during the quarter ended September 30, 2003 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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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 with this Report.

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

		32.1	Certification by Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. Section
			1350.

		32.2	Certification by Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. Section
			1350.

	(b)	Reports on Form 8-K filed during the quarter ended September 30, 2003

(i)

On July 16, 2003, the Company furnished a Form 8-K reporting, under Item 5, a news release announcing that it entered into a definitive merger agreement with New Haven Savings Bank.

(ii)

On July 17, 2003, the Company furnished a Form 8-K reporting, under Item 9, an informational presentation regarding the proposed merger.

(iii)

On July 24, 2003, the Company furnished a Form 8-K reporting, under Item 9 and in satisfaction of Item 12, a news release reporting earnings for the second quarter of the 2003 fiscal year.

(iv)

On July 25, 2003, the Company filed a Form 8-K/A reporting, under Item 5, an amendment to its July 16, 2003 Form 8-K filing announcing that it had entered into a definitive merger agreement, to include the complete text of the Agreement and Plan of Merger.

(v)

On July 28, 2003, the Company furnished a Form 8-K/A reporting, under Item 9, a correction of a typographical error in the informational presentation furnished in its July 17, 2003 Form 8-K.

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Signatures

Pursuant to the requirements of 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 13, 2003	/s/ Joseph H. Rossi

	Joseph H. Rossi President/Chief Executive Officer


Date: November 13, 2003	/s/ David H. Gonci

	David H. Gonci Senior Vice President/Chief Financial Officer