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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
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(Address of principal executive offices) (Zip Code)
(860) 875-2500
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock -- $.01 par value
Securities registered pursuant to Section 12(g) of the Act: None
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10K. ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES NO X
-------- ---------
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 30, 2003 was $55,813,824 based on the closing price of
$23.00 as quoted by American Stock Exchange.
The number of shares of the registrant's Common Stock outstanding as of February
27, 2004 was 2,859,111 shares.
DOCUMENTS INCORPORATED BY REFERENCE: None.
1
FORM 10-K TABLE OF CONTENTS
PAGE
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PART I Item 1 - Business 3
Item 2 - Properties 6
Item 3 - Legal Proceedings 6
Item 4 - Submission of Matters to a Vote of Security Holders 6
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PART II Item 5 - Market for Registrant's Common Equity and Related Shareholder Matters 6
Item 6 - Selected Consolidated Financial Data 7
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Item 7A- Quantitative and Qualitative Disclosures about Market Risk 20
Item 8 - Consolidated Financial Statements and Supplementary Data 21
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 49
Item 9A- Controls and Procedures 49
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PART III Item 10 - Directors and Executive Officers of the Registrant 50
Item 11 - Executive Compensation 53
Item 12 - Security Ownership of Certain Beneficial Owners and Management 58
Item 13 - Certain Relationships and Related Transactions 59
Item 14 - Principal Accounting Fees and Services 59
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PART IV Item 15 - Exhibits, Financial Statement Schedules and Reports on Form 8-K 61
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SIGNATURES 62
2
PART I
Special Note Regarding Forward-Looking Statements
This report contains certain "forward-looking statements." These forward-looking
statements, which are included principally in Management's Discussion and
Analysis describe future plans or strategies and include Alliance's expectations
of future financial results. The words "believe," "expect," "anticipate,"
"estimate," "plan," "project" and similar expressions identify forward-looking
statements. Alliance'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/tax changes, fluctuations of
interest rates, changes in the quality or composition of Alliance's loan and
investment portfolios, deposit flows, competition, demand for financial services
in Alliance'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.
PENDING MERGER
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, Inc."
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, or
cash, 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.
NHSB has adopted a plan to convert to a public company simultaneously with the
acquisitions. As part of the conversion, NHSB formed a new holding company and
conducted a subscription offering of its common stock to eligible depositors and
others. The subscription offering for NewAlliance common stock closed on March
11, 2004 and Alliance shareholders approved the merger agreement at a special
meeting of shareholders held on March 18, 2004. The transactions are expected to
be completed on or about April 1, 2004.
ITEM 1. BUSINESS
General. Alliance Bancorp of New England, Inc. ("Alliance" or the "Company") is
a Delaware corporation that was organized in 1997 as the holding company for
Tolland Bank (the "Bank"), which is its principal asset.
Tolland Bank is a Connecticut-chartered savings bank founded in 1841 and
headquartered in Vernon, as is Alliance. In 1986, Tolland Bank converted from
mutual to stock form. Tolland Bank's deposits are insured up to applicable
limits by the Federal Deposit Insurance Corporation.
Tolland Bank operates eight offices in Tolland County, and two offices in
Hartford County, Connecticut, and provides retail and commercial banking
products and services. Retail activities include branch deposit services, and
home mortgage and consumer lending. Commercial activities include merchant
deposit services, business cash management, construction mortgages, permanent
mortgages, and working capital and equipment loans. Through third party
relationships, Tolland Bank also provides investment products, insurance
products, and electronic payment services to retail and commercial customers.
At December 31, 2003, Alliance had total deposits of $339.0 million, total loans
of $276.4 million, and total assets of $438.5 million. There are no material
concentrations of loans or deposits with one customer or a group of related
customers. Real estate related assets comprise a substantial portion of total
assets, including residential mortgages, commercial mortgages, commercial loans,
and home equity loans. Loans to commercial entities organized to hold real
estate are a significant component of commercial mortgages. Corporate investment
securities industry concentrations are limited by policy to 6% of assets
excluding government and agency securities. The largest concentration at
December 31, 2003 was to insurance companies, totaling $10 million.
Market Area. Tolland Bank's market area is centered in Tolland County, a
suburban and rural area east of Hartford. Tolland Bank operates ten offices and
its wider market area extends throughout much of northeastern and central
Connecticut. Much of the market is part of the Greater Hartford metropolitan
area. Tolland Bank's South Windsor office is in Hartford County, together with
the newly opened Enfield office.
3
Lending Activities. Tolland Bank originates personal and commercial loans in and
around its market area. Retail lending includes the origination of residential
first mortgages and home equity lines of credit, which are generally secured by
second mortgages. Commercial lending focuses primarily on mortgage loans, along
with general commercial and industrial loans and subdivision development and
construction loans. Additionally, Tolland Bank has a portfolio of 100%
Government guaranteed loans which are purchased in the secondary market as an
alternative to investment purchases. Alliance does not purchase syndicated loans
or operate subprime lending programs; asset based loans are related primarily to
construction loans.
Most of Tolland Bank's residential mortgage originations are underwritten to
secondary market standards, and many are sold on a non-recourse, servicing
released basis. Loans held for sale consist principally of newly originated
residential mortgages scheduled for delivery to investors. Consumer loans
primarily consist of home equity lines and loans and are normally secured by
second mortgages. These loans are subject to the same general underwriting
standards as residential mortgage loans, with modified documentation
requirements, and Tolland Bank retains ownership and servicing of all home
equity lines and loans that it originates. Consumer loan originations include
"Fee-Free Refi" first mortgages which are processed similarly to other consumer
loans, but are included with residential mortgages in the consolidated financial
statements.
Commercial mortgages are primarily first mortgage loans on a variety of
commercial properties including retail, office, light manufacturing, and
recreation. Commercial mortgages normally amortize over 15-20 years and
typically mature in 10 years. Commercial mortgages are normally guaranteed by
the principals. Other commercial loans include commercial and industrial loans,
and real estate secured term loans, as well as subdivision development and
construction loans. The majority of commercial mortgages are priced at a spread
over the five year Federal Home Loan Bank borrowing rate. Tolland Bank's
underwriting policy generally requires minimum annual debt service coverage of
125% and a maximum loan to value of 75%. The Company originates commercial
mortgages throughout Connecticut.
Government guaranteed loans are purchased in the secondary market and are 100%
guaranteed by either the Small Business Administration or the U.S. Department of
Agriculture. These are business term loans and mortgages, and are primarily loan
certificates registered with and serviced by a national service corporation.
All loan originations are governed by a Board approved credit policy, which
requires that all policy exceptions be reported to the Board. All loans over $1
million are approved by the Board. The loan policy sets certain limits on
concentrations of credit related to one borrower. Tolland Bank's policy is to
assign a risk rating to all commercial loans. Tolland Bank conducts an ongoing
program of commercial loan reviews and quality control sample inspections of
residential and consumer loan originations.
The allowance for loan losses is determined based on a methodology described in
Alliance's accounting policies. See Note 1 to the consolidated financial
statements in Item 8. The allowance is evaluated quarterly by management and the
Board. Adverse developments in credit risk in Alliance's markets can develop
quickly, and the determination of the allowance is based on management's
assessment of both short and long term risk factors.
Total real estate secured loans were $247 million at December 31, 2003 (95% of
total loans and loans held for sale other than purchased government guaranteed
loans). Tolland Bank conducts an overall review of real estate market trends
periodically, and real estate lending activities are governed by real estate
lending and appraisal policies. New construction has primarily been active in
certain residential markets.
Investment Activities. Securities investments are a source of interest and
dividend income, provide for diversification, are a tool for asset/liability
management, and are a source of liquidity. Alliance's securities portfolio is
primarily composed of U.S. government and agency securities and publicly traded
U.S. corporate securities. Investment activities are governed by a
Board-approved investment policy, and the Board reviews all investment
activities on a monthly basis. Alliance uses the services of an investment
advisor in managing its portfolio. An Investment Committee of the Board meets
quarterly to review detailed information on the ratings, yields and values of
securities, as well as management's plans for investment security transactions.
Premiums on investment securities with prepayment risk are limited to a maximum
of 3%.
Deposits and Other Sources of Funds. Tolland Bank's major source of funds is
deposits, along with borrowings, principal payments on loans and securities, and
maturities of investments. Deposit growth has been achieved through opening new
offices and through growth in existing offices. Borrowings are generally used to
fund long-term assets and short-term liquidity requirements. Tolland Bank is a
member of the Federal Home Loan Bank of Boston ("FHLBB") and may borrow from the
FHLBB subject to certain limitations. Tolland Bank also has available informal
arrangements for federal funds purchases and reverse repurchase agreements, and
is also eligible for short-term borrowings from the Federal Reserve Bank of
Boston.
4
Competition. Alliance's market area is highly competitive with a wide range of
financial institutions. Competitors include national, regional and local
institutions. Factors affecting competition include the consolidation of bank
competitors, expansion of non-bank competitors, expansion of secondary markets
for bank products, and the growth of internet banking. Conversions of mutual
banks to stock ownership have also affected local competition. Tolland Bank
competes through pricing, product development, focused marketing, and providing
more convenience through technology and business hours. Tolland Bank strives to
provide the personal service advantage of a community bank and to take advantage
of potential market changes following mergers and consolidations by the large
regional banks. Tolland Bank has expanded its offerings of third party financial
products to both the consumer and commercial markets.
Technology. The development of internet e-commerce has been prominent throughout
the economy, including the banking industry. Most of Alliance's competitors
offer some level of internet and electronic banking services. While the local
demand for these technologies has been modest, the level of demand is increasing
rapidly. Alliance has a goal to be an active user of proven new technologies,
both in its product offerings and in its internal operations. A significant
effect of technological change has been to enable community banks to more easily
access emerging technologies previously available principally to larger
competitors.
Employees. As of December 31, 2003, the Company had 112 full-time equivalent
employees. None of the employees are represented by a collective bargaining
group, and Alliance's management considers relations with its employees to be
good.
Regulation and Supervision. Alliance and Tolland Bank are heavily regulated. As
a bank holding company, Alliance is supervised by the Board of Governors of the
Federal Reserve System, and it is also subject to the jurisdiction of the
Connecticut Banking Commissioner. As a Connecticut-chartered savings bank,
Tolland Bank is subject to regulation and supervision by the Connecticut Banking
Commissioner and by the FDIC. Changes to such laws and regulations can affect
Alliance's operating environment in substantial and unpredictable ways.
The FDIC insures the Bank's deposit accounts to the $100,000 maximum per
separately insured account. The Bank is subject to regulation, examination, and
supervision by the FDIC and to reporting requirements of the FDIC. The FDIC and
the FRB have adopted requirements setting minimum standards for capital adequacy
and imposing minimum leverage capital ratios. The Company and Bank exceeded all
applicable requirements at December 31, 2003. Connecticut statutes and
regulations govern, among other things, investment powers, lending powers,
deposit activities, maintenance of surplus and reserve accounts, the
distribution of earnings, the payments of dividends, issuance of capital stock,
branching, acquisitions and mergers and consolidations. Connecticut banks that
do not operate in accordance with the regulations, policies and directives of
the Banking Commissioner may be subject to sanctions for noncompliance. The
Commissioner may, under certain circumstances, suspend or remove officers or
directors who have violated the law, conducted the Bank's business in a manner
which is unsafe, unsound or contrary to the depositor's interest, or been
negligent in the performance of their duties.
In 1999, Congress enacted the Financial Modernization Act, which fundamentally
removes barriers between banking, insurance and securities brokerage which have
existed since the Glass Stegall Act in the 1930`s. There is increased
consolidation in these industries among national competitors. At the community
bank level, banks have already been combining the distribution of these products
through joint ventures and acquisitions of insurance agencies.
Alliance, as a public company, is subject to the enhanced corporate governance,
disclosure and enforcement provisions of the Sarbanes-Oxley Act of 2002 (the
"Act"). The Act includes very specific additional disclosure requirements and
new corporate governance rules; requires the SEC and securities exchanges to
adopt extensive additional disclosure, corporate governance and other related
rules; and mandates further studies of certain issues by the SEC and the
Comptroller General. The Act represents significant federal involvement in
matters traditionally left to state regulatory systems, such as oversight of the
accounting profession, and to state corporate law, such as the relationship
between a board of directors and management and between a board of directors and
its committees.
5
ITEM 2. PROPERTIES
The premises of Alliance are located in Connecticut as follows (see Note 6,
"Premises and Equipment, Net," and Note 13, "Commitments and Contingencies" in
Item 8 for additional information about the Company's premises):
Year Lease
Location - Town (Street) Owned/Leased/Rent Expires
- -------------------------------------------------------------------------
o Tolland - (215 Merrow Road) Leased 2008
o Vernon - (348 Hartford Turnpike) Owned
o Vernon - (62 Hyde Avenue) Owned
o Coventry - (Routes 31 and 44) Owned
o Ellington - (287 Somers Road) Owned
o Stafford Springs - (34 West Stafford Road) Rent
o Willington - (Routes 74 and 32) Leased 2005
o Hebron - (31 Main Street) Leased 2008
o South Windsor - (1665 Ellington Road) Owned
o Enfield - (73 Hazard Avenue) Owned
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any material legal proceedings other than routine
litigation incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY and RELATED SHAREHOLDER MATTERS
The Company's common stock is listed on the American Stock Exchange (AMEX) under
the symbol "ANE." A total of 3,466,476 shares of the Company's stock, or 121% of
year-end outstanding shares, were traded on AMEX in 2003. As of February 27,
2004, the Company had 397 holders of record of its common stock. This does not
reflect the number of persons or entities who hold their stock in nominee or
"street" name. The closing sale price of the stock on February 27, 2004 was
$41.23. Dividends declared and paid in 2003 and 2002 totaled $0.30 and $0.286
per share, respectively. Dividends are subject to the restrictions of applicable
regulations. See Note 10, "Shareholders' Equity," in Item 8 for additional
information. See also the information contained in Item 6.
The following table presents quarterly information on the range of high and low
prices for the past two years, together with dividends declared per share.
Quarter Ended High Low Dividends Declared Per Share
- -------------------------------------------------------------------------------------------------------------------------
December 31, 2003 $ 41.95 $ 32.40 $ 0.075
September 30, 2003 33.75 23.05 0.075
June 30, 2003 24.63 19.70 0.075
March 31, 2003 20.05 18.51 0.075
December 31, 2002 20.20 14.40 0.075
September 30, 2002 15.70 12.94 0.075
June 30, 2002 15.45 12.55 0.068
March 31, 2002 13.19 10.68 0.068
6
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
December 31 2003 2002 2001 2000 1999
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For the Year (in thousands)
Net interest income $ 12,157 $ 12,548 $ 12,211 $ 11,892 $ 10,346
Provision for loan losses 103 348 325 335 237
Service charges and other income 3,779 2,603 1,685 1,482 1,535
Net (loss) gain on securities & other assets (659) 251 (467) 36 190
Non-interest expense 12,512 10,153 8,932 8,621 7,808
Net income 1,468 3,458 2,975 3,220 2,922
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Per Share
Net income - basic $ 0.54 $ 1.33 $ 1.16 $ 1.26 $ 1.16
Net income - diluted 0.51 1.26 1.12 1.24 1.12
Dividends declared 0.30 0.286 0.273 0.250 0.209
Book value 11.49 9.58 8.58 7.06 5.65
Common stock price (close) 39.51 20.15 10.91 8.18 8.07
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At Year-End (in millions)
Total assets $ 438.5 $ 414.5 $ 384.6 $ 348.2 $ 306.9
Total loans 276.4 278.3 254.6 228.3 191.6
Other earning assets 131.8 109.6 104.0 95.9 85.0
Deposits 339.0 330.8 303.4 280.5 251.4
Borrowings 58.2 54.5 57.1 46.7 39.6
Shareholders' equity 32.8 25.6 22.1 18.1 14.3
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Operating Ratios
Return on average equity 5.09% 14.86% 14.80% 20.66% 17.68%
Return on average assets 0.35 0.86 0.82 0.97 0.99
Net interest margin (fully taxable equivalent) 3.17 3.42 3.71 4.02 3.88
Efficiency ratio 67.35 65.28 62.27 61.88 62.83
Equity % total assets (period end) 7.49 6.16 5.74 5.20 4.67
Dividend payout ratio 54.83 21.40 23.52 19.84 18.08
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Loan Related Ratios
Net (recoveries) charge-offs/
average regular loans (0.01)% -% 0.01% 0.06% 0.05%
Loan loss allowance/regular loans 1.61 1.60 1.62 1.65 1.82
Nonperforming assets/total assets 1.50 0.59 0.56 0.32 0.41
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Growth
Net income (58)% 16% (8)% 10% 14%
Regular loans 3 12 9 18 9
Deposits 2 9 8 12 5
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Notes:
(1) All share and per share data 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 represents the ratio of non-interest expenses to the
sum of fully taxable equivalent net interest income 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 prior year. Growth of regular loans
and deposits is compared to beginning of the period, annualized.
7
ITEM 7. 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.
All references to changes in fiscal year 2003 in this discussion are compared to
fiscal year 2002 unless otherwise specified, and all references to changes at
December 31, 2003 are compared to December 31, 2002 unless otherwise specified.
DISCUSSION OF CRITICAL ACCOUNTING POLICIES
The material estimates made by management in preparing Alliance's consolidated
financial statements are summarized in Note 1 to the Consolidated Financial
Statements 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 Alliance's loan loss allowance.
Securities Impairment
Alliance has a portfolio of marketable corporate debt and equity securities, all
of which were purchased under investment grade guidelines. Securities with
unrealized losses generally reflect changes in interest rates, capital market
spreads, and issuer financial condition. These securities are analyzed to
determine whether the loss is considered to be other than temporary. The
Company's assessment of debt security impairment focuses on whether the security
is expected to perform in accordance with its terms, including repayment of the
principal amount at maturity. Impairment of equity securities is evaluated based
on expectations for market price recovery within a reasonable period of time, as
well as expected future earnings and dividends. Unfavorable developments could
change management's view and result in future writedowns.
RESULTS OF OPERATIONS - 2003 VERSUS 2002
Earnings Summary
For the year ended December 31, 2003, Alliance reported net income of $1.5
million ($0.51 per diluted share) compared to net income of $3.5 million ($1.26
per diluted share) for the year 2002. The lower earnings were attributable in
large part to Alliance's recording of $1.5 million in expenses in 2003 related
to the pending merger. Results in 2003 were also adversely affected by a tighter
net interest margin resulting from continuing low interest rates. Alliance
increased its regular loan and investment portfolios in order to help offset the
impact of tighter margins. Reflecting the changes in net income, the Company's
return on average equity declined to 5.09% in 2003 from 14.86% in the prior
year, while the return on average assets decreased to 0.35% from 0.86%.
Net interest income decreased to $12.2 million in 2003 versus $12.5 million in
2002. This was caused by a decline in the net interest margin to 3.17% in 2003,
compared to 3.42% in 2002, due to lower interest rates. The decrease also
reflected a shift in the asset mix to instruments with lower margins, reflecting
shorter lives and less credit risk. The provision for loan losses totaled
$103,000 in 2003 and $348,000 in 2002, primarily reflecting portfolio growth in
both years and impairment provisions.
Non-interest income was $3.1 million in 2003 versus $2.9 million in 2002.
Service charges and other income totaled $3.8 million in 2003 versus $2.6
million in 2002, reflecting higher secondary market income which totaled $1.3
million in 2003 versus $310,000 in 2002. Secondary market income in 2003
benefited from the record refinancing demand in response to low interest rates
during the first half of the year. Service charges and other income also
benefited from a $161,000 increase in prepayment fees due to higher commercial
loan refinancings in 2003. Net losses on securities and assets totaled $659,000
in 2003 versus net gains of $251,000 in 2002. Gross securities gains totaled
$1.8 million in 2003 and gross securities losses totaled $2.4 million.
Securities gains were generally related to the sale of corporate bonds viewed as
fully valued. The losses included $2.0 million in writedowns of corporate
securities which were deemed to be impaired on an other-than-temporary basis and
$370,000 in realized losses on the sale of two utility common stocks to reduce
exposure in this sector.
Non-interest expense was $12.5 million in 2003 versus $10.2 million in 2002.
Total merger related expenses were $1.5 million in 2003, consisting principally
of legal and investment banking services. There were no merger related expenses
in 2002. All other expenses increased by $817,000, principally due to a $789,000
increase in compensation and benefits expense. This increase included a $469,000
increase in incentive related compensation and temporary help due primarily to
higher business volumes. Compensation and benefits expense also included a
$216,000 increase in pension expense and payroll taxes. Due primarily to the
non-deductibility of certain merger related expenses, the effective income tax
rate also increased to 45% in 2003 from 29% in 2002.
8
Net Interest Income
Years ended December 31 2003 2002 2001
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Average
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(dollars in thousands) Balance Rate Balance Rate Balance Rate
- ----------------------------------------------------------------------------------------------------------------------------
Residential mortgage loans $ 96,904 5.77% $ 68,873 6.67% $ 61,938 7.43%
Commercial mortgage loans 92,262 6.99 90,176 7.71 73,208 8.47
Other commercial loans 38,982 4.08 39,007 6.49 45,349 8.17
Consumer loans 37,506 6.42 40,505 5.12 37,704 6.80
Government guaranteed loans 21,656 6.38 27,656 6.72 26,179 7.10
- ----------------------------------------------------------------------------------------------------------------------------
Total loans 287,310 6.07 266,217 6.76 244,378 7.75
Securities 94,398 4.56 94,514 6.41 86,394 7.65
All other earning assets 13,160 1.07 17,447 1.73 10,285 3.61
- ----------------------------------------------------------------------------------------------------------------------------
Total earning assets 394,868 5.53 378,178 6.45 341,057 7.60
Other assets 28,212 24,417 20,384
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $ 423,080 $ 402,595 $ 361,441
- ----------------------------------------------------------------------------------------------------------------------------
NOW deposits $ 39,739 0.39 $ 36,082 0.86 $ 31,677 1.57
Money market deposits 43,942 1.27 45,145 1.98 41,073 3.48
Savings deposits 82,151 0.85 71,980 1.82 49,907 2.42
Time deposits 129,436 3.53 137,014 4.25 135,501 5.29
- ----------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 295,268 2.03 290,221 2.87 258,158 3.99
Borrowings 59,011 5.72 51,061 6.12 47,491 6.20
- ----------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 354,279 2.64 341,282 3.36 305,649 4.34
Demand deposits 37,496 33,784 30,862
Other liabilities 2,477 4,258 4,836
Shareholders' equity 28,828 23,271 20,094
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $ 423,080 $ 402,595 $ 361,441
- ----------------------------------------------------------------------------------------------------------------------------
Net Interest Spread 2.89% 3.09% 3.26%
Net Interest Margin 3.17% 3.42% 3.71%
Note: The average balance of loans includes loans held for sale, nonaccruing
loans and deferred fees and costs. Also, the balance and yield on all securities
is based on amortized cost and not on fair value.
Years ended December 31
Net Interest Income FTE (in thousands) 2003 2002 2001
======================================================================
Interest income $ 21,518 $ 24,007 $ 25,466
Tax-equivalent adjustment 353 401 449
Interest expense (9,361) (11,459) (13,255)
- ----------------------------------------------------------------------
Net interest income (FTE) $ 12,510 $ 12,949 $ 12,660
======================================================================
Note: The tax-equivalent adjustment 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 adjustment for each year presented.
Net interest income decreased by $391,000 (3%) in 2003 compared to 2002. Average
earning assets increased by 4% for the year, while the net interest margin
declined to 3.17% from 3.42%. Growth in average assets slowed to 5% from 11% in
the prior year due to slower economic conditions and to record demand for fixed
rate mortgages which are normally sold to the secondary market. The lower
interest margin reflected the Company's asset sensitivity to lower rates which
prevailed through most of the year. Alliance is asset sensitive, and net
interest income tends to decline during periods of comparatively low interest
rates such as in 2003. The $439,000 decrease in FTE basis net interest income
reflected the benefit of a $157,000 positive volume variance which was more than
offset by a $596,000 negative rate variance. The Company's sensitivity to
changes in interest rates is discussed further in the Interest Rate Risk section
of Management's Discussion and Analysis.
9
Interest rates continued to decline in 2003, following the steep declines in
2002. Short term interest rates declined in the first half of the year; the
three month treasury bill rate ended 2003 around 0.90%, decreasing from 1.20% at
the start of the year. Long term interest rates declined to the lowest levels in
decades during the middle of the year, and then increased in the latter part of
the year. The ten year treasury note rate began the year around 3.90%, fell to a
low of 3.11%, and ended the year around 4.25%. The decrease in interest rates in
the second quarter led to record demand for refinancings, which lasted through
the third quarter. A recovery in the stock market, together with the low
interest rates, also muted the strong deposit demand experienced in recent
years. The slower deposit growth constrained opportunities to offset lower
yields with higher volume.
Average earning assets increased by $17 million (4%) in 2003 due to a $20
million (29%) increase in average residential mortgages. Average interest
bearing liabilities grew by $13 million (4%), due primarily to a $10 million
(14%) increase in average savings accounts. An $8 million (16%) increase in
average borrowings offset an $8 million (6%) decrease in average time accounts.
Total transactions accounts (demand deposit and NOW) increased by $7 million
(11%).
Most categories of asset yields and liability costs continued to decrease due to
the ongoing effects of lower interest rates. The yield on earning assets fell to
5.53% from 6.45%. The greatest decrease was in the securities yield, which
declined to 4.56% from 6.41%, 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 declined to 2.64% from 3.36%. These changes
produced a decline in the net interest margin to 3.17% from 3.42%. Fully taxable
equivalent net interest income includes a $353,000 tax equivalent adjustment
which was down from $401,000 in 2002 due to a lower dividend rate on equity
securities.
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 $103,000 in 2003 compared to
$348,000 in 2002. The higher provision in 2002 related to growth in commercial
loans. The allowance increased to $4.18 million, or 1.61% of regular loans at
December 31, 2003, compared to $4.05 million, or 1.60% of regular loans, at the
previous year-end. Please see the later discussion on the allowance for loan
losses and nonperforming assets, and the Summary of Significant Accounting
Policies in Note 1 to the consolidated financial statements.
Non-Interest Income
Years ended December 31 (in thousands) 2003 2002 % Change
- -------------------------------------------------------------------
Loan related income $1,898 $ 755 151%
Deposit account income 802 822 (2)
Increase in cash surrender value
of life insurance 268 316 (15)
Miscellaneous income 811 710 14
- -----------------------------------------------------------------
Total service charges 3,779 2,603 45
and other income
Gross gains on securities 1,763 1,611 9
Gross losses on securities (2,422) (1,453) 67
- -----------------------------------------------------------------
Net (losses) gains on securities (659) 158 (517)
Gross gains on assets - 148
Gross losses on assets - (55)
- -----------------------------------------------------------------
Net gains on assets - 93
- -----------------------------------------------------------------
Total non-interest income $3,120 $2,854 9%
=================================================================
Percentage change shown if meaningful
Non-interest income increased by $266,000 (9%) to $3.12 million in 2003 compared
to $2.85 million in 2002. A $1.18 million increase in service charges and other
income was partially offset by a $910,000 decrease attributable to net (losses)
gains on securities and other assets.
The $1.18 million increase in service charges and other income was primarily due
to a $957,000 (309%) increase in secondary market income and a $161,000 (79%)
increase in commercial loan prepayment fees. The very low long term interest
rates during portions of 2003 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 $98 million in 2003, compared
to $24 million in 2002. Commercial loan refinancings also increased and
contributed to the increase in prepayment fee income. A $95,000 increase in
non-deposit investment product and annuity income offset a $49,000 decrease in
income on bank owned life insurance policies due to lower cash surrender value
crediting rates.
Net losses on securities and assets totaled $659,000 in 2003 versus net gains of
$251,000 in 2002. Gross securities gains totaled $1.8 million in 2003 and gross
securities losses totaled $2.4 million. Securities gains were generally related
to the sale of corporate bonds viewed as fully valued, and contributed to a
shortening of the duration and improvement of the average credit rating of the
portfolio. The losses included $2.0 million in writedowns of corporate
securities which were deemed to be impaired on an other-than-temporary basis and
$370,000 in realized losses on the sale of two utility common stocks to reduce
exposure in this sector. There were no gains on assets in 2003; these gains
totaled $93,000 in 2002 due to the sale of excess land.
10
Non-Interest Expense
Non-interest expense increased by $2.36 million (23%) in 2003, due primarily to
merger related expenses and variable staff costs related to higher business
volumes in certain fee based products. Excluding these amounts, all other
non-interest expenses increased by $348 thousand (4%) in 2003, reflecting
management efforts to control expense growth. Merger related expenses totaled
$1.54 million in 2003, consisting primarily of legal and investment banking
services. The increase in variable staff costs totaled $469,000 and consisted of
higher incentive related compensation and temporary help expense.
Compensation related expenses increased by $789,000 (14%). Excluding the
abovementioned $469,000 increase in variable staff costs, all other compensation
expenses increased by $320,000 (6%). Components of this increase included
increases of $222,000 in salaries, $123,000 in retirement plan costs, and
$93,000 in payroll taxes. The higher salaries were partially offset by a
$104,000 increase in salary deferrals related to loan originations. Full time
equivalent staff totaled 112 at year-end 2003, compared to 109 at year-end 2002,
reflecting the staff of 5 in the new Enfield office opened in November, 2003.
All other non-merger, non-compensation expenses increased by $28,000 in 2003.
Occupancy expense increased by $86,000 and director fees and expenses increased
by $149,000, while non-merger related net legal fees decreased by $317,000
(reversing an increase in 2002 due to loan collections activities and corporate
and shareholder related matters). The efficiency ratio increased to 67.4% in
2003 from 65.3% in 2002 due to the lower net interest margin.
Income Tax Expense
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 45% in 2003 compared to 29% in 2002. Alliance operates a
passive investment corporation for the purpose of servicing real estate related
loans. Under State statutes, income in passive investment corporations and
dividends to their parents are not subject to Connecticut Corporate Business
Tax. Income tax expense also benefited from investments in marketable equity
securities; dividends on these securities are substantially exempt from
taxation. The effective income tax rate also benefited from non-taxable
increases in cash surrender value of bank owned life insurance contracts.
Comprehensive Income
In addition to net income recorded in the consolidated income statements,
comprehensive income includes changes (after tax) in the unrealized market gains
and losses of investment securities available for sale. Comprehensive income was
$5.25 million in 2003 compared to $2.99 million in 2002. The components of
comprehensive income are detailed in the consolidated statements of changes in
shareholders' equity. The net unrealized loss on securities declined
substantially in 2003 due to lower interest rates, improved market spreads on
corporate debt securities, and the realized losses on corporate securities
discussed previously. Please see the following discussion on investment
securities.
Financial Condition - December 31, 2003 Versus 2002
Balance Sheet Summary
Total assets increased by $24.0 million (5.8%) to $438.5 million at December 31,
2003, versus $414.5 million at December 31, 2002. Growth was primarily funded by
deposits in the new Enfield office opened in November 2003 and proceeds were
primarily held in short-term investments, which increased to $21.0 million at
year-end; these holdings are expected to be reinvested primarily in higher
yielding investment securities in 2004. Total regular loans (excluding
government guaranteed loans) increased by 2.7% to $259.4 million, from $252.5
million at the end of the 2002 fiscal year. Total deposits increased by $8.1
million (2.5%) to $339.0 million at December 31, 2003, versus $330.8 million at
the end of the 2002 fiscal year. Deposit growth included $18.6 million in
balances opened in the new Enfield office.
Total investment securities increased to $109.4 million at December 31, 2003
versus $93.2 million at December 31, 2002. Securities purchases were
concentrated in U.S. government agency and adjustable mortgage backed securities
with three year interest rate maturities. During the first quarter of 2003,
Alliance eliminated the held to maturity classification of investment
securities, which had decreased to a balance of $5.4 million at year-end 2002.
These securities were transferred to the available for sale category, where all
security purchases will be recorded for the foreseeable future. Loans held for
sale decreased to $1.4 million at December 31, 2003 versus $11.9 million at
December 31, 2002 due to the decrease in mortgage demand near the end of 2003.
Government guaranteed loans decreased to $16.9 million at December 31, 2003
versus $25.8 million at December 31, 2002 due to prepayments.
11
The loan loss allowance increased by $125,000 (3.1%) to $4.18 million at
December 31, 2003, versus $4.05 million at the end of the 2002 fiscal year. Net
loan recoveries of $22,000 were recorded in the year 2003, compared to net
recoveries of $2,000 in the prior year. The allowance measured 1.61% of total
regular loans at December 31, 2003, compared to 1.60% at the previous year-end.
Nonaccruing loans totaled $6.6 million (1.50% of total assets) at year-end, up
from $2.4 million (0.59% of total assets) one year ago. This increase was
primarily due to two commercial loan relationships which became impaired in
2003. These loans were on a non-accrual status as of December 31, 2003 and were
being actively managed for collections. The most recent loan payments received
on these relationships were in December, 2003 and August, 2003. The allowance
for losses on impaired loans, which is included in the overall allowance for
loan losses, totaled $407,000 at December 31, 2003 versus $127,000 at December
31, 2002. There were no foreclosed assets in 2003 or 2002.
Shareholders' equity totaled $32.8 million at December 31, 2003 versus $25.6
million at the end of the 2002 fiscal year. Shareholders' equity measured 7.5%
of total assets, up from 6.2% at year-end 2002. Alliance's capital remained in
excess of all regulatory requirements and continued to exceed the requirement
for the highest regulatory capital category of "Well Capitalized". Shareholders'
equity increased principally due to an improvement of $3.8 million in net
unrealized gains and losses on investment securities, $2.8 million in additional
paid-in capital recorded for stock option exercises and related tax benefits,
and net income of $1.5 million for 2003, partially offset by dividends of
$805,000.
Cash and Cash Equivalents
Cash and equivalents increased by $17 million (94%) at year-end 2003 compared to
year-end 2002. This increase was largely due to new deposits in the Enfield
office in the last two months of the year. These proceeds were held in
anticipation of reinvestment in loans and securities in 2004. The average
balance of cash and equivalents was $28 million in 2003, compared to $29 million
in 2002. The yield on short term investments declined to 1.07% in 2003 compared
to 1.73% in 2002. Short-term investments were generally held in agented federal
funds, money market mutual funds, and money market preferred stock.
Investment Securities
Alliance invests in securities primarily to produce income, in conjunction with
the loan portfolio. Investment securities also play a role in other aspects of
asset/liability management, including liquidity, interest rate sensitivity, and
capital adequacy. Alliance also purchases 100% U.S. Government guaranteed loans
as an alternative to securities, based on market conditions.
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 $16 million (17%) at year-end 2003,
compared to year-end 2002. This growth partially offset runoff of government
guaranteed loans ($9 million) and a decrease in the balance of loans held for
sale ($11 million). Securities purchases totaled a record $67 million in 2003
and consisted primarily of U.S. government agency and mortgage backed securities
with interest rates fixed for no more than five years, and in most cases for no
more than three years. Other liabilities included $7 million representing
securities purchased and not settled at year-end 2003.
Proceeds from securities repayments, maturities, and calls increased to an
unusually high $38 million in 2003 from $25 million in the prior year due to the
unusually low interest rates during the middle of the year. Proceeds from sales
totaled $17 million. As in the prior year, in 2003 Alliance took advantage of
market conditions to adjust the portfolio with the objective of reducing credit
and interest rate risk by selling longer duration corporate securities and
purchasing primarily government agency and mortgage-backed securities.
At December 31, 2003, total securities of $109 million included government
agency and mortgage backed securities totaling $76 million (70%). All of these
securities were rated AA or AAA. The government agency securities were primarily
three year securities with one time calls in the first 12-18 months. The
mortgage backed securities were primarily 3/1 adjustable mortgage backed pass
through securities issued by government agencies.
Corporate debt and equity securities totaled $30 million (27%) and equity
investments in the Federal Home Loan Bank of Boston and Bankers Bank Northeast
totaled $3 million (3%). All of the accruing corporate securities had ratings by
Moody's and/or Standard & Poors, except for $6 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 corporate debt securities had an average rating of BBB+ at December
31, 2003. The corporate securities portfolio at year-end 2003 included $14
million in trust preferred securities, $5 million in other corporate debt, and
$11 million in marketable equity securities (consisting of primarily financial
institution preferred stocks and utility common stocks).
12
The securities portfolio includes six corporate debt securities which are
non-investment grade. Four of these securities, with a fair value of $4.4
million, were rated in the BB- to BB+ range, with a total net unrealized loss of
$221,000. Two securities were defaulted and had been written down to a net
balance of $200,000 at December 31, 2003; these two securities were being held
without accrual of interest. The marketable equity security portfolio had a net
unrealized gain of $28,000, net of gross unrealized losses of $331,000
concentrated in a government agency preferred equity and a utility common
equity. 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. For further information about the assessment of securities impairment,
please see Note 4 to the consolidated financial statements.
The total investment securities portfolio had a $0.6 million net unrealized gain
as of December 31, 2003, measuring 0.5% 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 improved spreads on corporate
securities, lower interest rates, and losses realized on corporate securities.
The average balance of investment securities was $94 million and $95 million in
2003 and 2002, respectively. The average taxable equivalent securities yield
declined to 4.56% from 6.41%, reflecting securities sales and runoff, followed
by reinvestment into shorter duration government agency and mortgage backed
securities.
The securities portfolio is purchased for yield and most securities are held for
long term income. Management anticipates that the securities portfolio will
continue to contribute satisfactorily to Alliance's earnings and risk management
objectives.
Total Loans
December 31 (dollars in millions) 2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
Residential mortgages $ 98.4 35.6% $ 78.8 28.3% $ 60.0 23.6% $ 58.3 25.5% $ 54.2 28.3%
Commercial mortgages 85.6 31.0 94.7 34.0 87.5 34.4 73.9 32.4 52.7 27.5
Other commercial loans 39.5 14.3 39.6 14.2 37.7 14.8 38.7 17.0 35.0 18.2
Consumer loans 36.0 13.0 39.4 14.2 39.8 15.5 35.6 15.6 33.8 17.7
- ---------------------------------------------------------------------------------------------------------------------------------
Total regular loans 259.5 93.9 252.5 90.7 225.0 88.3 206.5 90.5 175.7 91.7
Government guaranteed loans 16.9 6.1 25.8 9.3 29.6 11.7 21.8 9.5 15.9 8.3
- ---------------------------------------------------------------------------------------------------------------------------------
Total loans $ 276.4 100.0% $278.3 100.0% $ 254.6 100.0% $ 228.3 100.0% $ 191.6 100.0%
=================================================================================================================================
Total loans decreased by $2 million (1%) to $276 million at year-end 2003,
compared to year-end 2002. Total regular loans increased by $7 million (3%). The
growth was primarily in the portfolio of residential mortgage loans, which
increased by $20 million (25%). 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 later in the year. Total commercial and consumer
loans decreased by $13 million (7%), reflecting the impact of accelerated
prepayments and a slow economy.
The combined amount of loans originated in 2003 totaled a record $189 million,
increasing by $68 million (56%) over the prior year. This increase was
concentrated in residential mortgage originations, which totaled $135 million, a
$71 million (111%) increase over the prior year. Mortgage originations in 2003
included $87 million originated for sale, $21 million originated for portfolio,
and $27 million of "Fee Free Refi" loans also originated for portfolio.
Commercial loan originations in 2003 totaled $40 million, compared to $39
million in the prior year. Originations of consumer loans and lines of credit
totaled $14 million in 2003, compared to $18 million in 2002. Due to the decline
in loan applications near the end of the year, commitments to originate new
loans decreased to $7 million at year-end 2003, compared to $26 million at the
prior year-end.
The balance of residential mortgage loans held for sale declined by $11 million
to $1 million at December 31, 2003, reflecting the lower pipeline of loans in
process at that time. In accordance with the Company's policy, Alliance had
nonrecourse commitments to sell all loans held for sale and rate locked
originations commitments intended for sale at year-end 2003 and 2002. Loan sales
are made with servicing released on a flow basis, primarily to one investor, at
prices exceeding the cost basis or expected cost basis of those loans.
Throughout the year, management controlled the retention of long-term fixed rate
loans to limit interest rate risk based on the anticipated future increase in
long-term rates. Reflecting this emphasis, Alliance also refrained from any
significant purchases of fixed rate government guaranteed loans in 2003, with
the result that this portfolio decreased by $9 million to $17 million at
year-end 2003.
The average balance of total loans (including loans held for sale) increased by
$21 million (8%). The average balance of residential mortgages increased by $28
million. The yield on average loans declined to 6.07% from 6.76% due to lower
rates on loans originated, compared to rates on loans paid-off.
13
Nonperforming Assets
December 31
(in millions) 2003 2002 2001 2000 1999
- ---------------------------------------------------------------------
Nonaccruing loans $ 6.6 $ 2.4 $ 2.1 $ 1.1 $ 1.2
Foreclosed assets - - - - 0.1
- ---------------------------------------------------------------------
Total nonperforming assets $ 6.6 $ 2.4 $ 2.1 $ 1.1 $ 1.3
=====================================================================
Nonperforming assets as 1.5% 0.6% 0.6% 0.3% 0.4%
a percentage of total
assets
Nonperforming assets totaled $6.6 million (1.50% of total assets) at year-end
2003, up from $2.4 million (0.59% of total assets) at year-end 2002. This
increase was primarily due to two commercial loan relationships which became
impaired in 2003. These loans were on a non-accrual status as of December 31,
2003 and were being actively managed for collections. The most recent loan
payments received on these relationships were in December, 2003 and August,
2003. There were no properties acquired through foreclosure in 2003 or 2002.
Loans delinquent 30-89 days totaled $3.4 million at year-end 2003, which was
unchanged from the prior year-end. These loans measured 1.30% of total regular
loans at year-end 2003. At that date, commercial classified loans with a
potential to become nonperforming based on identified credit weaknesses totaled
$3.0 million, compared to $7.1 million at year-end 2002. The total at year-end
2003 included a $1.8 million commercial loan which was being paid in accordance
with its terms and which was viewed as adequately protected by established
repayment sources.
Allowance for Loan Losses
Years ended December 31
(in thousands) 2003 2002 2001 2000 1999
- --------------------------------------------------------------
Beginning balance $ 4,050 $ 3,700 $ 3,400 $ 3,200 $ 3,060
Charge-offs:
Residential mortgage (1) (1) (17) (85) (28)
Consumer (6) (51) (20) (22) (114)
Commercial (22) (5) (111) (107) (4)
- --------------------------------------------------------------
Total Charge-offs (29) (57) (148) (214) (146)
- --------------------------------------------------------------
Recoveries:
Residential mortgage 14 15 62 22 -
Consumer 37 38 57 29 31
Commercial - 6 4 28 18
- --------------------------------------------------------------
Total Recoveries 51 59 123 79 49
- --------------------------------------------------------------
Net Recoveries
(Charge-offs) 22 2 (25) (135) (97)
Provision for losses 103 348 325 335 237
- --------------------------------------------------------------
Ending balance $ 4,175 $ 4,050 $ 3,700 $ 3,400 $ 3,200
==============================================================
Net charge-offs (recoveries) as a percentage of average loans by type:
Years ended December 31 2003 2002 2001 2000 1999
-----------------------------------------------------------------
Residential mortgage (0.01)% (0.01)% (0.07)% 0.11% 0.05%
Consumer (0.08) 0.01 (0.10) (0.02) 0.25
Commercial 0.02 - 0.09 0.08 (0.02)
Total 0.01 - 0.01 0.06 0.05
Allowance as a
percentage of
outstanding loans by
type at year end:
Residential mortgage 0.90% 0.90% 0.94% 0.90% 0.82%
Consumer 0.91 0.83 0.91 0.91 1.33
Commercial 1.98 1.80 1.75 1.80 2.10
Subtotal (regular
loans) 1.61 1.60 1.64 1.65 1.82
Government
guaranteed loans - - - - -
Total loans 1.51 1.46 1.44 1.49 1.67
The loan loss allowance increased by $125,000 (3.1%) to $4.18 million at
December 31, 2003, versus $4.05 million at the end of the 2002 fiscal year. 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. For the last five years, net loan
charge-offs and nonperforming loans have been at comparatively low levels. While
the allowance has increased each year, the ratio of the allowance to regular
loans has declined due to the changed composition of the portfolio. The
methodology for the determination of the allowance for loan losses is described
earlier as a critical accounting policy and in Note 1 to the consolidated
financial statements.
The allowance for loan losses absorbs net loan charge-offs. Alliance recorded
$22,000 in net recoveries in 2003, compared to net recoveries of $2,000 in the
prior year. The allowance is increased by the provision for loan losses, which
totaled $103,000 in 2003, compared to $348,000 in 2001. There were no
significant changes in the ratio of the allowance to the various loan pools in
2003. The ratio of the allowance to nonperforming loans decreased to 64% at
year-end 2003, compared to 166% at year-end 2002, due to the increase in
nonperforming loans in 2003. The allowance measured 1.61% of total regular loans
at December 31, 2003, compared to 1.60% at the previous year-end.
14
The impaired loan allowance is included with the total commercial loan allowance
in the accompanying tables. Total impaired loans were $6.2 million at year-end
2003, compared to $1.8 million at the prior year-end. The valuation allowance on
impaired loans was $407,000 and $127,000 at year-end 2003 and 2002,
respectively. The $4.4 million increase in impaired loans was primarily due to
the two large commercial loans which became nonaccruing in 2003, as previously
described. The increase in the valuation allowance on impaired loans reflects
management's assessment that the fair value of collateral on one of these loans
had declined due to a potential increase in the foreclosure period. The other
large non-accruing commercial loan was also deemed impaired. No impairment loss
allowance was assessed on this loan which was making partial payments in
anticipation of a recapitalization and was assessed as adequately
collateralized. Commercial loans newly delinquent for 90 days are evaluated for
impairment. The trend of delinquencies and collateral coverage of those loans
can affect the future level of the impaired loan allowance.
December 31 (dollars in thousands) 2003 2002 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses by type of loan:
Residential mortgage $ 885 21.2% $ 708 17.5% $ 567 15.3% $ 525 15.4% $ 442 13.8%
Consumer 325 7.8 327 8.1 363 9.8 326 9.6 449 14.0
Commercial 2,471 59.2 2,423 59.8 2,186 59.1 2,021 59.4 1,842 57.6
Unallocated 494 11.8 592 14.6 584 15.8 528 15.6 467 14.6
- -----------------------------------------------------------------------------------------------------------------------------------
Total $4,175 100.0% $4,050 100.0% $3,700 100.0% $3,400 100.0% $3,200 100.0%
===================================================================================================================================
Deposits, Borrowings and Other Liabilities
December 31
(dollars in millions) 2003 2002 % change
- ---------------------------------------------------------------
Demand deposits $ 35.9 $ 35.6 1.0%
NOW deposits 41.8 39.1 7.0
Money market deposits 37.2 44.0 (15.3)
Savings deposits 100.7 77.6 29.7
Time deposits < $100 thousand 99.5 109.5 (9.2)
Time deposits > $100 thousand 23.9 25.1 (4.7)
--
- -------------------------------------------------------------
Total deposits $ 339.0 $ 330.9 2.5%
- -------------------------------------------------------------
Personal $ 282.2 $ 270.0 4.5%
Non-personal 56.8 60.9 6.8
- -------------------------------------------------------------
Total deposits $ 339.0 $ 330.9 2.5%
- -------------------------------------------------------------
Total deposits increased by $8 million (2%) at year-end 2003 compared to 2002.
Overall demand for interest bearing accounts was believed to have softened due
to low interest rates and improvements in capital markets. Deposit growth
included the benefit of $19 million in new deposits in the Enfield office, which
was opened in the fourth quarter of 2003. Most of the Enfield deposits were in
specially promoted savings accounts, and total bankwide savings accounts
increased by $23 million (30%) in 2003. Transaction account balances increased
by $3 million (4%). Money market account balances decreased by $7 million (15%),
including a $4 million decrease in municipal balances which were expected to be
short term in nature. Time accounts decreased by $11 million (8%) as some
maturing longer term account balances were withdrawn in the current low rate
environment. Due to the slower economy and the new Enfield office, the Bank did
not provide time account pricing promotions as actively as in some prior years.
Time account demand continued to generally favor shorter-term maturities due to
the unwillingness of customers to lock in longer-term rates at a time when rates
were at the lowest levels in four decades.
Alliance does not generally solicit higher rate jumbo deposits, and does not
solicit wholesale deposits outside of its market area. In addition to its
on-balance sheet deposit account offerings, Alliance also offers a third party
commercial sweep money market fund product. Sweep balances often measure up to
30% of the total funds provided by commercial customers.
Borrowings increased by $4 million (6%) to partially offset runoff of medium
term time accounts. Average deposits increased by $9 million (3%) in 2003 due to
higher average savings and transactions account balances. Average borrowings
increased by $8 million (16%), including higher short term borrowings before the
Enfield office opening. The average cost of interest bearing liabilities
declined to 2.64% in 2003 from 3.36% in 2002.
At year-end 2003, other liabilities included a $7 million securities settlement
liability on securities purchases near year-end which were pending settlement.
This liability was $2 million at year-end 2002.
MARKET RISK
Interest Rate Risk
Market risk is the sensitivity of income and equity to changes in interest rates
and other market driven rates or prices. Alliance's most significant form of
market risk is interest rate risk, which is the sensitivity of income and of
equity to fluctuations in interest rates. Alliance manages its assets and
liabilities to maximize net interest income, while also giving consideration to
interest rate risk, liquidity, credit risk, capital adequacy, customer demand,
and other market factors. Alliance's main interest rate risk focus is to limit
the risks related to rising interest rates. Actions taken to limit these risks
contribute to Alliance's sensitivity to lower earnings in the event of declining
interest rates and have reduced the interest spread. The unanticipated decrease
in rates during the last three years to the lowest rates in decades has
contributed to the decline in the net interest margin.
Alliance has an Asset/Liability Committee (ALCO) which meets weekly. ALCO sets
interest rates and product prices, monitors the balance sheet, and establishes
goals and strategies. On a monthly basis, the Board of Directors reviews key
Asset/Liability ratios and ALCO minutes, and on a quarterly basis the Board
reviews interest rate sensitivity analyses, related assumptions, and ALCO
strategies. The Board also approves ALCO policies.
15
Alliance uses a quarterly dynamic simulation model to measure interest rate
risk. This model evaluates changes which might result from a 200 basis point
rate shock. Income is modeled on a monthly basis over 24 months. Cash flows are
discounted to measure the economic value of assets and liabilities, in order to
measure equity at risk. Due to the very low interest rate environment, in 2002
Alliance changed its methodology to limit the downward rate shock to 150 basis
points. Alliance's model normally assumes that rate shocks will not change the
shape of the yield curve. With the short-term Treasury rate at 0.90% at year-end
2003, even a 150 basis point downward rate shock was viewed as improbable.
Model assumptions are made for each major category of interest bearing assets
and liabilities regarding their index, margin, spread, optionality, repricing
life, and growth. The base case model is based on Alliance's budget, and rate
shocks are compared to this base case. Budgeted growth and asset quality is
normally assumed to be insensitive to rate shocks within the range tested.
Alliance evaluates movements in market interest rates and prices, peer group
comparisons, and actual product behaviors. A review is performed quarterly to
compare actual experience to expectations based on the model. The model is also
an integral component of Alliance's budgeting and planning processes.
Modeling assumptions involve significant estimations and uncertainties, and
actual results may differ from estimated results. Factors which could cause such
differences include economic conditions, banking industry profitability and
competitive factors, changing consumer preferences, and changes in capital
markets' behavior.
Management's most significant judgment is the modeling of the interest
sensitivity of non-maturity deposits. Alliance models money market deposits as
adjusting for 60% of three month interest rate changes. Demand deposits are
modeled as non interest rate sensitive; NOW accounts are modeled as 20%
sensitive in 24-48 months, and the remaining 80% sensitive in eight years.
Savings accounts were previously modeled as 30% sensitive in eight years and 70%
sensitive in twelve years. Due to the account growth in 2002, Alliance changed
this assumption so that savings accounts are now modeled as 30% sensitive in six
months, 20% sensitive in eighteen months, 30% sensitive in eight years, and 20%
sensitive in twelve years.
The most significant events affecting interest rate sensitivity during the year
were: (1) the growth of savings accounts in the new Enfield office including the
benefit of a pricing promotion in the fourth quarter; (2) the sale and
prepayment of long duration purchased assets and reinvestment in securities with
three year interest rate durations; (3) the prepayment of commercial loans and
reinvestment in similar loans with lower rates; and (4) the growth and
refinancing of residential mortgages with interest rates fixed in the 3-15 year
range. The impact of these events was that the duration of total short and long
term investments decreased and the duration of total liabilities increased.
These events tended to increase Alliance's interest sensitivity in 2003,
following an increase in 2002. Additionally, with interest rates so low, the
proportionate impact of interest rate shocks on discounted cash flows is
magnified.
Alliance measures its static interest rate sensitivity by computing interest
rate gaps between interest sensitive assets and liabilities for specific
timeframes and cumulatively, based on the assumptions used in the dynamic model.
Alliance's policy limits the one year interest rate gap as a percentage of
earning assets to a range of (10%) - 10%. This one year interest rate gap ratio
increased from 6% at year-end 2002 to 12% at year-end 2003 indicating an
increased sensitivity in the repricing of assets over liabilities (e.g., a
positive one year gap). Alliance normally has a positive one year gap, due in
part to its portfolio of prime based consumer and commercial loans, which
reprice within a month when the prime interest rate changes.
For net interest income at risk, Alliance has a policy limiting the change in
net interest income to 10% based on modeled rate shocks. Because of the positive
one year gap, net income is normally projected to increase if interest rates
rise, and to decrease if interest rates fall. At year-end 2002, income at risk
(i.e. the change in net interest income) was an increase of 8% and a decrease of
8% based on upward and downward rate changes, respectively. At year-end 2003,
income was more at risk, increasing 14% and decreasing 11% based on the modeled
upward and downward rate shocks, respectively.
For equity at risk, Alliance has a policy limit of 15% based on modeled rate
shocks. Equity is normally projected to increase modestly if interest rates rise
and to decrease if interest rates fall. Equity at risk normally includes the
long run optionality of major asset and liability categories. At year-end 2002,
equity at risk was 8% and (16%) based on upward and downward rate changes,
respectively. At year-end 2003, equity at risk increased to 10% and (18%) based
on the modeled upward and downward rate shocks, respectively.
Those measurements which were in excess of policy guidelines at year-end 2003
were approved as minor exceptions to policy limits. The interest rate gap was
expected to come into conformity with the guideline in 2004 due to anticipated
growth of loans and securities. Interest rates are widely expected to increase
in 2004 due to the strengthening economy, and the income and equity at risk in
downward environments were viewed at year-end 2003 as reasonable based on
expected interest rates and expected investment securities purchases and loan
demand.
16
The model suggests 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 unusually low interest rate environment, uncertainty in the modeling process
has increased. Loan prepayment speeds had accelerated in mid-year due to the
unusually low rate environment, but had slowed by the end of the year after
interest rates turned up. Future deposit flows also reflect uncertainties
related to the competitiveness of other financial products in a possible rising
rate environment. The impact of other capital market conditions may also
significantly affect interest rate sensitivity.
Market Price Risk
Market driven prices that affect Alliance's market risk are primarily prices in
the markets for corporate debt and equity securities. Changes in market risk
perceptions and risk tolerance can contribute to changes in securities prices
affecting Alliance's capital and liquidity, and indirectly affecting earnings if
market changes constrict portfolio management alternatives available to Alliance
or contribute to circumstances affecting the potential impairment of a security.
Alliance monitors the prices of its investment securities at least once a month.
Alliance manages this risk primarily by setting portfolio limits, including
limits by issuer, by industry, by security type, and for the overall size of the
corporate debt and equity security portfolios.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Cash Flows
Alliance's primary source of funds is dividends received from Tolland Bank, and
its primary uses of funds are dividends paid to shareholders and semi-annual
interest payments related to its subsidiaries' trust preferred securities.
Additionally, merger related expenses were a major use of funds in 2003 and
proceeds from the exercise of stock options were an additional source of funds.
In recent years, dividends from Tolland Bank have been paid from current period
earnings of Tolland Bank, although additional amounts could be paid subject to
regulatory restrictions as further described in Note 10 to the consolidated
financial statements. In the past, proceeds from trust preferred securities have
been used as a source of funds for additional equity investments in Tolland Bank
to fund asset growth.
Tolland Bank's primary liquidity needs are to fund loan originations and the use
of credit commitments, along with deposit withdrawals and maturing borrowings.
Tolland Bank manages its day-to-day liquidity by maintaining short-term
investments and/or utilizing short-term borrowings. In addition to its FHLBB
relationship, Tolland Bank maintains credit facilities for short-term borrowings
and repurchase agreements. Additionally, Tolland Bank is eligible to obtain
short-term advances from the Federal Reserve Bank of Boston. During 2003,
advances and repayments of short term borrowings and the origination and sale of
residential mortgages were significant cash related activities.
During 2003, loan originations and asset purchases were funded by amortization
and other payments of loans and investments, as well as by deposit growth and
FHLBB borrowings.
In 2003, the primary uses of funds were the origination of loans, drawdowns on
loan commitments, and purchases of investment securities. The primary sources of
funds were loan and securities payments and calls, along with growth in the
various categories of deposits and securities sales. Total cash and equivalents
increased by $17 million due to inflows of deposits in the new Enfield office in
the fourth quarter. These funds were anticipated to be reinvested in loans and
investment securities, including $7 million of securities purchased and not yet
settled at year-end. In the event of additional funding needs, Tolland Bank
could choose to utilize its various credit sources, or obtain funds from the
investment portfolio either by selling securities available for sale or
obtaining loans collateralized by investment securities. Additionally, the
portfolio of government guaranteed loans represents a readily marketable pool of
assets, although management has no present intent to sell these assets.
During 2003, short-term investments averaged $13 million. The Bank had ample
liquidity from short-term investments in the first part of the year, and near
the end of the year. The Bank utilized short-term borrowings actively in the
August - October period to fund growth in loans and investments. Short-term
borrowings averaged $2 million for the year. Tolland Bank did not encounter any
unusual liquidity needs during 2002.
Capital Resources
Total shareholders' equity increased by $7.3 million (29%) in 2003, following a
$3.5 million (16%) increase in 2002. At December 31, 2003, the ratio of
shareholders' equity to total assets had increased to 7.5% from 6.2% a year
earlier. In addition to retained earnings of $0.7 million, factors contributing
to higher shareholders' equity in 2003 included other comprehensive income of
$3.8 million related to net unrealized security gains and $2.8 million related
to the exercise of stock options. Specified stock option exercises were required
by the merger agreement, and shareholders' equity included $1.0 million for the
exercise price proceeds and $1.8 million for the tax benefit resulting from the
option exercises (this benefit contributed to the $1.5 million balance of
prepaid income taxes included in other assets at December 31, 2003).
17
Capital ratios for Alliance and Tolland Bank exceeded all applicable regulatory
requirements for all periods presented. At December 31, 2003, Alliance and
Tolland Bank were "Well Capitalized", the highest capital category defined by
banking regulators. Trust preferred securities of $7.1 million provide
regulatory capital at the lower costs associated with debt financing, as
compared to equity financing. The Board assesses capital levels quarterly in
accordance with the Capital and Dividends policy.
Book value per share increased to $11.49 at the end of 2003, compared to $9.58
at the end of 2002. Alliance declared total dividends of $0.30 per share in
2003, a 5% increase compared to the previous year. The dividend payout ratio
measured 55% in 2003, compared to 21% in the prior year, due primarily to the
lower earnings in 2003.
As discussed in Note 1 to the consolidated financial statements, FASB
Interpretation No. 46R was adopted at the end of the fourth quarter of 2003.
This interpretation had the effect of increasing borrowings in the consolidated
financial statements by $105,000, representing the common equity of Alliance
Capital Trust II held by Alliance which was financed by a note payable by
Alliance to Alliance Capital Trust II. Because this interpretation was adopted
at the end of 2003, there was no effect on the 2003 income statement. The future
income statement effect is expected to be immaterial. The regulatory impact of
deconsolidating trust preferred securities under Interpretation No. 46R remains
under review, and no assurance can be given that the present regulatory
treatment of trust preferred securities as Tier I capital will continue. These
securities include a covenant which allows them to be called without penalty by
the issuer in the event of an adverse change in the regulatory treatment.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The following tables summarize Alliance's contractual obligations (by period in
which payments are due) and commercial commitments (by period of expiration) as
of December 31, 2003.
Contractual Obligations
Payments Due By Period
------------------------------------------------------------------
Under 1 After 5
December 31, 2003 (in thousands) Year 1-3 years 3-5 Years Years Total
- -------------------------------------------------------------------------------------------------------------
FHLB advances $ 1,500 $ 8,500 $ 13,500 $ 27,552 $ 51,052
Other borrowed funds - - - 7,105 7,105
Operating leases 112 138 97 - 347
Purchase commitments 168 168 - - 336
- -------------------------------------------------------------------------------------------------------------
Total $ 1,780 $ 8,806 $ 13,597 $ 34,657 $ 58,840
=============================================================================================================
Other Commitments
Amount of Commitment Expirations By Period
------------------------------------------------------------------
Under 1 After 5
December 31, 2003 (in thousands) Year 1-3 years 3-5 Years Years Total
- -------------------------------------------------------------------------------------------------------------
Home equity lines of credit $ 375 $ 1,107 $ 4,842 $ 21,317 $ 27,641
Other lines of credit 15,483 3,017 - 18,500
Loan origination commitments 7,047 - - - 7,047
Standby letters of credit 1,089 341 115 - 1,545
- -------------------------------------------------------------------------------------------------------------
Total $ 23,994 $ 4,465 $ 4,957 $ 21,317 $ 54,733
=============================================================================================================
18
COMPARISON OF 2002 VERSUS 2001
Summary
Alliance reported record earnings of $3.5 million in 2002, representing a 16%
increase over earnings of $3.0 million in 2001. On a diluted basis, earnings per
share were $1.26 in 2002, compared to $1.12 in the prior year. Alliance earned a
15% return on shareholders' equity in 2002, matching the return in the prior
year. Results for 2002 included a net securities gain of $158 thousand compared
to a net securities loss of $476 thousand in 2001. For the year 2002, cash
dividends declared totaled $0.286 per share, an increase of 5% over the dividend
paid in 2001.
Highlights of Alliance's performance in 2002 included:
o Strong loan and deposit growth offset shrinking margins due to low interest
rates.
o Service charges and other income rose by 54%, including insurance/investment
services, mortgage banking, deposit services, merchant processing, and
electronic banking income.
o Alliance's ranking as one of the 15 highest performing companies among the
218 small public thrifts in the annual performance ranking by SNL Financial
in its May, 2002 issue of Thrift Investor.
o Tolland Bank's 18% share of Tolland County bank deposits.
o Achievement in 2002 of Alliance's objective of returning at least 15% on
shareholders' equity, notwithstanding a difficult economic environment and
falling interest rates. Results included a 16% increase in net profit and an
11% increase in loans and deposits. No net loan charge-offs or foreclosed
assets were recorded for 2002.
o An eleven-for-ten stock split effected in the form of a 10% stock dividend
and a $0.286 cash dividend.
Results Of Operations--2002 Versus 2001
Net income was a record $3.5 million in 2002, representing a 16% increase over
net income of $3.0 million in 2001. On a diluted basis, earnings per share were
$1.26 in 2002, compared to $1.12 in the prior year. Alliance earned a 15% return
on shareholders' equity in 2002, matching the return in the prior year.
The return on average assets increased to 0.86% in 2002, compared to 0.82% in
the prior year. This increase was achieved despite a 0.29% decrease in the net
interest margin due to the low interest rates experienced in 2002. The return on
assets benefited from a net securities gain in 2002, compared to a net loss in
2001.
The efficiency ratio (ratio of non-interest expense to the sum of taxable
equivalent net interest income plus service charges and other income) increased
to 65% in 2002 from 62% in the prior year. The increase in 2002's efficiency
ratio was due to the tightening of the net interest margin.
In 2002, Alliance recorded $1.61 million in securities gains and $1.45 million
in securities losses for a net gain of $158,000. The gains on securities
resulted from sales of securities consistent with Alliance's long-term strategy
of reducing the portfolio's long duration corporate debt securities in favor of
locally originated loans with shorter expected average lives. The losses in 2002
were related to two insurance company debt securities which were written down to
fair value. Alliance also recorded net gains of $93 thousand on the sale of land
in 2002.
Net interest income increased by $337,000 (3%) in 2002. Total average earning
assets increased by $37.0 million (11%), but this increase was mostly offset by
a 0.29% decline in the net interest margin from 3.71% in 2001 to 3.42% in 2002.
The net interest margin measured 3.37% in the fourth quarter of 2002. The yield
on earning assets declined by 1.15% in 2002, reflecting the impact of falling
rates as well as higher levels of overnight investments in 2002. The cost of
interest bearing liabilities declined by a lesser 0.98%.
At the end of 2002, Alliance maintained an asset sensitive one year interest
rate gap which was expected to benefit interest income based on anticipated
future interest rate increases.
Service charges and other income increased by $918,000 (54%) in 2002. This
income totaled a record $2.60 million, representing 0.65% of average assets and
17% of revenues. Sources of growth in 2002 included deposit account income
($133,000); residential and commercial loan secondary market income ($170,000);
annuity commissions ($114,000); and bank-owned life insurance income ($171,000).
Alliance placed a strategic emphasis on fee based services, which expanded the
product offerings available to the customer base and also reduced the
sensitivity of total income to changes in interest margins.
The loan loss provision increased by $23,000 for the year. As noted, there were
no net loan chargeoffs in 2002, and negligible net loan chargeoffs were reported
in 2001.
19
Non-interest expense increased by $1.22 million (14%) in 2002, primarily due to
increased compensation related expense ($974,000). Other major expense increases
included a $150,000 increase in legal expenses for corporate and shareholder
related matters and a $170,000 increase in legal expenses related to loan
collections and recoveries. All other total overhead remained essentially
unchanged consistent with management's objectives.
Financial Condition--December 31, 2002 Versus 2001
Total assets increased to a year-end record total of $415 million in 2002,
rising by $30 million (8%) from $385 million at the prior year-end. Asset growth
was propelled by increases in regular loans, which increased by $28 million
(12%) (regular loans exclude purchased government guaranteed loans). Loan
increases were attributable to lower interest rates in the second half of the
year, together with the popularity of Tolland Bank's consumer loan products and
active sales development efforts in both the consumer and commercial markets.
Total investment securities decreased by $5 million. Securities sales totaled
$36 million, consisting primarily of longer maturity corporate debt securities
to shorten asset duration. Securities purchases were concentrated in 1-3 year
government agencies, adjustable mortgage-backed securities, and AA rated
corporate debt securities. The combined result of these balance sheet strategies
was to reduce the percentage of long lived assets held by Tolland Bank.
Residential mortgages held for sale increased by $9 million in 2002 due to the
high originations volume in the fourth quarter.
The allowance for loan losses increased by $350,000 to $4.05 million in 2002.
The allowance measured 1.60% of total regular loans at year-end 2002 compared to
1.64% at the prior year-end, reflecting the higher proportion of lower risk
residential mortgages in 2002. The allowance measured 166% of nonaccruing loans,
which totaled $2.4 million at year-end 2002, compared to $2.1 million at the
prior year-end. The ratio of nonaccruing loans/assets measured 0.59% of assets
at year-end 2002, compared to 0.56% at the prior year-end. Alliance had no
foreclosed assets at any time during 2002.
Total deposits increased in 2002 by $27 million (9%), with increases in all
major categories. Most of the growth was in savings account balances, which grew
by $17 million (29%). Average transaction account balances grew by $7 million
(12%); these accounts include checking and NOW accounts. Both savings and
transactions accounts represented lower cost funding sources, which helped
offset lower loan rates, and represented relationships with customers closely
tied to Tolland Bank's growing branch system.
Shareholders' equity totaled $25.6 million at December 31, 2002, increasing by
16% during the year, including the benefit of retained earnings and additional
paid-in capital related to stock option exercises. The ratio of shareholders'
equity to total assets improved to 6.2% at year-end 2002, increasing from 5.7%
at the prior year-end. This reflected Alliance's long term strategy of
supporting internal growth and improving capital adequacy. Alliance's capital
continued to exceed the requirement for the highest regulatory capital category
of "Well Capitalized".
Total book value per share increased to $9.58 at year-end 2002, an increase of
12% from $8.58 at the prior year-end. The quarterly dividend payout ratio
measured 22% of earnings in the most recent quarter, reflecting the higher
dividends after the stock split.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the sensitivity of income and equity to changes in interest rates
and other market driven rates or prices. Information regarding disclosures about
interest rate risk appears under Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in the section on Interest
Rate Risk.
Other market driven prices that affect the Company's market risk are primarily
prices in the markets for corporate debt and equity securities. Changes in
market risk perceptions and risk tolerance can contribute to changes in
securities prices affecting the Company's capital and liquidity, and indirectly
affecting earnings if market changes constrict portfolio management alternatives
available to the Company or contribute to circumstances affecting the potential
impairment of a security. The Company monitors the prices of its investment
securities at least once a month. The Company manages this risk primarily by
setting portfolio limits, including limits by issuer, by industry, by security
type, and for the overall size of the corporate debt and equity security
portfolios.
20
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report
To the Shareholders and Board of Directors of
Alliance Bancorp of New England, Inc.:
We have audited the accompanying consolidated balance sheets of Alliance Bancorp
of New England, Inc. and subsidiaries as of December 31, 2003 and 2002, and the
related consolidated income statements, statements of changes in shareholders'
equity, and statements of cash flows for each of the years in the three-year
period ended December 31, 2003. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Alliance Bancorp of
New England, Inc. and subsidiaries as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
------------
Hartford, Connecticut
February 18, 2004
21
Consolidated Balance Sheets
December 31
(in thousands, except share data) 2003 2002
- -----------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 14,822 $ 13,941
Short-term investments 21,002 4,520
- -----------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 35,824 18,461
Securities available for sale (at fair value) 109,375 87,812
Securities held to maturity
(fair value of $5,984 in 2002) - 5,372
Loans held for sale 1,399 11,942
Residential mortgage loans 98,403 78,717
Commercial mortgage loans 85,603 94,692
Other commercial loans 39,501 39,550
Consumer loans 35,905 39,547
Government guaranteed loans 16,940 25,756
- -----------------------------------------------------------------------------------------------------------------
Total loans 276,352 278,262
Less: Allowance for loan losses (4,175) (4,050)
- -----------------------------------------------------------------------------------------------------------------
Net loans 272,177 274,212
Premises and equipment, net 6,391 5,104
Accrued interest income receivable 2,038 2,417
Cash surrender value of life insurance 6,475 6,207
Other assets 4,869 2,987
- -----------------------------------------------------------------------------------------------------------------
Total assets $ 438,548 $ 414,514
=================================================================================================================
Liabilities and Shareholders' Equity
Demand deposits $ 35,939 $ 35,600
NOW deposits 41,826 39,091
Money market deposits 37,236 43,964
Savings deposits 100,654 77,605
Time deposits 123,310 134,572
- -----------------------------------------------------------------------------------------------------------------
Total deposits 338,965 330,832
Borrowings 58,157 54,510
Other liabilities 8,585 3,622
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 405,707 388,964
Preferred stock, $0.01 par value; 100,000 shares
authorized, none issued - -
Common stock, $0.01 par value; authorized 4,000,000
shares; issued 3,059,600 in 2003 and 2,868,105 in 2002;
outstanding 2,859,001 in 2003 and 2,667,506 in 2002 31 29
Additional paid-in capital 15,633 12,791
Retained earnings 19,846 19,183
Accumulated other comprehensive income (loss), net 440 (3,344)
Treasury stock (200,599 shares) (3,109) (3,109)
- -----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 32,841 25,550
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 438,548 $ 414,514
=================================================================================================================
See accompanying notes to consolidated financial statements
22
Consolidated Income Statements
Years ended December 31
(in thousands, except share data) 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------------
Interest and Dividend Income
Loans $ 17,102 $ 18,007 $ 18,931
Debt securities 3,214 4,859 5,207
Dividends on equity securities 739 839 957
Other interest and dividend income 463 302 371
- --------------------------------------------------------------------------------------------------------------------
Total interest and dividend income 21,518 24,007 25,466
- --------------------------------------------------------------------------------------------------------------------
Interest Expense
Deposits 5,985 8,335 10,308
Borrowings 3,376 3,124 2,947
- --------------------------------------------------------------------------------------------------------------------
Total interest expense 9,361 11,459 13,255
- --------------------------------------------------------------------------------------------------------------------
12,157 12,548 12,211
Net Interest Income
Provision for Loan Losses 103 348 325
====================================================================================================================
Net interest income after provision for loan losses 12,054 12,200 11,886
Non-Interest Income
Service charges and other income 3,779 2,603 1,685
Net (losses) gains on securities (659) 158 (476)
Net gains on assets - 93 9
- --------------------------------------------------------------------------------------------------------------------
Total non-interest income 3,120 2,854 1,218
Non-Interest Expense
Compensation and benefits 6,458 5,669 4,695
Occupancy 776 690 717
Data processing services and equipment 1,202 1,228 1,294
Office and insurance 579 567 545
Purchased services 1,299 1,233 979
Merger related 1,542 - -
Other 656 766 702
- --------------------------------------------------------------------------------------------------------------------
Total non-interest expense 12,512 10,153 8,932
- --------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,662 4,901 4,172
Income tax expense 1,194 1,443 1,197
- --------------------------------------------------------------------------------------------------------------------
Net Income $ 1,468 $ 3,458 $ 2,975
====================================================================================================================
Share Data
Basic earnings per share $ 0.54 $ 1.33 $ 1.16
====================================================================================================================
Diluted earnings per share $ 0.51 $ 1.26 $ 1.12
====================================================================================================================
Average basic shares outstanding 2,700,537 2,600,855 2,566,886
Average additional dilutive shares 163,309 140,473 79,948
- --------------------------------------------------------------------------------------------------------------------
Average diluted shares 2,863,846 2,741,328 2,646,834
====================================================================================================================
See accompanying notes to consolidated financial statements
23
Consolidated Statements of Changes in Shareholders' Equity
Accumulated
Additional Other com-
Common paid-in Retained prehensive Treasury
(in thousands, except share data) stock capital earnings income (loss) stock Total
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 $ 25 $ 11,516 $ 14,198 $ (4,515) $ (3,109) $ 18,115
==========================================================================================================================
Comprehensive income
Net income 2,975 2,975
Unrealized gains on securities,
net of reclassification adjustment 1,638 1,638
--------
Comprehensive income 4,613
Dividends declared ($0.273 per share) (700) (700)
Exercise of stock options 61 61
- --------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 $ 25 $ 11,577 $ 16,473 $ (2,877) $ (3,109) $ 22,089
==========================================================================================================================
Comprehensive income
Net income 3,458 3,458
Unrealized losses on securities,
net of reclassification adjustment (467) (467)
--------
Comprehensive income 2,991
Dividends declared ($0.286 per share) (738) (738)
Stock split effected in the form of a
stock dividend 3 (10) (7)
Directors' deferred stock compensation 158 158
Exercise of stock options 1 662 663
Tax benefit from exercise of stock options 394 394
- --------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ 29 $ 12,791 $ 19,183 $ (3,344) $ (3,109) $ 25,550
==========================================================================================================================
Comprehensive income
Net income 1,468 1,468
Unrealized gains on securities,
net of reclassification adjustment 3,784 3,784
--------
Comprehensive income 5,252
Dividends declared ($0.30 per share) (805) (805)
Directors' deferred stock compensation 42 42
Exercise of stock options 2 1,022 1,024
Tax benefit from exercise of stock options 1,778 1,778
- --------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 $ 31 $ 15,633 $ 19,846 $ 440 $ (3,109) $ 32,841
==========================================================================================================================
Disclosure of reclassification adjustment
Years ended December 31 (in thousands) 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------------------
Unrealized holding gains (losses) arising during $ 3,349 $ (363) $ 1,299
the year, net of income tax effect of ($1,725),
$187 and ($669), respectively
Less reclassification adjustment for losses (gains)
included in net income, net of income tax effect
of ($224), $54 and ($137), respectively 435 (104) 339
- --------------------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) on securities $ 3,784 $ (467) $ 1,638
==========================================================================================================================
See accompanying notes to consolidated financial statements
24
Consolidated Statements of Cash Flows
Years ended December 31 (in thousands) 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 1,468 $ 3,458 $ 2,975
Adjustments to reconcile net income to
net cash provided (used) by operating activities:
Provision for loan losses 103 348 325
Depreciation and amortization 684 732 508
Net loss (gain) on securities and other assets 659 (251) 467
Loans originated for sale (87,122) (33,333) (13,406)
Proceeds from loans sold 97,665 24,448 11,349
Increase (decrease) in other liabilities 4,963 1,178 (798)
Decrease in accrued interest income receivable 379 395 377
Tax benefit from exercise of stock options 1,778 394 -
(Increase) decrease in other assets (2,163) (441) 1,156
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 18,414 (3,072) 2,953
Investing Activities:
Securities available for sale:
Proceeds from repayments and maturities 26,993 11,636 587
Proceeds from sales 16,663 35,735 9,755
Proceeds from calls 10,430 9,000 1,000
Purchases (67,447) (55,478) (37,445)
Securities held to maturity:
Proceeds from amortization and maturities 286 3,126 4,013
Proceeds from calls - 1,000 2,005
Net decrease (increase) in total loans 1,881 (23,693) (27,498)
Proceeds from sales of foreclosed assets - - 230
Purchases of premises and equipment (1,751) (151) (240)
Proceeds from sales of premises and equipment - 211 195
Purchases of life insurance - - (3,000)
- --------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (12,945) (18,614) (50,398)
Financing Activities:
Net increase in interest-bearing deposits 7,794 25,521 19,488
Net increase in demand deposits 339 1,953 3,354
Proceeds from FHLBB advances 80,794 27,163 20,709
Principal repayments of FHLBB advances (77,252) (27,622) (11,240)
Net increase (decrease) in other borrowings - (2,100) 900
Exercise of stock options 1,024 663 61
Cash dividends paid (805) (745) (700)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 11,894 24,833 32,572
- --------------------------------------------------------------------------------------------------------------------
Net Change in Cash and Cash Equivalents 17,363 3,147 (14,873)
Cash and cash equivalents at beginning of the year 18,461 15,314 30,187
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of the year $ 35,824 $ 18,461 $ 15,314
====================================================================================================================
Supplemental Information on Cash Payments
Interest $ 9,354 $ 11,455 $ 13,295
Income taxes 1,090 1,650 1,550
====================================================================================================================
Supplemental Information on Non-cash Transactions
Securities transferred to available for sale $ 5,087 $ 3,166 $ 11,882
Securities transferred to held to maturity - - 7,045
Net loans transferred to foreclosed assets - - 206
- --------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
25
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
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 the common stock
of Alliance Capital Trust I ("Trust I") and Alliance Capital Trust II ("Trust
II") which have issued trust preferred securities.
Tolland Bank provides consumer and commercial banking services from its ten
offices located in and around Tolland County, Connecticut. 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 for all periods include Alliance, the
Bank, TIC, and ARS. Trust I and Trust II were also included in the consolidated
financial statements prior to December 31, 2003, at which time these
subsidiaries were deconsolidated upon adoption of FASB Interpretation No. 46
(revised), as described below under "Recent Accounting Standards" and in Note 9.
All significant intercompany accounts and transactions have been eliminated in
consolidation. The Company and its consolidated 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 consolidated 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. The Company uses the accrual method of accounting for
all material items of income and expense.
Significant Estimates. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and disclosure of contingent assets and
liabilities, as of the date of the financial statements and the reported amounts
of revenues and expenses for the periods presented. The actual results of
Alliance could differ from those estimates.
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); establishing the deferred tax asset valuation
allowance; and determining the obligation for pension and other post-retirement
benefits. 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.
Securities. Beginning with the first quarter of 2003, purchases of investment
securities have been and will be accounted for as available for sale for the
foreseeable future due to management's elimination of the held to maturity
category (see Note 3). Prior to 2003, debt securities for which the Company had
the positive intent and ability to hold to maturity, were classified as held to
maturity securities and reported at amortized cost. Securities available for
sale are 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 income
taxes. 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.
Realized gains or losses on the sale of securities are generally computed on a
specific identified cost basis and reported in net gain (loss) on securities in
the consolidated income statements. Premiums and discounts on debt securities
are recognized as an adjustment of yield by the interest method.
26
Any decline in the fair value of a security below its cost that is considered to
be other-than-temporary is reflected as a realized loss in the consolidated
income statements. Securities with unrealized losses are periodically reviewed
by Management to assess the loss. A written evaluation is performed by
Management for debt securities with unrealized losses which are not rated as
investment grade by the rating agencies that draws a conclusion as to whether
there has been an other-than-temporary impairment.
Loan Sale Activities. Residential mortgage loans originated and held for sale
are classified separately in the consolidated balance sheets and reported at the
lower of amortized cost or market value (based on secondary market prices). An
adjustment to reduce these loans to market value was not required at December
31, 2003 and 2002. Gains or losses on sale are determined using the specific
identification method. All loans held for sale were committed for sale when
their rates were locked; loan sale commitments generally are settled within 30
days of closing.
The Company generally sells its residential mortgage loans on a servicing
released basis. The Company also sells participation interests in commercial
loans which the Company holds and services. All sales are made on a non-recourse
basis and there are no transfers that qualify as secured borrowings.
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities, establishes accounting and
reporting standards for derivative instruments and hedging activities and
requires that all derivatives be recognized on the balance sheet at fair value.
The Company uses forward delivery contracts (sale commitments) to reduce market
risk on (i) closed residential mortgage loans held for sale and (ii) rate-locked
loans (origination commitments) expected to be closed and held for sale. All
such loans are committed for sale without recourse at prices exceeding cost.
Forward sale commitments are entered into with respect to individual loan
origination commitments, with delivery conditional on the closing of the related
loans. The forward sale commitments generally require delivery within 60 days of
closing the related loan and conformity with secondary market guidelines
including loan documentation. The total outstanding amount of forward mortgage
sale commitments was $2,411,000 at December 31, 2003 and $21,404,000 at December
31, 2002. Forward sale commitments and interest rate lock (origination)
commitments are recorded in the consolidated balance sheets at fair value. The
Company had no other derivative instruments under SFAS No. 133 at December 31,
2003 and 2002.
Changes in the fair value of forward sale commitments and related origination
commitments have not been material, and are equal in amount due to the Company's
practice of entering into a sale commitment at the time it issues an origination
commitment for a particular loan. Changes in the fair value of forward sale
commitments, interest rate lock (origination) commitments and hedged loans held
for sale are included in service charges and other income (a component of
non-interest income in the consolidated income statements).
Forward sale commitments related to closed loans are accounted for as fair value
hedges under SFAS No. 133. Changes in the fair value of such commitments and
loans are both recorded in the consolidated income statements and, accordingly,
any hedge ineffectiveness is included in reported net income. However, because
the Company's forward sale commitments relate to specific closed loans, changes
in the fair value of the forward commitments offset changes in the fair value of
the related loans and, accordingly, there is no hedge ineffectiveness recognized
as a gain or loss in earnings. All components of the changes in fair value of
the forward sale commitments are included in the assessment of hedge
effectiveness.
The Company's objective in entering into forward sale commitments is to minimize
market risk attributable to changes in interest rates during the regular conduct
of its mortgage banking activities. The Company regularly originates residential
mortgage loans intended for sale into the secondary market. The Company's
strategy is to enter into customary secondary market commitments with strong
counterparties for conforming residential mortgage products.
Total Loans. Total loans (representing all loans other than those held for sale)
are reported at the principal amount outstanding, net of charge-offs, and
adjusted for the net amount of deferred fees and costs, premiums and discounts.
Net loans are total loans less the allowance for loan losses.
Premiums and discounts are recognized as an adjustment of yield by the interest
method based on the contractual terms of the loan. Commitment fees are
considered to be an adjustment to the loan yield. Loan origination fees and
certain direct costs of loan origination are also deferred and accounted for as
an adjustment to yield based on the contractual amortization of the loan,
adjusted for prepayments.
27
Accrued interest income receivable is included in the consolidated balance
sheets. Most of the Company's loans require interest payments monthly in
arrears. The Company generally places loans on nonaccrual status when a payment
becomes more than three months past due. The Company may also place a loan on
nonaccrual sooner if a concern develops as to the ultimate collection of
principal or interest. The Company may continue to accrue interest on certain
commercial loans which are well secured and in the process of collection.
Generally, when a commercial loan is placed on nonaccrual status, any interest
receivable over ninety days is charged-off against income. Interest receivable
on all other loans is charged-off against income entirely when the loan is
placed on nonaccrual status. Payments received on nonaccruing loans are normally
applied first against unpaid interest.
Allowance for Loan Losses and Provision for Loan Losses. The allowance for loan
losses is maintained at a level estimated by the Company to be adequate to
absorb estimated credit losses associated with the loan portfolio. The provision
for loan losses is a charge to current period income necessary to maintain the
loan loss allowance at the level estimated to be adequate by the Company.
The Company's Credit Committee is responsible for assessing the adequacy of the
loan loss allowance. The Committee provides its quarterly assessment to the
Board of Directors for approval of the amount of the loan loss allowance.
The Company consistently follows a detailed methodology for determining the loan
loss allowance. This methodology is based on the loan categories shown on the
consolidated balance sheets. Allowances for loan impairment are maintained in
accordance with SFAS No. 114, Accounting by Creditors for Impairment of a Loan.
Additionally, amounts are allocated to individual pools of loans based on the
size of each pool, the expected average life of each pool, the inherent annual
loss rate based on an assessment of historic losses for that pool, and
Management's assessment of current environmental conditions that could affect
individual loan categories. Finally, an unallocated component is assigned to the
overall allowance based on Management's assessment of the overall risks and
trends of the portfolio, uncertainties in the loan loss estimation process and
other relevant factors.
A loan is considered impaired when it is probable that the Company will not be
able to collect all amounts due according to the contractual terms of the loan
agreement. Management excludes large groups of smaller balance homogeneous
loans, including residential mortgages and consumer loans, which are evaluated
collectively for impairment. The amount of impairment represents the difference
between the present value of the expected cash flows related to the loan, using
the original contractual interest rate, and its recorded amount, or, as a
practical expedient for collateral dependent loans, the difference between the
appraised value of the collateral and the recorded amount of the loan. When
foreclosure is probable, impairment is measured based on the fair value of the
collateral. The Company's method of recognition of interest income on impaired
loans is consistent with the method of recognition of interest on all loans.
Current estimates of loan losses may vary from future estimates and from
ultimate loan loss experience. While the allowance is based on an analysis of
individual loans and loan pools, the entire allowance is available to absorb
losses on any loan or loan category. The Company's estimates of the
collectibility of principal and interest are based in many cases on estimates of
future borrower cash flows and market conditions and expectations. In addition,
federal and state regulatory agencies, as an integral part of their examination
process, periodically review the Company's allowance for loan losses. Based on
information available to them at the time of their examination, and on
regulatory guidelines then in effect, such agencies may require the Company to
recognize adjustments to the allowance for loan losses.
Loan Charge-offs. Loans are charged-off in whole or in part when it has been
determined that there has been a loss of principal. For real estate secured
loans, this determination is normally made in conjunction with a current
appraisal analysis. Charge-offs (recoveries) are charged (credited) to the
allowance for loan losses. Initial writedowns on recently acquired foreclosed
assets are also charged-off against the allowance for loan losses.
Foreclosed Assets. Foreclosed assets are transferred from the loan portfolio and
recorded initially at the lower of cost or fair value less selling costs, with
any necessary write down from carrying value recognized as a charge-off against
the allowance for loan losses.
The Company periodically obtains and analyzes appraisals of foreclosed real
estate. If the fair value less selling costs is less than the carrying value of
these assets, these assets are written down to that value by crediting the
amount to a valuation allowance. Gains and losses on the ultimate disposition of
foreclosed assets, and provisions to increase the valuation allowance, are
reported in net gains on assets in the consolidated income statements.
Estimating the carrying value of foreclosed real estate generally involves the
same uncertainties discussed above regarding the allowance for loan losses. Net
income and expense related to the operations of foreclosed real estate is
included in other non-interest expense in the consolidated income statements.
Premises and Equipment. Premises and equipment are reported at cost less
accumulated depreciation and amortization. Depreciation is charged to expense on
a straight-line basis over the estimated useful lives of the related assets.
Leasehold improvements are amortized on a straight-line basis over the shorter
of the lease term or the estimated useful lives of the improvements. Estimated
lives are 15 to 40 years for buildings and improvements and 3 to 20 years for
furniture, fixtures, software and equipment. Expenditures for maintenance and
repairs are charged to expense as they are incurred.
Cash Surrender Value of Life Insurance. The cash surrender value of bank-owned
life insurance relates to policies on employees and directors of Tolland Bank
for which the Bank is the beneficiary. Increases in cash surrender value are
included in non-interest income in the consolidated income statements. These
policies are issued for the general account of the insurance companies.
28
Revenues and Expenses from Sales of Non Deposit Investment Products. In
conjunction with third parties, certain employees of the Company are licensed to
sell non deposit investment products, including mutual funds, annuities and
other insurance products. The Company records as non-interest income revenues
earned from product sales in accordance with the terms of revenue sharing
agreements with these third parties. The Company currently employs the persons
authorized to sell these products and pays most of the direct costs related to
the sales activities. These costs are charged to expense as incurred, and are
classified primarily in compensation and benefits expense. Under a previous
agreement in effect prior to November 2002, a third party vendor employed its
sales representative and incurred all of the costs of engaging in the sales
activities.
Deferred Income Taxes. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to temporary differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases, and tax operating loss carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
future taxable income. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. The valuation allowance for deferred tax assets is subject to
ongoing adjustment based on changes in circumstances that affect management's
judgment about the likelihood that the associated tax benefits will be realized.
Adjustments to increase or decrease the valuation allowance for deferred tax
assets related to unrealized losses on securities are charged or credited,
respectively, to accumulated other comprehensive income (loss), while all other
adjustments are charged or credited to income tax expense.
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.
The following table 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.
Years ended December 31
(in thousands, except share data) 2003 2002 2001
- -------------------------------------------------------------------------
Net income, as reported $ 1,468 $ 3,458 $ 2,975
Deduct total stock-based
compensation expense determined
under the fair-value-based
method, net of related tax effects - (905) (36)
=========================================================================
Pro forma net income $ 1,468 $ 2,553 $ 2,939
=========================================================================
Basic earnings per share
As reported $ 0.54 $ 1.33 $ 1.16
Pro forma 0.54 0.98 1.15
Diluted earnings per share
As reported 0.51 1.26 1.12
Pro forma 0.51 0.93 1.11
The fair value of each option grant was estimated using the Black-Scholes
option-pricing model in accordance with the weighted-average assumptions
indicated below. The resulting weighted-average fair values were $3.81 in 2002
and $2.17 in 2001. There were no options granted in 2003.
Assumptions used for grants made
in the year ended December 31 2003 2002 2001
=============================================================
Expected dividend yield - 2.00% 3.05%
Expected volatility - 31.12% 37.07%
Risk free interest rate - 3.82% 5.04%
Expected life (years) - 8.00 10.00
Deferred Stock Plans. The Directors' Deferred Compensation Plan allows directors
to defer director fees and to receive payment in shares of the Company's common
stock. The number of shares is fixed based on current share prices at the time
the fees are recorded as expense, and directors must receive payment in shares.
Accordingly, the deferred compensation is credited to additional paid-in capital
when earned. When the deferred compensation is paid in shares, the difference
between the current share price and the price at the deferral date is also
recorded in additional paid-in capital.
The Stock Option Income Deferral Plan permits option holders to elect a
stock-for-stock exercise to defer to this plan shares with a value equal to the
taxable income that would have otherwise resulted from the option exercise.
Elections to exercise stock options under this plan are reported as exercised
stock options. Such elections are not recorded in shareholders' equity until the
end of the deferral period.
29
Retirement Benefit Plans. The Company has a noncontributory pension plan
covering substantially all employees working 20 hours per week or more. Costs
related to this plan, based upon actuarial computations of current and future
benefits for employees, are charged to non-interest expense and are funded in
accordance with the requirements of the Employee Retirement Income Security Act
("ERISA"). The Company also accrues costs related to unfunded employee plans
providing for supplemental retirement benefits. The Tolland Bank Directors'
Retirement Plan provides for payments to former directors upon retirement from
the board. The Company accrues costs related to these unfunded plans over the
period of service, based on various actuarial assumptions including normal
retirement expectations.
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. Diluted earnings per share are calculated
by dividing net income by the sum of the number of shares used for basic
earnings per share and an incremental number of shares reflecting the potential
dilution that could occur if common stock equivalents (such as stock options)
were converted into common stock using the treasury stock method. The
incremental number of shares also includes all shares in the Stock Option Income
Deferral Plan.
Cash Flow Reporting. The Company uses the indirect method to report cash flows
from operating activities. Under this method, net income is reconciled to net
cash flow from operating activities. Net reporting of cash transactions
affecting balance sheet items has been used where permitted. The Company
considers due from banks and short-term investments to be cash equivalents.
Comprehensive Income. Comprehensive income includes net income and any changes
in equity from non-owner sources that are not included in the income statement,
including changes in unrealized gains and losses on securities, net of
applicable income taxes.
Business Segments. An operating segment is a component of a business for which
separate financial information is available that is evaluated regularly by the
chief operating decision-maker in deciding how to allocate resources and
evaluate performance. The Company's operations are limited to financial services
provided within the framework of a community bank, and decisions are based
generally on specific market areas and product offerings. Accordingly, based on
the financial information now regularly evaluated by the Company's chief
operating decision-maker, the Company operates in a single business segment.
Recent Accounting Developments. In January 2003, the Financial Accounting
Standards Board ("FASB") issued Interpretation No. 46 ("FIN 46"), Consolidation
of Variable Interest Entities, which establishes accounting guidance for
consolidation of variable interest entities (VIEs) that function to support the
activities of the primary beneficiary. The primary beneficiary of a VIE 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 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.
In December 2003, the FASB issued a revision to FIN 46 ("FIN 46R") which
replaces the original standard and revises various provisions (including
effective dates). Under the new guidance, special effective date provisions
apply to enterprises that have fully or partially applied FIN 46 prior to the
issuance of FIN 46R. Otherwise, application of FIN 46 or FIN 46R is required in
financial statements of public entities that have interests in structures that
are commonly referred to as special-purpose entities for periods ending after
December 15, 2003. Application by public entities, other than small business
issuers, for all other types of variable interest entities is required in
financial statements for periods ending after March 15, 2004.
The Company adopted FIN 46R as of December 31, 2003 and deconsolidated its two
trust preferred subsidiaries (Trust I and Trust II), which are further described
in Note 9. This deconsolidation, which did not have a significant effect,
resulted in the recognition of a liability for the Company's junior subordinated
debentures issued to the subsidiaries and the derecognition of the liability
previously reported for the subsidiaries' trust preferred securities.
In April 2003, the 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 SFAS No. 133. This statement did not have a material
impact on the Company's consolidated financial statements.
30
In May 2003, the 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. Under
SFAS No. 150, certain freestanding financial instruments that embody obligations
of the issuer, and that are now classified as equity, must be classified as
liabilities (or as assets in some circumstances). SFAS No. 150 also includes
required disclosures for financial instruments within its scope. For SEC
registrants such as the Company, SFAS No. 150 was generally effective for
financial instruments entered into or modified after May 31, 2003 and otherwise
at the beginning of the first interim period beginning after June 15, 2003 (July
1, 2003 for the Company). The effective date has been deferred indefinitely for
certain types of mandatorily redeemable financial instruments. The Company
currently does not have any financial instruments that are within the scope of
SFAS No. 150.
In November 2003, Emerging Issues Task Force Issue No. 03-1, The Meaning of
Other Than Temporary Impairment and its Application to Certain Investments,
established new disclosure requirements for temporarily-impaired investments,
effective for fiscal years ending after December 15, 2003. The disclosures
include aggregated data in tabular format and narrative information. The
required disclosures have been made in the Note 4.
In December 2003, the FASB issued a revision to SFAS No. 132, Employers'
Disclosures About Pensions and Other Postretirement Benefits, which requires new
annual disclosures about the types of plan assets, investment strategy,
measurement date, plan obligations, and cash flows, as well as interim period
disclosure of the components of the net periodic benefit cost. This revision is
effective for annual financial statements for fiscal years ending after December
31, 2003. The required disclosures have been made in Note 11. The new interim
period disclosures are required for periods beginning after December 15, 2003.
An additional requirement to disclose future expected benefit payments is
effective for fiscal years ending after June 15, 2004.
2. Pending Merger
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, Inc."
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.
NHSB has adopted a plan to convert to a public company simultaneously with the
acquisitions. As part of the conversion, NHSB formed a new holding company and
conducted a subscription offering of its common stock to eligible depositors and
others. The transactions are expected to be completed on or about April 1, 2004.
3. Cash and Cash Equivalents
Short-term investments at December 31 are summarized below:
(in thousands) 2003 2002
==========================================================
Federal funds sold $20,000 $ -
Money market preferred stock 1,000 4,500
Other short-term investments 2 20
- ----------------------------------------------------------
Total short-term investments $21,002 $ 4,520
==========================================================
The Company is required to maintain certain average vault cash and cash reserve
balances with the Federal Reserve Bank of Boston. Cash and due from banks
included amounts so required of $3,723,000 and $3,780,000 at December 31, 2003
and 2002, respectively.
31
4. Securities
Information concerning the securities portfolios is summarized below as of
December 31, 2003 and 2002.
Amortized Unrealized Unrealized Fair
December 31, 2003 (in thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------
Securities available for sale
U.S. Government and agency debt $ 45,041 $ 276 $ (23) $ 45,294
U.S. Agency mortgage-backed debt 31,140 77 (239) 30,978
Trust preferred 13,839 849 (175) 14,513
Other corporate debt 4,758 69 (268) 4,559
Marketable equity 10,965 359 (331) 10,993
Non-marketable equity 3,038 - - 3,038
- ------------------------------------------------------------------------------------------------------------------------
Total available for sale $ 108,781 $ 1,630 $ (1,036) $ 109,375
========================================================================================================================
December 31, 2002 (in thousands)
- ------------------------------------------------------------------------------------------------------------------------
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
========================================================================================================================
Gross unrealized losses and related fair values at December 31, 2003 are
summarized below, aggregated by security category and length of time the
individual securities have been in a continuous unrealized loss position:
Less than 12 months 12 months or longer Total
---------------------------------------------------------------------------------
Unrealized Unrealized Unrealized
December 31, 2003 (in thousands) Fair Value Losses Fair Value Losses Fair Value Losses
- ---------------------------------------------------------------------------------------------------------------------------
U.S. Government and agency debt $ 4,806 $ (23) $ - $ - $ 4,806 $ (23)
U.S. Agency mortgage-backed debt 20,838 (239) - - 20,838 (239)
Trust preferred 1,519 (23) 1,444 (152) 2,963 (175)
Other corporate debt - - 3,333 (268) 3,333 (268)
Marketable equity 1,380 (116) 3,130 (215) 4,510 (331)
- ---------------------------------------------------------------------------------------------------------------------------
Total temporarily-impaired securities $ 28,543 $ (401) $ 7,907 $ (635) $ 36,450 $ (1,036)
===========================================================================================================================
The Company's assessment of debt security impairment focuses on whether the
security is expected to perform in accordance with its terms, including
repayment of the principal amount at maturity. An affirmative assessment is
generally deemed to indicate that impairment is not other than temporary. The
Company's assessment relies primarily on debt ratings from major rating
agencies. Unrealized losses on debt securities that have investment grade
ratings are generally viewed as temporary impairments. Non-investment grade
securities are additionally evaluated based on the issuer's financial condition,
financial results, payment performance, corporate news, analyst reports, and the
market price of other securities issued by these companies. Debt securities with
unrealized losses that have prepayment risk are additionally evaluated to assess
whether other-than-temporary impairment exists as a result of
other-than-temporary changes in market conditions.
Temporarily-impaired securities in the categories of U.S. Government and agency
debt, U.S. Agency mortgage-backed debt, and trust preferred securities were all
investment grade rated at December 31, 2003. The unrealized losses were
generally related to changes in market prices for similar securities. The U.S.
Agency mortgage-backed debt securities are primarily three year hybrid
adjustable rate mortgage pass through securities, which bear interest at a fixed
rate for three years and then adjust annually at a spread over the one year U.S.
Treasury constant maturity index. These unrealized losses are primarily related
to instruments purchased in mid 2003, when interest rates were comparatively
low. Management expects that the unrealized losses will be substantially
eliminated within the three year time horizon prior to the first interest rate
adjustment for these securities.
32
The unrealized losses on trust preferred securities were concentrated in one A+
rated international diversified life insurance company with a fair value of
$1,444,000 and an unrealized loss of $152,000 at December 31, 2003. This fixed
rate security had an AA- minus rating when it was purchased in 1999. The
unrealized loss reflects the slight downgrade, market changes, and the
comparatively long maturity in 2049. Considering all pertinent factors,
management concluded that the impairment is temporary at December 31, 2003.
The unrealized losses on corporate debt securities consist of losses of $268,000
on three corporate securities that were rated BB/BB- at December 31, 2003. These
securities had been rated A-/BBB+ at purchase in 1998/1999. Two of these issuers
were acquired by non-investment grade companies. The other issuer was downgraded
due to the impact of the recession and industry conditions. The unrealized loss
on these securities has declined in recent periods and represents 7.4% of the
amortized cost at December 31, 2003. Management has evaluated the credit quality
of these issuers and expects that these securities will perform in accordance
with their terms. The final maturities of these securities are in 2025, 2026,
and 2035.
The Company's assessment of equity security impairment focuses on expectations
for market price recovery within a reasonable period of time, as well as
expected future earnings and dividends. The Company's equity securities are all
purchased for dividend yield. Securities with significant unrealized losses are
evaluated based on the same factors used to evaluate non-investment grade debt
securities, as well as the magnitude and duration of the losses. The unrealized
losses on equity securities at December 31, 2003 were concentrated in two
securities. A preferred stock issued by a U.S. Government agency, with a fair
value of $1,380,000 and an unrealized loss of $116,000, had an investment grade
rating of AA-. Management believes that the unrealized loss is temporary and
reflects general market conditions. The second security was a utility common
stock that began to decline in value at the time of a general market sell-off in
this sector. At December 31, 2003, the fair value of this security was $650,000
and its unrealized loss was $195,000. Based on the consistent rate of price
recovery recorded in 2003, and on continuing improving expectations for the
issuer, management believes the positive price trend for this security would
eliminate the unrealized loss in 2004 and, accordingly the unrealized loss was
viewed as temporary.
The amortized cost, estimated fair value and average yield of debt securities
are shown in the following table by remaining period to contractual maturity.
Actual maturities may differ from contractual maturities because certain issuers
have the right to call or prepay obligations with or without call or prepayment
penalties. The average yield is calculated based on amortized cost.
December 31, 2003 Amortized Fair Average
(dollars in thousands) Cost Value Yield
- ---------------------------------------------------------------------
Debt securities available for sale
Due in 1 year or less $3,026 $ 3,052 2.76%
Due after 1 to 5 years 42,591 42,901 2.99
Due after 5 to 10 years 2,295 2,435 6.74
Due after 10 years 46,866 46,956 4.76
- -------------------------------------------------------------------
Total available for sale $94,778 $95,344 3.95%
===================================================================
At December 31, 2003, the Company had $41,738,000 of securities available for
sale with call provisions.
Non-marketable equity securities consist of the required investment in Federal
Home Loan Bank of Boston stock and an equity investment in Bankers Bank
Northeast.
At December 31, 2003, securities with an amortized cost of $2,023,000 were
pledged to secure treasury, tax and loan accounts and public deposits.
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 accounted for as
available for sale and the same treatment will be applied to purchases for the
foreseeable future. Ten securities with an amortized cost totaling $5,087,000
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 2002, three corporate debt securities with an amortized cost of
$3,166,000 were transferred to available for sale from held to maturity due to
evidence of significant deterioration in the issuers' credit worthiness through
the downgrading by a credit agency and other relevant factors. The unrealized
loss at the transfer date of $489,000 (net of income taxes of $252,000) was
recorded as an increase in the accumulated other comprehensive loss.
33
On January 1, 2001, the Company adopted SFAS No. 133 and, as permitted by this
accounting standard, reclassified certain debt securities from held to maturity
to available for sale. Securities with a total amortized cost of $11,882,000,
net of a transfer adjustment of $1,571,000 and with a total fair value of
$11,585,000, were transferred to available for sale from held to maturity. The
net unrealized loss on these securities was $1,868,000. At the same time,
securities with an amortized cost totaling $7,045,000 and a fair value totaling
$7,127,000 were transferred to held to maturity from available for sale. The net
unrealized gain on these securities was $82,000 at the transfer date. The
overall impact of these transfers was an increase of $196,000 in the accumulated
other comprehensive loss.
A summary of the net gains (losses) on securities is shown in the following
table:
Years ended December 31
(in thousands) 2003 2002 2001
- ------------------------------------------------------------------------
Debt securities sold
Gross gains $1,392 $1,265 $ 165
Gross losses - (89) (130)
- ------------------------------------------------------------------------
Net gains on sales 1,392 1,176 35
- ------------------------------------------------------------------------
Equity securities sold
Gross gains 371 332 79
Gross losses (370) - (1)
========================================================================
Net gains on sales 1 332 78
========================================================================
Net gains on sales of securities 1,393 1,508 113
Losses on writedowns (2,052) (1,364) (589)
Gain on equity shares awarded - 14 -
========================================================================
Net (losses) gains on securities $ (659) $ 158 $ (476)
========================================================================
In 2003, a debt security with an amortized cost of $1,547,000 was written down
by $1,397,000, and an equity security with a cost of $988,000 was written down
by $504,000. Also in 2003, a debt security with an amortized cost of $200,000
was written down by $150,000 after having been written down by $849,000 in 2002.
A debt security with an amortized cost of $515,000 was written off in 2002 after
having been written down by $515,000 in 2001. Also in 2001, an equity security
with a cost of $119,000 was written down by $74,000. These writedowns reflect
other-than-temporary declines in the value of these securities.
5. Total Loans and Allowance for Loan Losses
December 31 (in thousands) 2003 2002
- ------------------------------------------------------------
Residential mortgage loans $ 98,403 $ 78,717
Commercial mortgage loans 85,603 94,692
Other commercial loans:
Construction 12,080 12,093
Other commercial
Real estate secured 13,159 11,831
Non real estate secured 14,262 15,626
- ------------------------------------------------------------
Total other commercial loans 39,501 39,550
Consumer loans:
Installment 6,639 11,291
Home equity line loans 28,143 26,811
Other consumer loans 1,123 1,445
- ------------------------------------------------------------
Total consumer loans 35,905 39,547
- ------------------------------------------------------------
Total regular loans 259,412 252,506
Purchased government guaranteed loans 16,940 25,756
- ------------------------------------------------------------
Total loans $276,352 $278,262
============================================================
Premiums on loans purchased,
deferred loan fees and costs, net $ 906 $ 673
Following is information about the Company's nonaccruing loans and impaired
loans:
December 31 (in thousands) 2003 2002
- -----------------------------------------------------------
Total nonaccruing loans $ 6,571 $ 2,433
Accruing loans past due 90 days or more 572 185
- -----------------------------------------------------------
Impaired loans:
Valuation allowance required $ 2,582 $ 774
No valuation allowance required 3,576 989
- -----------------------------------------------------------
Total impaired loans $ 6,158 $ 1,763
===========================================================
Total valuation allowance on $ 407 $ 127
impaired loans
Commitments to lend additional funds
to borrowers with impaired loans - -
Years ended December 31
(in thousands) 2003 2002 2001
- -----------------------------------------------------------------------
Additional interest that would have
been earned on year-end
nonaccruing loans if they had been
accruing based on original terms $ 296 $ 96 $ 84
Total interest income recognized on
impaired loans while such loans
were considered impaired 93 279 140
Average recorded investment in
impaired loans 2,539 3,706 1,616
The valuation allowance on impaired loans is included in the overall allowance
for loan losses. Changes in the allowance for loan losses were as follows:
Years ended December 31
(in thousands) 2003 2002 2001
- -------------------------------------------------------------
Balance at beginning of year $ 4,050 $ 3,700 $ 3,400
Charge-offs (29) (57) (148)
Recoveries 51 59 123
Provision for loan losses 103 348 325
- -------------------------------------------------------------
Balance at end of year $ 4,175 $ 4,050 $ 3,700
=============================================================
The majority of the Company's loans are secured by real estate located within
Tolland County in central Connecticut. Real estate loan activities are governed
by the Company's loan policies, and loan to value ratios are based on an
analysis of the collateral backing each loan.
Loans serviced for others totaled $2,581,000 and $3,883,000 at December 31, 2003
and 2002, respectively.
In the ordinary course of business, the Company makes loans to its directors and
officers and their related interests on substantially the same terms prevailing
at the time of origination for comparable transactions with others. As of
December 31, 2003 and 2002, loans to related parties totaled $634,000 and
$239,000, respectively. During 2003, advances on related party loans totaled
$583,000 and payments on related party loans totaled $189,000.
34
6. Premises and Equipment, Net
December 31 (in thousands) 2003 2002
- ----------------------------------------------------------
Land $ 1,639 $ 1,247
Buildings 6,363 5,372
Furniture, fixtures, and equipment 3,379 3,032
- ----------------------------------------------------------
Total premises and equipment 11,381 9,651
Less: accumulated depreciation
and amortization (4,990) (4,547)
- ----------------------------------------------------------
Premises and equipment, net $ 6,391 $ 5,104
==========================================================
The Company did not sell any premises or equipment in 2003. The Company sold
parcels of excess land with a cost of $101,000 and $278,000 in 2002 and 2001,
respectively. A net gain of $145,000 in 2002 and a net loss of $2,000 in 2001
were recorded from the sales of property.
7. Other Assets
December 31 (in thousands) 2003 2002
- ----------------------------------------------------------
Prepaid federal income tax $ 1,535 $ -
Securities sold, not settled 1,283 -
Deferred tax asset, net 452 1,362
Prepaid retirement benefit cost 822 1,015
All other assets 777 610
- ----------------------------------------------------------
Total other assets $ 4,869 $ 2,987
==========================================================
8. Deposits
December 31 2003 2002
- -----------------------------------------------------------
Avg. Avg.
(dollars in thousands) Amount Rate Amount Rate
- -----------------------------------------------------------
Demand deposits $ 35,939 -% $ 35,600 -%
NOW deposits 41,826 0.37 39,091 0.43
Money market deposits 37,236 1.02 43,964 1.46
Savings deposits 100,654 0.80 77,605 1.25
- -----------------------------------------------------------
Total non-time deposits 215,655 0.62 196,260 0.91
Time deposits, by
remaining
period to maturity:
Within 1 year 61,100 2.31 67,659 3.02
After 1, but within 2 years 27,551 4.28 20,187 4.41
After 2, but within 3 years 9,732 4.39 19,702 5.15
After 3, but within 4 years 19,483 4.86 7,716 4.86
After 4, but within 5 years 5,444 3.65 19,308 4.87
- -----------------------------------------------------------
Total time deposits 123,310 3.38 134,572 3.91
- -----------------------------------------------------------
Total deposits $338,965 1.62% $330,832 2.13%
===========================================================
35
Amounts and average rates of time deposits of $100,000 or more, by remaining
period to maturity, were as follows:
December 31 2003 2002
- ------------------------------------------------------------
Avg. Avg.
(dollars in thousands) Amount Rate Amount Rate
- ------------------------------------------------------------
Within 3 months $ 2,664 1.59% $ 4,235 2.53%
After 3, but within 6 months 3,092 3.20 2,502 2.89
After 6, but within 12
months 3,150 4.03 2,024 3.36
After 12 months 14,988 4.78 16,310 4.89
- ------------------------------------------------------------
Total time deposits of
$100,000 or more $23,894 4.12% $25,071 4.17%
============================================================
Interest expense and interest paid on deposits are summarized as follows:
Years ended December 31
(in thousands) 2003 2002 2001
- ----------------------------------------------------------------
Interest expense:
NOW deposits $155 $312 $498
Money market deposits 556 893 1,431
Savings deposits 699 1,310 1,206
Time deposits 4,575 5,820 7,173
- ----------------------------------------------------------------
Total deposit interest expense $5,985 $8,335 $10,308
================================================================
Interest paid:
Time deposits of $100,000
or more $1,008 $1,131 $ 1,280
Total deposit interest paid 5,983 8,348 10,323
================================================================
9. Borrowings
Borrowings in the following table are reported based on the remaining period to
contractual maturity. Amortizing borrowings totaled $3,500,000 at December 31,
2003. None of the borrowings amortized at December 31, 2002. Actual maturities
may differ from contractual maturities because lenders have the right to call
certain borrowings with or without call penalties.
December 31 2003 2002
(dollars in thousands) Amount Rate Amount Rate
- ----------------------------------------------------------------------------
FHLBB advances due:
Within 1 year $ 1,500 5.09% $ - -%
After 1, but within 2 years 7,000 6.52 1,500 5.09
After 2, but within 3 years 1,500 5.66 7,000 6.52
After 3, but within 4 years 3,500 3.81 1,500 5.66
After 4, but within 5 years 10,000 4.66 3,500 3.81
After 5 years 27,552 5.09 34,010 5.21
- ----------------------------------------------------------------------------
Total FHLBB advances 51,052 5.13 47,510 5.31
Junior subordinated
debentures issued to
unconsolidated
subsidiaries 7,105 10.14 - -
Trust preferred securities
of subsidiaries - - 7,000 10.14
- ----------------------------------------------------------------------------
Total borrowings $58,157 5.73% $54,510 5.93%
- ----------------------------------------------------------------------------
36
The Company paid $3,366,000, $3,107,000 and $2,972,000 in interest on borrowings
during the years ended December 31, 2003, 2002 and 2001, respectively.
The Company may borrow additional funds from the Federal Home Loan Bank of
Boston ("FHLBB") subject to certain limitations, including a line of credit for
short-term borrowings of $1,500,000. To secure advances from the FHLBB, the
Company has pledged certain qualifying assets, as defined by the FHLBB. To
obtain additional loan advances, the Company may be required to invest in
additional amounts of FHLBB stock. The investment in FHLBB stock included in
securities available for sale as of December 31, 2003 and 2002, was $2,857,000
and $2,605,000, respectively.
FHLBB advances at December 31, 2003 include advances that are callable at the
option of the lender as follows: $22,500,000 at 5.06% callable as of December
31, 2003, $5,000,000 at 6.04% callable in 2004, and $5,000,000 at 5.39% callable
in 2008. Borrowings are callable on a quarterly basis continually after the
first call date. If the advances are called, the Company may elect to replace
the funding with additional FHLBB borrowings at then prevailing market interest
rates.
Information on the Company's other short-term borrowings is summarized below:
At or for the years ended December 31
(dollars in thousands) 2003 2002 2001
- ----------------------------------------------------------------
Outstanding at year end
Balance $ - $ - $2,100
Rate -% -% 1.80%
Average outstanding $ 543 $ 118 $ 244
Maximum month-end balance $5,000 $2,816 $8,383
Weighted average interest rate 1.35% 2.59% 2.61%
The Company has two statutory business trusts, of which the Company owns all of
the common securities. These trusts issued trust preferred securities totaling
$7,000,000 and invested the proceeds thereof in an equivalent amount of junior
subordinated debentures issued by the Company. The subordinated debentures are
unsecured obligations of the Company and are subordinate and junior in right of
payment to all present and future senior indebtedness of the Company. The
Company has entered into a guarantee, which provides a full and unconditional
guarantee of amounts due on the trust preferred securities. The trust preferred
securities qualified as Tier 1 capital for the Company under regulatory
definitions at December 31, 2003 and 2002.
The trust preferred securities include $3,500,000 bearing interest at 9.40% and
$3,500,000 at 10.88%, and have maturities in 2029 and 2030. Early redemption at
the Company's option may occur after 2009 and 2010, or in the event of certain
regulatory or tax changes. Additionally, payments on these securities may be
suspended by the Company for up to five years under certain circumstances. The
terms of the junior subordinated debentures, including interest rates and
maturities, are the same as the related trust preferred securities.
The trust preferred securities were included in the Company's consolidated
borrowings prior to the adoption of FIN 46R on December 31, 2003, as described
in Note 1. The deconsolidation of the trust preferred subsidiaries resulted in
the derecognition of the trust preferred securities of $7,000,000, and the
recognition of (i) junior subordinated debentures of $7,105,000 in borrowings
and (ii) an investment in trust subsidiary of $105,000 in other assets.
10. Shareholders' Equity
Treasury Stock
Treasury stock consists of 200,599 common shares at a cost of $15.50 per share
purchased in 1998.
Accumulated Other Comprehensive Income (Loss), net
December 31 (dollars in thousands) 2003 2002
- -----------------------------------------------------------------
Net unrealized gain (loss) on securities
currently classified as available for
sale $ 594 $ (3,905)
Net unamortized loss on securities
transferred from available for sale
to held to maturity - (76)
Deferred income tax effect, net of
valuation allowance in 2002 (154) 637
- -----------------------------------------------------------------
Total accumulated other
comprehensive income (loss) $ 440 $ (3,344)
=================================================================
37
Dividends
The Company's principal asset is its investment in the Bank. As such, the
Company's ability to pay cash dividends to its shareholders is largely dependent
on the ability of the Bank to pay cash dividends to the Company. The declaration
of cash dividends is dependent on a number of factors, including regulatory
limitations, financial conditions, and the Bank's operating results. The
shareholders of the Company will be entitled to dividends only when, and if,
declared by the Company's Board of Directors out of funds legally available
therefrom. The declaration of future dividends will be subject to favorable
operating results, financial conditions, debt service requirements on trust
preferred securities, tax considerations and other factors. FDIC regulations
require banks to maintain certain capital ratios, as noted below, which may
otherwise restrict the ability of the Bank to pay dividends to the Company. The
Bank's ability to pay dividends is also governed by State of Connecticut banking
regulations.
Regulatory Capital Requirements
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company's consolidated financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
following table) of Total Capital and Tier 1 Capital to risk-weighted assets,
and of Leverage (Tier 1) Capital to average assets. Management believes that, as
of December 31, 2003 and 2002, the Bank exceeded all capital adequacy
requirements to which it was subject.
As of December 31, 2003, the most recent notification from the FDIC categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Bank must maintain
minimum Total risk-based, Tier 1 risk-based and Leverage ratios measuring 10.0%,
6.0% and 5.0%, respectively. There have been no conditions or events since that
notification that Management believes have changed the Bank's capital category.
The following table presents capital and capital ratio information for the Bank:
December 31
(dollars in thousands) 2003 2002
- ----------------------------------------------------------------------------
Actual:
Total risk-based capital $40,576 13.8% $36,730 11.7%
Tier 1 risk-based capital 36,871 12.5 32,788 10.4
Leverage 36,871 8.6 32,788 7.9
Minimum regulatory
capital standards:
Total risk-based capital $23,588 8.0 $25,222 8.0%
Tier 1 risk-based capital 11,794 4.0 12,611 4.0
Leverage 17,208 4.0 16,602 4.0
The Company is subject to similar consolidated regulatory capital requirements
of the Federal Reserve Board. The Company satisfied these requirements at
December 31, 2003 and 2002, with capital ratios substantially the same as those
of the Bank.
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 December 31, 2003, if the Company was not allowed to include the
$7.0 million of trust preferred securities issued by Trust I and Trust II within
Tier I capital, then the Company would still exceed the regulatory required
minimums for capital adequacy purposes.
38
Stock Options
The Company maintains a Stock Option Incentive Plan for the benefit of officers
and other employees of the Company. Under the terms of this plan, 329,992 shares
may be issued or transferred pursuant to the exercise of options to purchase
shares of common stock and stock appreciation rights ("SARs") and awards of
restricted stock. The exercise price of the option is equal to the market price
of the common stock on the date of grant. Options granted to officers and other
full time salaried employees may be accompanied by SARs and awards of restricted
stock. No SARs or awards of restricted stock have been granted as of December
31, 2003. Total shares reserved for future option grants were 538 at December
31, 2003.
The Company also maintains a Stock Option Plan for Non-Employee Directors. Under
the terms of this plan, 177,100 shares may be issued or transferred pursuant to
the exercise of options to purchase shares of common stock. Total shares
reserved for future grants to non-employee directors were 30,660 at December 31,
2003. Total options outstanding include grants made under prior stock option
plans.
A summary of the status of the Company's stock option plans and changes therein
is presented in the following table.
Years ended December 31 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------
Weighted-Avg. Weighted-Avg. Weighted-Avg.
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 427,256 $ 13.04 290,959 $ 7.56 314,495 $ 7.34
Granted - - 232,040 17.45 18,040 8.95
Exercised (242,053) 12.33 (94,643) 7.00 (20,621) 3.82
Forfeited - - (1,100) 12.04 (20,955) 9.07
- ------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 185,203 $ 13.97 427,256 $ 13.04 290,959 $ 7.56
==============================================================================================================================
Options exercisable at end of year 116,803 $ 11.87 338,556 $ 11.88 285,459 $ 7.55
==============================================================================================================================
Shares reserved for future grants 31,198 31,198 262,133
The following table summarizes information about stock options outstanding at
December 31, 2003:
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------------------------------------------
Range of Weighted-Avg. Weighted-Avg. Weighted-Avg.
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Contractual Life Price Outstanding Price
- ------------------------------------------------------------------------------------------------------------------------
$6 to $9 59,400 5.5 years $ 7.67 59,400 $ 7.67
$9 to $12 5,500 5.8 9.09 5,500 9.09
$12 to $15 7,040 8.3 12.73 7,040 12.73
$15 to $19 113,263 8.9 17.59 44,863 17.65
- ------------------------------------------------------------------------------------------------------------------------
Total 185,203 7.7 years $ 13.97 116,803 $ 11.87
========================================================================================================================
Deferred Stock Plans
The Company maintains a Directors' Deferred Compensation Plan which allows
participants to defer receipt of fees earned as a director of the Company. Upon
the death, retirement or resignation of a director, payment is made in the form
of Company common stock. Total shareholders' equity included $200,000 at
December 31, 2003, equal to the market value at grant date of the 18,267 common
shares issuable under this plan.
The Company established a Stock Option Income Deferral Plan in 2001, whereby
option holders may elect a stock-for-stock exercise to defer to the plan shares
equal in value to the taxable income that would have otherwise resulted from the
option exercise. Through December 31, 2003, 10,549 options had been exercised
pursuant to this plan (all in 2001).
39
11. Employee Benefit Plans
Pension Plan
The Company sponsors a noncontributory defined benefit pension plan covering all
employees who meet certain eligibility requirements. Benefits are based on
length of service and qualifying compensation. The Company's policy is to fund
the plan in accordance with the requirements of applicable regulations. Plan
assets are invested in stock, bond, and money market investments. The Company's
measurement date is December 31 for pension accounting purposes. The pension
plan's funded status and amounts recognized in the Company's financial
statements are shown in the following table.
Years ended December 31 (in thousands) 2003 2002
- --------------------------------------------------------------------
Change in projected benefit obligation
Benefit obligation at beginning of year $ 3,164 $ 2,800
Service cost 181 152
Interest cost 229 196
Actuarial loss 623 146
Benefits paid (134) (130)
- --------------------------------------------------------------------
Projected benefit obligation at end of year $ 4,063 $ 3,164
====================================================================
Accumulated benefit obligation at end of year $ 3,335 $ 2,944
- --------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning of year $ 3,114 $ 2,656
Employer contributions 50 888
Gain (loss) on plan assets 513 (300)
Benefits paid (134) (130)
- --------------------------------------------------------------------
Fair value of plan assets at end of year $ 3,543 $ 3,114
====================================================================
Funded status at end of year
Funded status (projected benefit obligation
in excess of plan assets) $ (520) $ (50)
Unrecognized net transition obligation - (3)
Unrecognized net actuarial loss 1,323 1,070
Unrecognized prior service benefit (cost) 19 (2)
- --------------------------------------------------------------------
Prepaid benefit cost
(included in other assets) $ 822 $ 1,015
====================================================================
The following assumptions were used to determine benefit obligations at
December 31:
2003 2002
- --------------------------------------------------------------------
Discount rate 6.25% 6.75%
Rate of compensation increase 5.00% 5.00%
- --------------------------------------------------------------------
Components of net periodic pension expense (benefit) are as follows:
Years ended December 31
(in thousands) 2003 2002 2001
- ---------------------------------------------------------------
Service cost $ 181 $ 152 $ 118
Interest cost 229 196 178
Expected return on plan assets, net (274) (221) (271)
Net amortization and deferral 107 (5) (35)
- ---------------------------------------------------------------
Net periodic pension
expense (benefit) $ 243 $ 122 $ (10)
===============================================================
40
The following assumptions were used to determine the net periodic pension
expense (benefit):
2003 2002 2001
- ---------------------------------------------------------------
Discount rate 6.75% 7.00% 7.25%
Rate of compensation increase 5.00% 5.00% 5.00%
Expected long-term return on plan
assets 8.50% 8.50% 9.25%
The actuarial loss for the year ended December 31, 2003 was primarily
attributable to the lower discount rate, along with an increase in the age of
plan entrants.
The Company's pension plan weighted-average asset allocations by asset category
are shown in the following table. Due to a change in the plan trustee at
December 31, 2003, plan assets were temporarily converted to cash on that date
in order to complete the transfer of plan assets. The asset allocations for
December 31, 2003 are based on the reinvestments made on January 2, 2004.
Weighted-
average
target
asset
December 31 2003 2002 allocations
- --------------------------------------------------------------
Equity securities-large
cap U.S. 45.2% 33.5% 25-60%
Equity securities-all other 14.2% 12.0% 0-30%
Debt securities 35.8% 25.1% 10-40%
Cash and equivalents 4.8% 29.4% 0-30%
- --------------------------------------------------------------
Total 100.0% 100.0%
==============================================================
The Company's investment goal is to accumulate a pool of assets sufficient to
meet the benefit obligations of the plan. To accomplish this, it is expected
that the return on assets will exceed the rate of inflation and compare
favorably with returns achieved in the capital markets. Since investment returns
and Company contributions are expected to exceed benefit payments for the
foreseeable future, liquidity considerations do not impose stringent
restrictions on investment management.
The Company's strategy is to invest primarily in investment grade publicly
traded debt and equity securities in order to achieve a long term rate of return
consistent with its assumptions. The Company utilizes an investment manager to
make specific investment decisions within established parameters. The Company
allows up to 90% of investments to be in equity securities and the Company
requires that a minimum of 25% of investments be in large cap U.S. stocks and a
minimum of 10% of investments be in U.S. bonds. No investments are made in
securities issued by the Company. Plan results are evaluated on a quarterly
basis.
The Company's investment manager constructs investment objectives for each asset
category, which objectives are normally to exceed the return of a designated
related benchmark over a full market cycle while maintaining a market level of
risk and similar portfolio characteristics. The strategy for large cap U.S.
equity securities normally has subcomponents for growth, value, and core index
objectives. The strategy for all other equity securities normally has
subcomponents for small cap and international investments. The debt securities
investments are mostly in U.S. securities with an average quality of AA and an
average duration not exceeding five years.
The expected return on plan assets is established by the Company based on
discussions with the investment manager and on consideration of published
expectations from various sources. The expected return on plan assets was last
changed in 2001 when it was reduced from 9.25% to 8.50% due to lower expected
future capital markets returns. The current expected return is viewed by the
Company as being generally consistent with future equity returns of 10-11% and
future debt returns of 5-6%.
41
The Company intends to make future contributions to meet the minimum funding
standards prescribed by law, but does not expect that a contribution will be
required in 2004.
Savings Plan
The Company also sponsors a defined contribution 401(k) savings plan, which
includes a discretionary matching contribution by the Company equal to 35% of
the employees' contribution up to 6% of earnings. Savings plan expense totaled
$76,000, $69,000 and $59,000 for the years 2003, 2002 and 2001, respectively.
Additionally, the Company offers retirees participation in its medical insurance
benefit program. No contribution is provided by the Company.
Supplemental Retirement Plans
The Company has a supplemental retirement plan for an active key employee. A
liability is being accrued to provide benefits that will offset the effect of
tax law provisions which reduce pension benefits for highly paid employees; the
accrual assumes that the employee remains active until normal retirement age.
The accrued liability for this plan (included in other liabilities) was $215,000
and $155,000 at December 31, 2003 and 2002, respectively. Plan expense was
$60,000, $55,000 and $60,000 for the years 2003, 2002, and 2001, respectively.
The Company purchased a bank-owned life insurance policy on the life of this
employee. Increases in the cash surrender value will assist in the funding of
the supplemental retirement plan liability. The death benefit is split between
the Company and the employee's beneficiary. The Company will recover the cost of
the prepaid premium from the cash value of this policy. The cash surrender value
of this policy was $3,173,000 and $3,039,000 at December 31, 2003 and 2002,
respectively. Increases in cash surrender value recorded in the income statement
were $134,000 in 2003, $148,000 in 2002, and $146,000 in 2001. This policy is
held in the general account of an AA rated life insurance company.
The Company also has a supplemental retirement plan for a retired key employee.
The accrued liability for this plan (included in other liabilities) was $71,000
and $77,000 at December 31, 2003 and 2002, respectively. Plan payments were
$6,000 in each of the years 2003, 2002, and 2001.
Directors Retirement Plan
The Company has a directors retirement program to provide a benefit upon
termination of service or death for directors of Tolland Bank. A liability is
being accrued assuming that the directors remain active until normal retirement
age and become vested. The accrued liability for this plan (included in other
liabilities) was $90,000 at December 31, 2003. The plan was adopted at the end
of 2002 and no liability was recorded at that date. Plan expense was $90,000 for
the year 2003. The plan allows the directors at retirement to be paid in a lump
sum or over a ten year period. No directors had retired under this plan as of
December 31, 2003.
Other Bank-Owned Life Insurance Policies
The Company owns certain other director and officer life insurance polices in
addition to the policy described above for an active key employee. Under these
additional policies, death benefits are payable to the Company and a benefit
will be paid to the participants' beneficiaries representing a portion of the
death benefits proceeds. Increases in the cash surrender value will assist in
the funding of the Company's benefits programs. The Company will recover the
cost of the prepaid premium from the cash value of these policies. The cash
surrender value of these policies was $3,302,000 and $3,168,000 at December 31,
2003 and 2002, respectively. Increases in cash surrender value recorded in the
income statement were $134,000 in 2003 and $168,000 in 2002; the policies were
purchased at the end of 2001, and there was no effect on the income statement in
2001. These policies are held in the general accounts of two AA rated life
insurance companies.
42
12. Income Taxes
Components of income tax expense are as follows:
Years ended December 31
(in thousands) 2003 2002 2001
- ------------------------------------------------------------
Current:
Federal $1,076 $1,537 $1,204
State - - -
- ------------------------------------------------------------
Total current 1,076 1,537 1,204
Deferred (including change in
valuation allowance):
Federal 118 (94) (7)
State - - -
- ------------------------------------------------------------
Total deferred 118 (94) (7)
- ------------------------------------------------------------
Total income tax expense $1,194 $1,443 $1,197
============================================================
The actual income tax expense differs from the "expected" income tax expense,
computed by applying the statutory U.S. Federal corporate tax rate of 34% to
income before income taxes, as follows:
Years ended December 31
(in thousands) 2003 2002 2001
- ------------------------------------------------------------
Expected income tax expense at $ 905 $1,666 $ 1,418
statutory rate
(Decrease) increase in income
tax resulting from:
Dividends received deduction (172) (195) (219)
Increase in cash surrender value
of life insurance (91) (89) (49)
Merger related expenses 502 - -
Other, net 50 61 47
- ------------------------------------------------------------
Total income tax expense $1,194 $1,443 $1,197
============================================================
The Company made income tax payments of $1,090,000, $1,650,000 and $1,550,000
during the years ended December 31, 2003, 2002 and 2001, respectively.
The tax effects of temporary differences and net operating loss carryforwards
that give rise to significant portions of the deferred tax assets and deferred
tax liabilities are presented in the following table.
December 31
(in thousands) 2003 2002
- -----------------------------------------------------------------------
Deferred tax assets:
Allowance for loan losses $ 1,226 $ 1,157
State tax net operating loss carryforward 1,663 1,159
Depreciation of premises and equipment 81 20
Unrealized losses on securities - 1,551
Other, net 436 642
- -----------------------------------------------------------------------
Total gross deferred tax assets 3,406 4,529
Less: valuation allowance (1,721) (2,137)
- -----------------------------------------------------------------------
Deferred tax assets, net of valuation allowance 1,685 2,392
Deferred tax liabilities:
Unrealized gains on securities (154) -
Loan origination costs (530) (433)
Other (549) (597)
- -----------------------------------------------------------------------
Total gross deferred tax liabilities (1,233) (1,030)
- -----------------------------------------------------------------------
Net deferred tax assets $ 452 $ 1,362
=======================================================================
43
In order to fully realize the net deferred tax assets, the Company must either
generate future taxable income or incur tax losses that can be carried back to
prior years. Based on the Company's historical and anticipated taxable income,
Management believes that the Company will realize its net deferred tax assets.
A deferred tax asset valuation allowance of $1,721,000 and $1,522,000 at
December 31, 2003 and 2002, respectively, was established for state deferred tax
assets attributable to temporary differences and state tax net operating loss
carryforwards that may not be realized due to the expectation that there will be
no state taxable income for the foreseeable future because of the passive
investment company. As of December 31, 2002, there was also a valuation
allowance of $615,000, for the federal tax effect of net unrealized capital
losses on equity securities. There was no similar valuation allowance as of
December 31, 2003 since the Company was in a net unrealized capital gain
position at that date.
Total state tax net operating loss carryforwards of $33,596,000 are available at
December 31, 2003, of which $4,145,000 expires in 2004 and the remainder expires
between 2020 and 2023.
13. Commitments and Contingencies
Future minimum rental payments required under operating leases that have
remaining noncancellable lease terms of more than one year as of December 31,
2003 are as follows: 2004 - $112,000; 2005 - $78,000; 2006 - $60,000; 2007 -
$60,000; and 2008 - $37,000. Total rental expense under operating leases was
$120,000, $122,000 and $118,000 for the years ended December 31, 2003, 2002 and
2001, respectively.
There are various legal proceedings against the Company arising out of its
business. Although the outcome of these cases is uncertain, in the opinion of
Management, based on discussions with legal counsel, these matters are not
expected to result in a material adverse effect on the financial position or
future operating results of the Company.
14. Financial Instruments With Off-Balance Sheet Risk
The Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the needs of its customers. The instruments
involve, to varying degrees, credit risk, interest rate risk and liquidity risk
in excess of the amounts recognized in the consolidated balance sheets. The
off-balance sheet amounts related to these instruments are as follows:
December 31 ( in thousands) 2003 2002
- ------------------------------------------------------------
Commitments to extend credit:
Commitments to originate new loans:
Fixed rate $ 2,009 $20,331
Variable rate 5,038 6,166
Unadvanced construction lines of credit 13,781 13,138
Unadvanced home equity credit lines 27,641 28,292
Unadvanced commercial lines of credit 4,285 6,557
Unadvanced reserve credit lines 434 434
Standby letters of credit 1,545 1,987
Commitments to purchase Government
guaranteed loans - 302
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the agreement. The total
commitment amounts do not necessarily represent future cash requirements or
credit risk. Standby letters of credit are generally unconditional and
irrevocable, and are generally not expected to be drawn upon. In general, the
Company uses the same credit policies in providing these financial instruments
as it does in making funded loans.
All of the Company's outstanding standby letters of credit are performance
standby letters of credit within the scope of FASB Interpretation No. 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 shown in the preceding
table. The Company's recognized liability for performance standby letters of
credit was insignificant at December 31, 2003 and 2002.
15. Fair Values of Financial Instruments
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale, at one time, the Company's entire holdings of a particular financial
instrument. Because no market exists for a portion of the Company's financial
instruments, fair value estimates were based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment and,
therefore, cannot be determined with precision. Changes in assumptions could
affect the estimates significantly. Fair value estimates were based on existing
on and off-balance sheet financial instruments without attempting to estimate
the value of anticipated future business and the value of assets and liabilities
that are not considered financial instruments. In addition, the tax
ramifications relating to the realization of the unrealized gains and losses
have not been considered but may have a significant effect on fair value
estimates.
44
The carrying amounts reported in the consolidated balance sheets for cash and
short-term investments approximate those assets' fair values. Fair values of
securities were based on quoted market prices, which where available in most
cases. For securities without quoted market prices and for loans, the fair
values were estimated by discounting anticipated future cash flows using current
interest rates on instruments with similar terms and credit characteristics. The
carrying amount of accrued interest receivable approximates fair value.
The fair values of deposits with no stated maturity were, by definition, equal
to their carrying amounts. The fair values of time deposits were based on the
discounted value of contractual cash flows, estimated using discount rates equal
to the interest rates offered at the valuation date for deposits of similar
remaining maturities. The carrying amounts of short-term borrowings approximated
their fair values. Rates currently available for debt with similar terms and
remaining maturities were used to estimate the fair value of long-term
borrowings. The carrying amount of accrued interest payable approximates fair
value.
The fair values of the Company's off-balance sheet financial instruments
approximate their carrying amounts, which are insignificant at December 31, 2003
and 2002.
The following are the carrying amounts and estimated fair values of the
Company's financial assets and liabilities, none of which were held for trading
purposes.
December 31 2003 2002
- ------------------------------------------------------------------------------
Carrying Fair Carrying Fair
(in thousands) Amount Value Amount Value
- ------------------------------------------------------------------------------
Financial assets:
Cash and cash equivalents $ 35,824 $ 35,824 $ 18,461 $ 18,461
Securities available for sale 109,375 109,375 87,812 87,812
Securities held to maturity - - 5,372 5,984
Residential mortgage loans
held for sale 1,399 1,399 11,942 12,050
Net loans 272,177 273,586 274,212 281,564
Accrued interest receivable 2,038 2,038 2,417 2,417
Financial liabilities:
Deposits with no stated
maturity 215,655 215,655 196,260 196,260
Time deposits 123,310 129,163 134,572 140,793
Borrowings 58,157 62,639 54,510 60,067
Accrued interest payable 385 385 378 378
16. Condensed Financial Statements of Alliance Bancorp of New England, Inc.
(Parent Company)
Balance Sheets
December 31
(in thousands) 2003 2002
- ----------------------------------------------------------------
Assets
Cash and cash equivalents $ 314 $ 509
Equity investment in subsidiaries 37,589 31,808
Due from subsidiaries 579 536
Prepaid income taxes 1,778 -
Other assets 104 130
- ----------------------------------------------------------------
Total assets $40,364 $32,983
================================================================
Liabilities and Shareholders' Equity
Liabilities:
Junior subordinated debentures issued
to trust subsidiaries $ 7,105 $ 7,105
Other liabilities 418 328
- ----------------------------------------------------------------
Total liabilities 7,523 7,433
Total shareholders' equity 32,841 25,550
- ----------------------------------------------------------------
Total liabilities and shareholders' equity $40,364 $32,983
================================================================
Income Statements
Years ended December 31
(in thousands) 2003 2002 2001
- ------------------------------------------------------------------
Dividends from subsidiaries $ 1,632 $1,025 $1,331
Interest expense on junior
subordinated debentures (721) (725) (706)
- ------------------------------------------------------------------
Net interest and dividend 911 300 625
income
Non-interest expenses:
Merger related (1,542) - -
Other (270) (497) (252)
- ------------------------------------------------------------------
Total non-interest expense (1,812) (497) (252)
- ------------------------------------------------------------------
(Loss) income before income
tax benefit and equity in net
income of subsidiaries (901) (197) 373
Income tax benefit 348 433 345
- ------------------------------------------------------------------
(Loss) income before equity in (553) 236 718
net income of subsidiaries
Equity in undistributed net
income of subsidiaries 2,021 3,222 2,257
- ------------------------------------------------------------------
Net income $ 1,468 $3,458 $2,975
==================================================================
45
Statements of Cash Flows
Years ended December 31
(in thousands) 2003 2002 2001
- ------------------------------------------------------------------
Operating Activities:
Net income $ 1,468 $ 3,458 $ 2,975
Adjustments to reconcile net
income to net cash (used)
provided by operating
activities:
Equity in undistributed net
income of subsidiaries (2,021) (3,222) (2,257)
Other adjustments, net 139 158 106
- ------------------------------------------------------------------
Net cash (used) provided by
operating activities (414) 394 824
- ------------------------------------------------------------------
Financing Activities:
Exercise of stock options 1,024 663 61
Cash dividends paid (805) (745) (700)
- ------------------------------------------------------------------
Net cash provided (used)
by financing activities 219 (82) (639)
- ------------------------------------------------------------------
Net Change in Cash and
Cash Equivalents (195) 312 185
Cash and cash equivalents at
beginning of the year 509 197 12
- ------------------------------------------------------------------
Cash and cash equivalents at
end of the year $ 314 $ 509 $ 197
==================================================================
46
Consolidated Supplementary Financial Data (unaudited)
Selected Quarterly Financial Data
2003 2002
(in thousands, except share data) Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
-----------------------------------------------------------------------------------------------------------------
Net interest income $2,992 $2,912 $3,047 $3,207 $3,195 $3,090 $3,069 $3,194
Provision for loan losses 38 13 6 46 47 64 65 172
Non-interest income 683 517 1,085 835 754 751 684 665
Non-interest expense 3,582 3,464 2,798 2,669 2,664 2,570 2,452 2,467
-----------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 55 (48) 1,328 1,327 1,238 1,207 1,236 1,220
Income tax expense 190 191 409 404 356 346 371 370
-----------------------------------------------------------------------------------------------------------------
Net (loss) income $ (135) $ (239) $ 919 $ 923 $ 882 $ 861 $ 865 $ 850
=================================================================================================================
Per Share Data:
Basic (loss) earnings per share $(0.05) $(0.09) $ 0.34 $ 0.34 $ 0.34 $ 0.33 $ 0.34 $ 0.33
Diluted (loss) earnings per share (0.05) (0.09) 0.32 0.33 0.32 0.32 0.32 0.32
Cash dividends declared 0.075 0.075 0.075 0.075 0.075 0.075 0.068 0.068
Common stock price:
High 41.95 33.75 24.63 20.05 20.20 15.70 15.45 13.19
Low 32.40 23.04 19.70 18.51 14.34 12.94 12.55 10.68
Close 39.51 33.34 23.00 19.75 20.15 15.30 13.77 12.95
Net interest income has been on a declining trend due to the accumulated effect
of lower interest rates. The trend was ameliorated in part around the end of
2002 due to volume growth and time deposit repricing, but this was offset by
higher loan prepayment volume in the middle of 2003. The higher loan loss
provision in the first quarter of 2002 reflected higher impairment reserves.
Decreases in the provision in 2003 were due to slower portfolio growth caused by
higher loan prepayments and a shift in the portfolio mix towards lower risk
residential mortgages.
Non-interest income benefited from fee income growth in 2002 and further
benefited from record levels of secondary market income in the first three
quarters of 2003. Non-interest income included a $303,000 net gain on securities
and assets in the first half of 2002 due to equity security sales. Non-interest
income was affected by a $504,000 net loss on securities and assets in the third
quarter of 2003 due to a writedown on a debt security deemed to be impaired on
an other-than-temporary basis. An additional net loss of $89,000 was recorded in
the fourth quarter of 2003 due to net gains and losses recognized, including
writedowns and losses on the sale of securities.
Non-interest expense increased in the second half of 2002 due to higher staff
costs and legal fees related to problem assets and corporate and shareholder
matters. Staff costs were higher in 2003 due primarily to incentive compensation
related to higher business volumes. Merger related expenses totaled $748,000 in
the third quarter of 2003, followed by an additional $794,000 in the subsequent
quarter. 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 in the second half of 2003.
Quarterly net income was generally flat for the first three quarters of 2002.
Net income grew in the following three quarters from the combined benefit of
higher net interest income and secondary market income. Losses were recorded in
the last two quarters of 2003 due to merger related expenses. After interest
rates rebounded from record lows in June 2003, net income was also adversely
affected as secondary market income declined and net interest income also
declined due to the accumulated impact of loan and security prepayments.
Quarterly data may not sum to annual data due to rounding.
47
Volume and Rate Analysis - FTE Basis
2003 versus 2002 Change due to 2002 versus 2001 Change due to
- ------------------------------------------------------------------------------------------------------------------------
(in thousands) Volume Rate Total Volume Rate Total
- ------------------------------------------------------------------------------------------------------------------------
Interest income:
Loans $ 870 $ (1,775) $ (905) $ 1,603 $ (2,527) $ (924)
Securities available for sale 448 (1,643) (1,195) 1,023 (1,046) (23)
Securities held to maturity (622) 24 (598) (515) 25 (490)
Other earning assets 68 93 161 181 (250) (69)
- ------------------------------------------------------------------------------------------------------------------------
Total Change 764 (3,301) (2,537) 2,292 (3,798) (1,506)
- ------------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 143 (2,492) (2,349) 1,170 (3,143) (1,973)
Borrowings 464 (213) 251 219 (41) 178
- ------------------------------------------------------------------------------------------------------------------------
Total Change 607 (2,705) (2,098) 1,389 (3,184) (1,795)
- ------------------------------------------------------------------------------------------------------------------------
Net Change $ 157 $ (596) $ (439) $ 903 $ (614) $ 289
========================================================================================================================
Note: Changes attributable jointly to volume, rate and mix have been allocated
proportionately.
Contractual Maturities of Construction and Commercial Loans
1 Year 1-5 Over 5
December 31, 2003 (in thousands) or Less Years Years Total
----------------------------------------------------------------------------------------------------------
Construction loans:
Residential $ 1,000 $ - $ 787 $ 1,787
Commercial 11,067 6,672 1,463 19,202
Commercial loans 24,428 53,318 28,155 105,901
----------------------------------------------------------------------------------------------------------
Total $36,495 $59,990 $30,405 $126,890
==========================================================================================================
Interest rate sensitivity:
Predetermined rates $17,208 $13,708 $25,324 $ 56,240
Variable rates 19,287 46,282 5,081 70,650
----------------------------------------------------------------------------------------------------------
Total $36,495 $59,990 $30,405 $126,890
==========================================================================================================
Securities Cost and Fair Value
2003 2002 2001
---------------------------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair Amortized Fair
December 31 (in thousands) Cost Value Cost Value Cost Value
---------------------------------------------------------------------------------------------------------------------
Available for sale
U.S. Government and agency debt $ 45,041 $ 45,294 $26,167 $26,326 $10,149 $10,105
U.S. Agency mortgage-backed debt 31,140 30,978 13,615 13,775 17,876 17,834
Trust preferred 13,839 14,513 17,551 16,998 24,526 22,452
Other corporate debt 4,758 4,559 15,841 14,277 22,047 21,408
Marketable equity 10,965 10,993 15,758 13,651 12,387 11,594
Non-marketable equity 3,038 3,038 2,785 2,785 2,580 2,580
---------------------------------------------------------------------------------------------------------------------
Total available for sale $108,781 $109,375 $91,717 $87,812 $89,565 $85,973
---------------------------------------------------------------------------------------------------------------------
Held to maturity
U.S. Government and agency debt $ - $ - $ 1,047 $ 1,112 $ 2,063 $ 2,107
U.S. Agency mortgage-backed debt - - 850 870 2,747 2,800
Other mortgage-backed debt - - 259 267 1,518 1,550
Other corporate debt - - 3,216 3,735 6,069 5,530
---------------------------------------------------------------------------------------------------------------------
Total held to maturity $ - $ - $ 5,372 $ 5,984 $12,397 $11,987
=====================================================================================================================
48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. Controls and Procedures.
Based on their evaluation as of December 31, 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 December 31, 2003 that have materially affected, or are reasonably likely
to materially affect, the Company's internal control over financial reporting.
49
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Amount of Common Stock
Term Beneficially Owned (1)
December 31, 2003 Director to -----------------------
Members of the Board of Directors **** Age Since(16) Expire Amount Percent
- --------------------------------- --- --------- ------ ------ -------
Robert C. Boardman 71 1980 2004 24,332(3)(7) *
Mr. Boardman was formerly President of the Capital Area
Health Consortium. Prior to this he served as Executive
Director of Rockville General Hospital from 1974 through
1987. He retired in 2002.
Joseph P. Capossela 59 1999 2003 9,270(13) *
Mr. Capossela is an attorney and partner in the Vernon law
firm of Kahan, Kerensky & Capossela, LLP.
Rodney C. Dimock ** 57 2001 2003 9,792(14) *
Mr. Dimock is the Principal of Arrow Capital, LLC a
private investment and consulting firm. He previously
served as President of Aetna Realty Investors, Inc, and
Cornerstone Properties Inc.
D. Anthony Guglielmo 63 1985 2005 72,101(4)(10) 2.51
Mr. Guglielmo, Chairman of the Board, is President and
owner of Penny-Hanley and Howley Co., Inc., an
insurance agency. Mr. Guglielmo currently serves as a
Connecticut State Senator.
Patrick J. Logiudice *** 57 2002 2004 61,676 2.16
Mr. Logiudice serves as Executive Vice President of
Alliance and is the Chief Lending Officer of its subsidiary,
Tolland Bank.
Reginald U. Martin 61 1999 2003 10,425(11) *
Mr. Martin is the managing partner of Insurance Planning
Associates, an employee benefits sales and consulting firm
in Tolland.
Douglas J. Moser 59 1991 2005 32,936(2)(5) 1.15
Mr. Moser is a partner in the architectural firm of Moser
Pilon & Nelson, which he established in 1980.
Patricia A. Noblet 59 1999 2003 10,150(11) *
Ms. Noblet is a Certified Residential Specialist with Sentry
Real Estate Services in Vernon.
Kenneth R. Peterson 58 1982 2004 36,444(9)(15) 1.27
Mr. Peterson, Vice Chairman of the Board, is a partner in
Gardner and Peterson Associates, a land surveying and
civil engineering firm where he has practiced since 1968.
Matthew L. Reiser 57 2000 2005 10,480(12) *
Mr. Reiser is a self-employed private investor. Formerly he
was Vice President, American Management Systems
(AMS), an international business and information
technologies consulting firm until 2000.
Joseph H. Rossi 53 1995 2005 174,341(6)(8) 6.05
Mr. Rossi serves as President and Chief Executive Officer
of Alliance and Tolland Bank.
50
(1) Except as otherwise noted, all beneficial ownership is direct and each
beneficial owner exercises sole voting and investment power over the
shares.
(2) Includes currently exercisable options to purchase 9,378 shares.
(3) Includes currently exercisable options to purchase 13,777 shares.
(4) Includes currently exercisable options to purchase 9,078 shares.
(5) Shared voting and investment power on all shares held, and includes 356
shares for which Mr. Moser disclaims beneficial ownership.
(6) Includes currently exercisable options to purchase 22,813 shares.
(7) Includes shared voting and sole investment on 1,098 shares held by his
wife.
(8) Includes shared voting and investment power on 23,318 shares held jointly
with wife and 330 shares held jointly with minor children.
(9) Includes voting and investment power on 14,298 shares held jointly with
wife.
(10) Includes 29,294 shares held by his wife and includes shared voting and
investment power on 3,733 shares held jointly.
(11) Includes currently exercisable options to purchase 10,040 shares.
(12) Includes currently exercisable options to purchase 8,280 shares.
(13) Includes currently exercisable options to purchase 9,160 shares.
(14) Includes currently exercisable options to purchase 7,400 shares.
(15) Includes currently exercisable options to purchase 11,777 shares.
(16) Includes service on the Board of Directors of the Bank.
* Less than one percent
** Appointed by the Board of Directors, in accordance with the Certificate of
Incorporation, began service in April 2001 to complete the unexpired term
of a director who resigned. Mr. Dimock previously served as a director from
1980 to 1996.
*** Shares include 273 shares with held by his wife. Under the Company's
bylaws, the vacancy for the unexpired term held by Mr. Logiudice was filled
by the Board of Directors on October 30, 2002. Patrick J. Logiudice will
serve until 2004 or the next annual meeting for the election of directors.
In addition to beneficially owned shares, there are 9,987 shares held in
the Stock Option Income Deferral Plan for Mr. Logiudice.
**** With regard to terms expiring in 2003, the Certificate of Incorporation
provides that terms expire at time of an annual meeting; in light of the
merger transaction, no annual meeting is expected to occur and terms will
continue until the transaction is complete or an annual meeting is held.
51
Amount of Common Stock
Beneficially Owned (1)
Executive Officers Who Are Not Directors Age Amount Percent
- ---------------------------------------- --- ------ -------
David H. Gonci is Senior Vice President, Chief Financial 51 60,000(2) 2.10%
Officer and Treasurer of Alliance and Tolland Bank.
Cynthia S. Harris is Secretary of Alliance and Vice President/ 56 24,729(3) *
Human Resources of Tolland Bank.
* Less than one percent.
(1) Except as otherwise noted, all beneficial ownership is direct and each
beneficial owner exercises sole voting and investment power over the
shares.
(2) Includes 58,240 shares with shared voting and investment power.
(3) Includes 8,857 shares with shared voting and investment power.
Board Meetings and Committees
The business of the Company's and the Bank's Boards of Directors is conducted
through meetings and activities of the Boards and their committees. The Board of
Directors of the Bank consists of those persons who serve as directors of the
Company. Additionally, members of the Company's committees serve on the
identical committees of the Bank. Each current director attended at least 86% of
the Tolland Bank and Alliance Board and committee meetings during the period he
or she was a director and a committee member.
Code of Ethics and Audit Committee Financial Expert
Under SEC rules adopted under the Sarbanes-Oxley Act of 2002, public companies
are required to adopt a code of ethics or if one is not adopted disclose that
fact and explain why a code of ethics has not been adopted. The Company has not
adopted a code of ethics beyond its existing business conduct policies. The
reason is the need for a code of ethics is moot in light of the anticipated
merger with NewAlliance Bancshares, which is expected to be completed on or
about April 1, 2004. The resulting company, NewAlliance Bancshares will be
subject to a similar code of ethics requirement. The Board of Directors has also
declined to name an "audit committee financial expert," as that term is defined
by SEC rules adopted under the Sarbanes-Oxley Act of 2002, in light of the
pending merger. It is anticipated that NewAlliance Bancshares will designate a
financial expert for its audit committee. The Board of Directors has determined,
however, that the decision to not name an audit committee financial expert has
not impaired the ability of its audit committee to provide effective oversight
of the Company's external financial reporting and internal control over
financial reporting.
Reports of Changes in Beneficial Ownership
Based upon a review of Forms 3 and 4 and amendments thereto furnished to the
Company during the fiscal year ended December 31, 2003, Form 5 and amendments
thereto furnished to the Company with respect to the fiscal year ended December
31, 2003, and written representations from all reporting persons, all statements
required by rules promulgated by the Securities and Exchange Commission under
Section 16 of the Securities Exchange Act of 1934 were timely filed.
52
ITEM 11. Executive Compensation
The following table sets forth the compensation paid to Joseph H. Rossi, Patrick
J. Logiudice and David H. Gonci for each of the last three fiscal years. No
other executive officer of the Company or the Bank earned a total salary and
bonus in excess of $100,000 or served as Chief Executive Officer of the Company
or the Bank during the last fiscal year.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
------------------------------------------ ----------------------
Securities
Name and Other Annual Underlying
Principal Position Salary Bonus Compensation(1) Options(3)
- ------------------ ------ ----- --------------- -------------
Joseph H. Rossi, 2003 $ 225,000 $ 25,000 $ 72,360 -
President and CEO 2002 210,000 25,000 66,688 50,000
2001 175,254 - 62,511 -
Patrick J. Logiudice 2003 130,402 15,000 2,631 -
Exec. Vice President 2002 121,256 15,000 2,439 35,000
2001 116,789 2,000 2,345 1,000
David H. Gonci 2003 123,136 15,000 2,586 -
Senior Vice President, 2002 114,068 15,000 2,395 35,000
CFO, Treasurer 2001 105,835 2,000 2,222 1,000
(1) Consists of employer 401(k) contributions and other perquisites, and in the
case of Mr. Rossi $59,196, $55,323 and $51,704 for years 2003, 2002 and
2001, respectively for the incremental vested value of the SERP benefit.
(2) The Company's fiscal year ends December 31.
(3) The exercise price is equal to the closing price of the Company's stock on
the date of the grant.
Bonus Plan
The Board of Directors has adopted the Tolland Bank Bonus Plan (the "Bonus
Plan") to provide a means for officers and employees of the Bank to be rewarded
for outstanding contributions toward corporate objectives. The Bonus Plan has
three elements: a short-term bonus, a long-term bonus, and an instant reward
bonus. The short-term bonus is a cash bonus, awarded annually, on a
discretionary basis, from a bonus pool which is based on the Bank's average
annual return on assets. Long-term bonuses typically consist of awards of stock
options pursuant to the 1997 Stock Incentive Plan. Instant rewards are cash
awards of $50 to $2,500, payable to employees, for outstanding accomplishments
beyond normal job responsibilities. The Bonus Plan is a discretionary plan
administered by the Personnel Committee of the Board of Directors, and is
subject to change from year to year.
Option Grants in Last Fiscal Year
There were no option grants for the fiscal year ending December 31, 2003.
Stock Option Income Deferral Plan
The Stock Option Income Deferral Plan permits certain members of management and
directors to defer recognition of their income when stock options are exercised.
Under the Plan, the number of shares equivalent in value to the income that
would have been realized when the options are exercised are transferred to the
Plan. Because actual ownership of the underlying stock is deferred, required
taxes are paid at a later date, which is the date that the shares are paid under
the Plan pursuant to the election of the participant at the time of the
deferral, subject to additional provisions of the Plan, although the Plan
provides that the Participant shall elect the time for distribution within the
times that the Personnel Committee allows such elections. Only one individual,
Mr. Logiudice, has elected to use the Stock Option Income Deferral Plan to defer
taxable income, with 9,987 shares held in the plan.
Aggregated Option Exercises and Year-End Option Values
The following table sets forth the number of shares acquired on the exercise of
stock options and the aggregated gains realized on the exercise during fiscal
2003 by Mr. Rossi, Mr. Logiudice and Mr. Gonci. The table also sets forth the
number of shares covered by exercisable and unexercisable options held by Mr.
Rossi, Mr. Logiudice and Mr. Gonci on December 31, 2003, and the aggregated
gains that would have been realized if the unexercised options had been
exercised on December 31, 2003.
53
Number of Shares Value of Unexercised
Shares Acquired Covered by Unexercised In-The-Money
On Exercise Value Options on 12/31/03 Options As Of 12/31/03(1)
Name During Fiscal 2003 Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------------ ---------- ----------- ------------- ----------- -------------
Joseph H. Rossi 107,598 $3,011,758 22,813 - $ 497,552 -
Patrick J. Logiudice 34,211 1,293,189 - - - -
David H. Gonci 22,729 1,166,514 - - - -
(1) Equals the difference between the aggregated exercise price of such options
and the aggregate fair market value of the common stock that will be
received upon exercise, assuming such exercise occurred on Wednesday,
December 31, 2003, upon which the last sale of the common stock on the AMEX
for the year 2003 was $39.51 per share.
Executive Employment Agreements
The Board of Directors of the Company, on December 10, 2002, approved three
employment agreements (the "Agreement" or "Agreements") for its principal
Executive Officers -- Chief Executive Officer and President, Joseph H. Rossi,
Chief Financial Officer David H. Gonci, and Chief Lending Officer Patrick J.
Logiudice (the "Executive" or "Executives"). The Agreements are identical in
nature except for the Executive's base salary reference amount on the effective
date of the Agreements. The initial term of the Agreements is thirty-six (36)
months with additional one year extensions (barring notice by either party of
intention not to renew) on the anniversary date. The Agreements provide payment
of base compensation to the Executives which may be increased (but not reduced
below base compensation on the effective date of the Agreement) pursuant to the
Board's annual base salary determinations. During the term of the Agreement, if
the Executive is terminated by the Employer for any reason other than for just
cause, or if the Executive resigns after material changes in the circumstances
of Executive's employment, the Executive is entitled to receive, for the
remaining term of the Agreement, an amount equal to his base salary and
compensation plus the value of any stock options that were granted to the
Executive but which were not exercisable on the date of termination, and the
value of all employee benefits that would have been provided to the Executive
during the term of the Agreement. The Executive, upon termination, may not
compete with the Company for one (1) year in any city, town or anywhere in
Tolland County in which the Employer has an office or has filed an application
for an office. Executive and his dependents are also permitted under the
Agreement to participate in welfare benefit programs of the Company until the
term of the Agreement expires or the Executive obtains other employment.
The Agreement also provides for payments to the Executives following termination
of employment upon the occurrence of a Change in Control of the Company or the
Bank. The payment will be triggered following a Change in Control if the
Executive is dismissed, if the Executive resigns following a change in the
circumstances of his employment, or if Executive resigns for any reason during a
"window period" that will begin 90 days from the effective date of the Change in
Control and ends 180 days after the effective date of Change in Control. Under
the Agreement, upon termination the Executive would receive three times his
highest annual compensation for the three taxable years preceding his
termination which includes base salary and any other taxable income including
amounts relating to the granting of vesting or exercise of restricted stock or
stock option awards (limited to 20,000 exercised options) and fringe benefits.
The Agreement also contains gross up provisions designed to compensate Executive
for any excise tax under ss. 4999 of the Internal Revenue Code which may be
required. This provision is designed to pay to the Executive the amounts to pay
the excise tax as well as any additional state or federal taxes resulting from
the payment of three times annual compensation following the Executive's
termination as a result of a Change in Control.
Change in Control Agreements
The Company also has Change in Control Agreements (the "Control Agreements")
adopted on December 10, 2002 with Cynthis S. Harris, Gerald D. Coia and Karen
Ouimet-Matusek (the "Officers"). The Agreements have a term of thirty-six (36)
months, which may be extended for an additional twelve (12) month term unless
notice is provided by either the Company or the Officers. The Control Agreements
provide payments equal to three times annual compensation in the event of a
Change in Control. In the event of a Change in Control provision, the Control
Agreement also provides for continuation of welfare benefits programs for the
Executive and dependents for five (5) years following termination.
Non-qualified, Unfunded Supplemental Retirement Income Agreement
Mr. Rossi is the beneficiary of a non-qualified, unfunded supplemental
retirement income agreement, which is intended to provide him with annual income
in the form of an annuity payable for life with an annual benefit equal to 70%
of his highest five (5) year average compensation, offset by the sum of the
benefits provided under certain existing retirement plans or arrangements for
him. In connection with a change in control, Mr. Rossi's employment agreement
permits the benefit payable to Mr. Rossi under his retirement agreement to be
paid in the form of a lump sum payment discounted to its present value as of the
payment date. The retirement agreement also permits in the case of a change of
control that Mr. Rossi be treated for purposes of determining his benefits under
The Retirement Plan of Tolland Bank as having worked until age 65.
54
Termination and Release Agreements
Upon consummation of the merger, it is expected that the employment of Messrs.
Rossi, Gonci, Lorusso (a non-executive with a separate change in control
agreement), Coia, Ms. Harris, and Ms. Ouimet-Matusek will terminate. Effective
as of July 15, 2003, Messrs. Rossi, Gonci, Logiudice, Lorusso, Coia, Ms. Harris,
and Ms. Ouimet-Matusek each signed termination and release agreements. These
agreements were amended on November 15th and November 25, 2003. Pursuant to each
agreement, each such executive is entitled to receive a lump sum payment on the
closing date of the merger, provided that the executive is still employed by the
Company immediately prior to such date. In addition, each executive is entitled
to continue to receive from the Company life, medical, and disability insurance
coverage for five years, or to receive a lump-sum payment in lieu thereof. In
exchange for receiving such benefits, each such executive has agreed to release
the Company from any obligation to make any payments or to provide other
benefits under the employment agreements and change in control agreements, and
in Mr. Rossi's case, the retirement agreement. Further, each executive agreed,
prior to December 31, 2003, to exercise all of the specified amounts of vested
non-qualified stock options granted to the executive and to accept payment of
any cash bonus to which such executive may be entitled to receive in the
ordinary course for services rendered in 2003. Related option exercises occurred
on December 29, 2003. The amount of the lump sum payments to be received upon
the closing of the merger by Messrs. Rossi, Gonci, Logiudice, Lorusso, Coia, Ms.
Harris, and Ms. Ouimet-Matusek are equal to $2,416,638, $765,000, $818,181,
$322,390, $285,470, $333,030, and $233,937, respectively. In addition, if it is
determined that Messrs. Rossi, Gonci and Logiudice would be subject to excise
tax under the provisions of the Internal Revenue Code relating to payments made
in connection with a change in control, they are entitled, pursuant to their
employment agreements, to receive payments from Alliance to offset any
additional taxes owed. If the merger is not completed, the employment agreements
and change in control agreements will continue to remain in effect. Messrs.
Rossi, Gonci and Logiudice have also entered into agreements with New Haven
Savings Bank not to compete with New Haven Savings Bank or its subsidiaries.
These non-compete agreements provide Messrs. Rossi, Gonci and Logiudice with
payments of $1,760,000, $550,000, and $625,000, respectively, in consideration
for not competing with New Haven Savings Bank or its subsidiaries in banking and
related activities in Connecticut and certain markets in Rhode Island and New
York. The non-competition prohibition would begin on the effective date of the
merger and continue for 36 months for Mr. Rossi, and 15 months in the case of
Messrs. Gonci and Logiudice.
401(k) Plan
In 1991, the Bank established the Tolland Bank 401(k) Savings Plan (the "401(k)
Plan"), a defined contribution contributory profit sharing plan designed to
comply with Section 401(k) of the Internal Revenue Code of 1986, as amended (the
"Code"). Each full-time and regular part-time employee with 30 days of service
is eligible to participate in this plan.
Under the 401(k) Plan, a participant may defer a minimum of 2% of his or her
before-tax compensation from the Bank (subject to certain limitations) as a
contribution under this plan. The Bank will make matching contributions equal to
35% of the first 6% of each participant's contributions and participants are
offered eighteen different investment vehicles for their accounts. Participants
are 100% vested at all times in their contributions and the income earned
thereon. Participants become 100% vested in the Bank's matching contributions
after four years of service or earlier upon retirement, permanent disability,
death or attaining age 65. Benefits under the 401(k) Plan will be paid at
retirement, disability, death or other termination of employment with the Bank.
Benefits may be paid in a lump sum or in installments, depending on certain
factors. The 401(k) Plan also permits participants to make early withdrawals
from their accounts (subject to certain limitations) in case of hardship and to
borrow against their accounts.
Pension Plan
The Bank maintains a defined benefit pension plan (the "Pension Plan") that is
designed to satisfy the requirements for tax qualification set forth in the
Internal Revenue Code of 1986, as amended (the "Code"). Under the Pension Plan,
the Bank makes annual contributions, which are actuarially determined, for the
benefit of eligible employees. Expenses for administering the Pension Plan are
paid out of Pension Plan assets and also directly by the Bank. Employee
contributions are not required.
The Pension Plan covers each full-time and regular part-time employee who was
hired prior to his or her 60th birthday, who has completed at least one year of
service and worked a minimum of 1,000 hours in that year, and who has attained
age 21. The Pension Plan contains automatic spousal coverage for all eligible
participants.
55
The Pension Plan generally provides for monthly benefit payments (in straight
line annuity amounts) to the participant as of the date the participant retires.
For employees who made contributions, the normal form of benefit payment is a
modified cash refund. A Pension Plan participant is eligible to receive an
actuarially-reduced early retirement benefit if he or she is within ten years of
his or her normal retirement date, has separated from service and has completed
at least ten years of service. In most cases, an employee will become a
fully-vested participant when he or she completes five years of service.
Participants who remain in service past their normal retirement date are
eligible for an actuarially-increased retirement benefit based on the amount of
their normal retirement benefit. If a participant terminates service after he or
she becomes eligible for early retirement, the vested percentage will be 100%.
The Pension Plan is integrated with the Social Security System.
The amount of a participant's benefit is based on average yearly earnings
(including base salary and bonus) during the participant's highest five
consecutive years during his or her last ten years of credited service
multiplied by his or her credited service as an active participant in the
eligible class (not to exceed 30 years of service).
The table set forth below illustrates annual pension benefits payable for life
at age 65 in 2003 under the Pension Plan provisions for various levels of
compensation and years of service.
Compensation covered by the Plan includes average salary and bonus for the five
highest years. The maximum compensation covered by the Plan is the lesser of
actual average compensation or $200,000. Messers, Rossi, Logiudice and Gonci
have 8, 9 and 11 years of service respectively. Benefits are computed on a
straight-life annuity basis, and are not subject to any deduction for Social
Security or other off set amounts.
PENSION PLAN TABLE
Years of Credited Service at Retirement Age 65
Final Average ---------------------------------------------------------------------
Compensation 15 20 25 30 35
- ------------ -- -- -- -- --
$125,000 $29,800 $ 39,700 $ 49,700 $ 59,600 $ 69,500
150,000 36,500 48,700 60,900 73,100 85,300
175,000 43,300 57,700 72,200 86,600 101,000
200,000 50,000 66,700 83,400 100,100 116,800
Other Programs
The Company owns additional life insurance policies on the lives of officers and
directors. Also, the Company has supplemental retirement plans for an active
(employee) director and a retired (employee) director. See Note 11, "Employee
Benefit Plans," in Item 8 for additional information. The Company also maintains
a Stock Option Plan for officers and other employees. See Note 10,
"Shareholders' Equity," in Item 8 for additional information.
Directors' Fees
Directors receive retainer fees as follows: Chairman - $11,000 annually; Vice
Chairman - $10,500 annually; and members - $10,000 annually. Retainer fees are
paid quarterly. Directors also receive a fee for each meeting attended. Members
of the Board receive $650 and members of the committees receive $550 per meeting
attended. While the Chairman of the Board receives $750, each committee's
chairman receives $650. The Vice Chairman of the Board receives $700 and each
committee vice-chairman receives $650 for each meeting attended. It is the
policy of the Company not to pay directors' fees to Executive Officers of the
Company who also serve as directors.
Directors' Deferred Compensation Plan
The Company implemented a Directors' Deferred Compensation Plan (the "Deferred
Compensation Plan") during 1997 to permit directors to defer recognition of
income on fees that they received as directors. Under the Deferred Compensation
Plan, directors can defer receipt of annual retainer fees and defer federal
income taxation on deferred amounts until the year in which benefits are
actually received by a participating director. Directors may benefit from the
ability to defer taxes to a date when their taxable income is less and tax
brackets lower.
Under the Code, deferred fees are deemed to be liabilities of Alliance, and the
directors are deemed to be general creditors. Deferred directors' fees are held
until a director ceases to be a director for any reason. Thus, upon the
director's death, retirement or resignation, such fees shall be paid in the form
of stock in a lump sum within 60 days after the participant terminated his
services as a director. The Deferred Compensation Plan is administered by the
Personnel Committee. The stock liability will be credited on the date such fees
are earned and will be based on the price of the Common Stock for such dates.
The number of Directors participating in the Deferred Compensation Plan is four.
56
The four directors who defer directors fees under the deferred compensation plan
are Messrs. Guglielmo, Moser, Peterson, and Ms. Noblet. The amount of the
Company's common stock held by the plan on behalf of such directors is 3,906,
3,862, 3,884 and 3,187 shares, respectively. As a past participant in the plan,
Mr. Boardman has 3,427 shares of the Company's Common Stock held by the Plan on
his behalf.
Directors' Options
Directors also participate in the 1999 Non-Employee Directors' Stock Option
Plan. Under the Plan, directors receive options based on continued service on
the Board of Directors at their fair market value. The Plan was amended at the
November 2002 meeting of the Board. Under the amendment, all non-employee
directors, on the Effective Date, received non-statutory stock options to
purchase 9,500 shares of Company stock at fair market value on the effective
date of the grants, December 2, 2002. The options vest over a five year period
at a rate of 20% per year, with 100% vesting upon the fifth anniversary of the
award. In addition, options subject to vesting become 100% vested upon a
director's retirement in accordance with the Company's written retirement
policies for non-employee directors, upon a change in control of the Company or
Tolland Bank, or upon a failure of the director if nominated by the Board to be
elected by shareholders.
Tolland Bank Directors' Retirement Plan
The Board of Directors also adopted at its November 2002 meeting a Tolland Bank
Directors' Retirement Plan which provides payments to former directors upon
retirement from the Board. Directors are fully vested in the Plan upon the
completion of five (5) years of service on the Board. The annual benefit
provided under the plan is $1,000 multiplied by the participant's number of
years of service up to a maximum of 20 years, or $20,000 (the "Full Benefit").
The benefit shall be paid to the participant for a period of ten (10) years. To
receive the retirement benefit, directors must agree not to serve in a similar
directorial capacity with another financial institution or business which
materially competes with the Company for a period of one year. A change in
control of the Company or Tolland Bank or the failure of a Board nominated
director to be elected by shareholders would enable an eligible director to
receive the Full Benefit of $20,000 per year for 10 years or in a lump sum
discounted to its present value. Directors terminated for just cause, including
a gross or willful failure to perform a substantial portion of duties or
responsibilities as a director, may not receive benefits.
Compensation Committee Interlocks and Insider
Participation in Compensation Decisions
There were no interlocking relationships where (a) an executive officer of
Alliance or Tolland Bank served as a member of the compensation committee of
another entity, one of whose executive officers served on the Compensation
Committee of Alliance or Tolland Bank; (b) an executive officer served as a
director of another entity, one of whose executive officers served on the
Compensation Committee of Alliance or Tolland Bank; or (c) an executive officer
of Alliance or Tolland Bank served as a member of the compensation committee of
another entity, one of whose executive officers served as a director of Alliance
or Tolland Bank.
57
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The table which follows sets forth information as of December 31, 2003, with
respect to principal beneficial ownership of Common Stock by any person
(including any "group" as that term is used in Section 13(d)(3) of the
Securities Exchange Act of 1934) who is known to the Company to be the
beneficial owner of more than 5% of the Company's Common Stock and with respect
to ownership of Common Stock by all directors and officers of the Company as a
group.
Name and Address Number of Shares Percent
of Beneficial Owner Beneficially Owned(1) of Class (2)
- ------------------- --------------------- ------------
Friedman, Billings, Ramsey Group, Inc. 251,500(3) 8.80%
1001 19th Street North
Arlington, VA 22209
FMR Corp. 221,000(4) 7.73%
82 Devonshire Street
Boston, MA 02109
Neuberger Berman Inc. 180,300(5) 6.31%
605 Third Avenue
New York, NY 10158
Joseph H. Rossi 174,341(6) 6.05%
c/o Alliance Bancorp of New England, Inc.
348 Hartford Turnpike
Vernon, CT 06066
US Bancorp 165,440(7) 5.79%
800 Nicollet Mall
Minneapolis, MN 55402-7020
BPI Global Asset Management LLP 144,500(8) 5.01%
1900 Summit Tower Boulevard
Orlando, FL 32810
Towle & Co. 143,255(9) 5.01%
12855 Flushing Meadow Drive
St. Louis, MO 63131
All directors and executive officers
as a group (13 persons) 536,676(10) 18.07%
(1) Based on information provided by the respective beneficial owners and on
filings with the Securities and Exchange Commission made pursuant to the
Securities Exchange Act of 1934.
(2) Based on 2,859,001 shares of common stock issued and outstanding as of
December 31, 2003.
(3) Based solely on information provided in a Schedule 13G/A filed with the SEC
by Friedman, Billings, Ramsey Group, Inc. All shares are held with shared
voting and dispositive power.
(4) Based solely on information provided in a Schedule 13G filed with the SEC by
FMR Corp. The beneficial owner has sole dispositive power for the shares.
(5) Based solely on information provided in a Schedule 13G filed with the SEC by
Neuberger Berman Inc. This includes 153,300 shares with sole voting power.
All shares are held with shared dispositive power.
(6) Includes currently exercisable options to purchase 22,813 shares. Mr. Rossi
shares voting and investment power on 23,318 shares held jointly with wife
and 330 shares held jointly with minor children.
(7) Based solely on information provided in a Schedule 13G filed with the SEC by
U.S. Bancorp. This includes 157,440 shares with sole voting and dispositive
power.
58
(8) Based solely on information provided in a Schedule 13G filed with the SEC
by BPI Global Asset Management LLP. All shares are held with shared voting
and dispositive power.
(9) Based solely on information provided in a Schedule 13G filed with the SEC
by Towle & Co. This includes 43,997 shares with sole voting and dispositive
power and 99,258 shares for which the reporting person has discretionary
authority under shared dispositive power.
(10) Includes currently exercisable options granted to directors and executive
officers to purchase an aggregate of 111,743 shares. The figures are based
on beneficial ownership information provided by the directors and officers.
Securities Authorized For Issuance Under Equity Compensation Plans
The following chart presents securities authorized for issuance under equity
compensation plans, as of December 31, 2003.
Equity Compensation Plan Information
Number of securities
to be issued Weighted-average
upon exercise of exercise price of Number of securities
outstanding options, outstanding options, remaining available
Plan category warrants and rights warrants and rights for future issuance
------------- ------------------- ------------------- -------------------
Equity compensation
plans approved by 185,203 $ 13.97 31,198
security holders
Equity compensation
plans not approved _ _ _
by security holders
------------------------ ----------------------- ----------------------------
Total 185,203 $ 13.97 31,198
------------------------ ----------------------- ----------------------------
In addition to the equity compensation plan information, see also Item 11-Stock
Option Income Deferral Plan and Directors' Compensation Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Bank has had, and expects to have in the future, banking transactions with
directors, officers and their associates on substantially the same terms,
including interest rates and collateral on loans, as those prevailing at the
same time for comparable transactions with others, which do not involve more
than the normal risk of collectibility or present other unfavorable features.
The aggregate of all extensions of credit to directors, officers and their
associates had a high balance in 2003 at December 31, 2003 (representing 5.2% of
the Bank's equity capital at that time), including $967,000 of unused lines of
credit. The directors of the Company satisfy applicable SEC and AMEX
independence requirements.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table presents fees paid by the Company for professional services
rendered by KPMG LLP for the years ended December 31, 2003 and 2002. Certain
amounts for 2002 have been reclassified to conform to the 2003 presentation.
Years ended December 31
(in thousands) 2003 2002
- -------------------------------------------------------
Audit fees $231 $ 78
Audit related fees 25 5
Tax fees 26 25
All other fees - 7
- -------------------------------------------------------
Total fees $282 $115
- -------------------------------------------------------
Audit fees were for professional services rendered for the audit of the
Company's consolidated financial statements and review of the interim
consolidated financial statements included in quarterly reports and services
that are normally provided by KPMG LLP in connection with statutory and
regulatory filings or engagements. The 2003 services included $103,000 paid to
KPMG LLP in conjunction with the pending merger.
Audit-related fees were for assurance and related services that are reasonably
related to the performance of the audit or review of the Company's consolidated
financial statements and are not reported under "Audit fees." These services
include accounting and reporting consultations.
59
Tax fees were for professional services primarily for federal and state tax
compliance.
All other fees were for services other than the services reported in the other
three categories above.
The Audit Committee has concluded that the provision of the non-audit services
listed above is compatible with maintaining the independence of KPMG LLP.
The Audit Committee pre-approves all audit and permissible non-audit services
provided by the independent auditors. These services may include audit services,
audit-related services, tax services and other services. Pre-approval is
generally provided for up to one year, and any pre-approval is detailed as to
the particular service or category of services and is generally subject to a
specific budget. The independent auditors and management are required to
periodically report to the Audit Committee regarding the extent of services
provided by the independent auditors in accordance with this pre-approval, and
the fees for the services performed to date. The Audit Committee may also
pre-approve particular services on a case-by-case basis. In 2003, all of the
services performed by KPMG were pre-approved by the Audit Committee.
60
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)i The consolidated financial statements of Registrant and its
subsidiaries are included within Item 8 of this report.
(a)ii All schedules have been omitted as the required information is either
included or is not applicable.
(a)iii See the exhibits listed below under 15(c).
(b) Reports on Form 8-K for Fourth Quarter
--------------------------------------
i. On October 30, 2003, the Company furnished a Form 8-K reporting,
under Item 9 and Item 12, a news release announcing third quarter
results for the 2003 fiscal year and the postponement of the
Company's annual meeting of shareholders.
ii. On December 30, 2003, the Company furnished a Form 8-K reporting,
under Item 9, the engagement of a new stock transfer agent and
option exercises by certain executive officers and directors.
(c) Exhibit Index
-------------
The exhibits listed below are included with this Report or are incorporated
herein by reference to an identified document previously filed with the
Securities and Exchange Commission as set forth parenthetically.
3(i) Certificate of Incorporation of Registrant (Exhibit 99.1 to the
Registration Statement on Form 8-A filed September 23, 1997).
3(ii) Bylaws of Registrant (Exhibit 99.2 to the Registration Statement
on Form 8-A filed September 23, 1997).
10(i) Alliance Bancorp of New England, Inc. employment agreements for
Joseph H. Rossi, Patrick J. Logiudice and David H. Gonci.
10(ii) 1997 Stock Incentive Plan for Directors, Officers and Key
employees (Exhibit 4.3 to the Registration Statement on Form S-8
filed November 6, 1997).
10(iii) Supplemental Executive Retirement Plan and Agreement between
Tolland Bank and Joseph H. Rossi, dated December 14, 1999.
(Exhibit 10(iii) to the report filed with the SEC on Form 10-K on
March 30, 2000).
10(iv) Directors' Deferred Compensation Plan (Exhibit 10(iv) to the
Report on Form 10-K filed on March 27, 1998).
10(v) 1999 Stock Option Plan for Non-Employee Directors (Exhibit 4.3 to
the Registration Statement on Form S-8 filed October 28, 1999).
10(vi) Cash Bonus Plan (Exhibit 10(vi) to the Report on Form 10-K filed
on March 27, 1998).
10(vii) Stock Option Income Deferral Plan (Exhibit 10(vii) to the Report
on Form 10-K filed on March 6, 2002).
10(viii) Bank Owned Life Insurance Plan (Exhibit 10(viii) to the Report on
Form 10-K filed on March 6, 2002).
10(ix) Alliance Bancorp of New England, Inc. change in control agreements
for Gerald Coia, Cynthia Harris, and Karen Ouimet-Matusek (Exhibit
10(ix) to the Report on Form 10-K filed on March 31, 2003).
10(x) Tolland Bank Directors' Retirement Plan (Exhibit 10(x) to the
Report on Form 10-K filed on March 31, 2003).
10(xi) Amendments to the 1999 Stock Option Plan for Non-Employee
Directors (Exhibit 10(xi) to the Report on Form 10-K filed on
March 31, 2003).
10(xii) Termination and Release Agreements for Messrs. Rossi, Gonci,
Logiudice, Lorusso, Coia, Ms. Harris, and Ms. Ouimet-Matusek
(Exhibit C to Exhibit 2.1 to the Report on Form 8-K/A filed on
July 25, 2003)
21. Subsidiaries of Registrant.
23. Independent Auditors' Consent.
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.
61
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on March 23, 2004.
ALLIANCE BANCORP OF NEW ENGLAND, INC.
by
/s/ Joseph H. Rossi
- -------------------
Joseph H. Rossi
President/Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following directors and officers on behalf of the
Company on March 23, 2004:
/s/ Robert C. Boardman /s/ Douglas J. Moser
- ---------------------- --------------------
Robert C. Boardman Douglas J. Moser
Director Director
/s/ Joseph P. Capossela /s/ Patricia A. Noblet
- ----------------------- ----------------------
Joseph P. Capossela Patricia A. Noblet
Director Director
/s/ Rodney C. Dimock /s/ Kenneth R. Peterson
- -------------------- -----------------------
Rodney C. Dimock Kenneth R. Peterson
Director Vice Chairman
/s/ D. Anthony Guglielmo /s/ Matthew L. Reiser
- ------------------------ ---------------------
D. Anthony Guglielmo Matthew L. Reiser
Chairman Director
/s/ Patrick J. Logiudice /s/ Joseph H. Rossi
- ------------------------ -------------------
Patrick J. Logiudice Joseph H. Rossi
Director/Executive Vice President Director/President/Chief
Executive Officer
/s/ Reginald U. Martin /s/ David H. Gonci
- ---------------------- ------------------
Reginald U. Martin David H. Gonci
Director Senior Vice President/Chief
Financial Officer/Treasurer
62