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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1997 or
|_| Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
FORM 10-K
Commission file number: 001-13405
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ALLIANCE BANCORP OF NEW ENGLAND, INC.
(Exact Name of Registrant as Specified in its Charter)
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DELAWARE 06-1495617
(State or other jurisdiction of (I.R.S. Employer
of incorporation or organization) Identification Number)
348 Hartford Turnpike
Vernon, Connecticut 06066
(Address of Principal Executive Office) (Zip Code)
(860)-875-2500
Registrant's telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 per share, American Stock Exchange
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 10-K. |_|
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based on the closing sale price of January 30, 1998, as reported
by American Stock Exchange, was $28,839,000.
The number of shares outstanding of common stock was 1,661,794 as of
January 30, 1998.
1
DOCUMENTS INCORPORATED BY REFERENCE
The Alliance Bancorp of New England, Inc. Proxy Statement for the Annual Meeting
of Stockholders to be held on April 8, 1998 is incorporated by reference into
Part III of this Form 10-K.
Table of Contents
PAGE
----
PART I Item 1 - Business 2
Item 2 - Properties 5
Item 3 - Legal Proceedings 5
Item 4 - Submission of Matters to a Vote of Security Holders 5
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PART II Item 5 - Market for Registrants 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 17
Item 8 - Consolidated Financial Statements and Supplementary Data 18
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 18
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PART III Item 10 - Directors and Executive Officers of the Registrant 18
Item 11 - Executive Compensation 18
Item 12 - Security Ownership of Certain Beneficial Owners and Management 18
Item 13 - Certain Relationships and Related Transactions 18
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PART IV Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K 18
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PART I
Special Note Regarding Forward-Looking Statements
This report contains certain "forward-looking statements." These forward-looking
statements, which are included in Management's Discussion and Analysis, describe
future plans or strategies and include the Company's expectations of future
financial results. The words "believe," expect," "anticipate," "estimate,"
"project" and similar expressions identify forward-looking statements. The
Company's ability to predict results or the effect of future plans or strategies
or qualitative or quantitative changes based on market risk exposure is
inherently uncertain. Factors which could affect actual results include but are
not limited to change in general market interest rates, general economic
conditions, legislative/regulatory changes, fluctuations of interest rates,
changes in the quality or composition of the Company's loan and investment
portfolios, deposit flows, competition, demand for financial services in the
Company's markets, and changes in the accounting principles, policies, and
guidelines. These factors should be considered in evaluating the forward-looking
statements, and undue reliance should not be placed on such statements.
ITEM 1. BUSINESS
--------
General. Alliance Bancorp of New England, Inc. ("Alliance" or the "Company") is
a Delaware corporation that was organized in 1997. Alliance's primary activity
is to act as the holding company for Tolland Bank (the "Bank"), which is its
sole subsidiary and principal asset.
The Bank is a Connecticut chartered savings bank which was founded in 1841 and
is headquartered in Vernon, as is Alliance. In 1986, Tolland Bank converted from
mutual to stock form. The Bank's deposits are insured up to applicable limits by
the Federal Deposit Insurance Corporation ("FDIC").
The Bank operates seven offices in Tolland County and provides retail and
commercial banking products and services in Tolland County and surrounding
towns. Retail activities consist of branch deposit services, home mortgage and
consumer lending, and mortgage banking. Commercial activities include merchant
deposit services, business cash management, and construction mortgages,
permanent
2
mortgages, and working capital and equipment loans. Through third party
relationships, the Bank also provides investment products, insurance products,
and electronic payment services to retail and commercial customers.
At December 31, 1997, Tolland Bank had total deposits of $221.7 million, total
loans of $157.4 million, and total assets of $247.1 million. There are no
material concentrations of loans or deposits with one customer, a group of
related customers, or in a single industry.
Market Area. The Bank's market area is centered in Tolland County, Connecticut,
a suburban and rural area east of Hartford. The bank operates seven offices and
its wider market area extends throughout much of northeastern Connecticut and
into Massachusetts. Much of the market is part of the Greater Hartford
metropolitan area.
Lending Activities. The Bank actively solicits retail and commercial loans in
and around its market area. Retail lending consists primarily of the origination
of residential first mortgages and home equity lines of credit, which are
generally secured by second mortgages. Commercial lending focuses primarily on
owner occupied first mortgage loans, along with general commercial and
industrial loans and subdivision development and construction loans.
Additionally, the Bank has a portfolio of 100% Government guaranteed loans
purchased in the secondary market to supplement local loan originations. Except
for the Government guaranteed loans, the Bank attempts to cross-sell other loan
and deposit products to build multiple sales to its customer base.
Most of the Bank's residential mortgage originations are underwritten to
secondary market standards and are sold on a non-recourse, servicing released
basis. The Bank offers an extensive list of mortgage types, including FHA and VA
loans, land loans, and subprime loans (which are also sold 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, and the bank retains
ownership and servicing of all home equity lines and loans that it originates.
Consumer loans also include secured installment loans, which are primarily well
seasoned mobile home loans and indirect loans which were originated in the
1980's.
Commercial mortgages are primarily first mortgage loans on a variety of owner
occupied commercial properties. The Bank also provides commercial mortgages on
investor owned properties, including retail, office, and light manufacturing.
Commercial mortgages normally amortize over
15 - 20 years and typically mature in 5-10 years. Commercial mortgages are
normally guaranteed by the principals and by owner occupant businesses. Other
commercial loans include commercial and industrial loans, and real estate
secured loans, as well as subdivision development and construction loans.
Government guaranteed loans are purchased in the secondary market and are 100%
guaranteed by either the Small Business Administration (SBA) or the U.S.
Department of Agriculture (USDA). 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. Loan approval
limits are based on loan and relationship size, and most commercial loans are
approved either by the Chief Lending Officer, the Company's Credit Committee,
and/or the Board. The loan policy sets certain limits on concentrations of
credit related to one borrower. The Bank's policy is to assign a risk rating to
all commercial loans. The Bank conducts an ongoing program of commercial loan
reviews and quality control sample inspections of residential and consumer loan
originations.
Total real estate secured loans were $117.5 million (74.6% of total loans) at
year-end 1997. Local real estate prices have declined throughout much of the
current decade. Aided by favorable interest rates and a modest recovery in the
Connecticut economy, real estate prices have firmed in some sectors over the
last two years, while some sectors continue to show further modest softening.
The Bank conducts an overall review of real estate market trends at least once
each year, and real estate lending activities are governed by real estate
lending and appraisal policies. New construction has remained active in certain
residential markets, along with commercial retail, medical office, and lodging
properties.
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. In 1997, investment activities were
limited to purchases and sales of available for sale securities. The Company's
investment portfolio consists of high grade investment securities, and is
primarily composed of mortgage backed securities, U.S. agency securities, and
exchange traded equity securities. Investment activities are governed by a Board
approved investment policy, and the Board reviews all investment activities on a
monthly basis.
3
Deposits and Other Sources of Funds. The Banks' major sources of funds are
deposits, borrowings, principal payments on loans and securities, and maturities
of investments. Borrowings are generally used to fund long-term assets and
short-term liquidity requirements or to manage interest rate risk. The Bank is a
member of the Federal Home Loan Bank of Boston ("FHLBB") and may borrow from the
FHLBB subject to certain limitations. The Bank also has available lines of
credit for federal funds purchases and reverse repurchase agreements.
Competition. The Company's market area is highly competitive with a wide range
of financial institutions including commercial banks, both mutual and stock
owned savings banks, savings and loan associations, and credit unions. The Bank
also competes with insurance and finance companies, investment companies, and
brokers for the same funds. Factors affecting competition include ongoing
mergers and acquisitions (including expansion of regional and national banks),
the introduction of new product types and rate structures, and the development
of new delivery channels (including supermarket banking and home banking). The
Bank competes through pricing, product development, focused marketing, and
providing more convenience through technology and business hours. The Bank
strives to provide the personal service advantage of a community bank and to
take advantage of potential market changes following consolidations by the large
regional banks.
Employees. As of year-end 1997, the Company had 83 full-time equivalent
employees. None of the employees are represented by a collective bargaining
group, and management considers relations with its employees to be good.
Regulation And Supervision. The Company and the Bank are heavily regulated. As a
bank holding company, Alliance is supervised by the Board of Governors of the
Federal Reserve System ("FRB") and it is also subject to the jurisdiction of the
Connecticut Department of Banking. As a Connecticut-chartered savings bank, the
regulation and supervision by the FDIC and the Connecticut Department of
Banking.
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 has
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, 1997. Furthermore, under the capital standards, the
Company and the Bank are currently well-capitalized.
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.
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Under the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("Riegle-Neal"), different types of interstate transactions and activities will
be permitted, each with different effective dates. Interstate transactions and
activities provided for under the law include: (i) bank holding company
acquisitions of separately held banks in a state other than a bank holding
company's home state; (ii) mergers between banks with different home states,
including consolidations of affiliated banks; (iii) establishment of interstate
branches either de novo or by branch acquisition; and (iv) affiliate banks
acting as agents for one another for certain banking functions without being
considered a "branch." In general, subject to certain limitations, nationwide
interstate acquisitions are now permissible, irrespective of state law
limitations other than limitations related to deposit concentrations and bank
age requirements. Interstate mergers were permissible on June 1, 1997, unless a
state passed legislation either to prevent or to permit the earlier occurrence
of interstate mergers. States may at any time enact legislation permitting
interstate branching either de novo or through acquisition. Affiliated banks may
act as agents for one another beginning one year after enactment. Each of the
transactions and activities must be approved by the appropriate federal bank
regulator, with separate and specific criteria established for each category.
Year 2000 Considerations. The Company uses computer systems extensively in its
operations. The Company has established a Year 2000 project plan to address
systems and facilities changes necessary to properly recognize dates after 1999.
The Company's Year 2000 Considerations are discussed more fully in Management's
Discussion and Analysis of Financial Condition and Results of Operation.
4
Supplementary Information
- -------------------------
The following supplementary information, some of which is required under Guide 3
(Statistical Disclosure by Bank Holding Companies), is found in this report on
the pages indicated below, and should be read in conjunction with the related
financial statements and notes thereto.
Selected Consolidated Financial Data 7
Average Balance Sheet, Net Interest Income
and Interest Rates 9
Loan Portfolio 11
Nonaccruing Loans 12
Provision and Allowance for Loan Losses 12
Interest Rate Sensitivity 14
Maturity of Securities 11 Exhibit 99-
Foreclosed Properties 13
Time Deposits of $100 Thousand or More 13
Short-term Borrowings 13
Deposits 13
Volume and Rate Analysis-FTE Basis 22 Exhibit 99
Selected Quarterly Financial Data 22 Exhibit 99
Construction and Commercial Loans 23 Exhibit 99
Securities Cost and Fair Value 23 Exhibit 99
Market Risk Sensitive Instruments 24 Exhibit 99
ITEM 2. PROPERTIES
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The premises of Alliance are located in Connecticut as follows (see the notes
"Premises and Equipment, Net" and "Commitments and Contingencies" in Item 8 for
additional information about the Company's premises):
Year Lease
Location - Town (Street) Owned / Leased Expires
- --------------------------------------------------------------------------------
o Tolland - (Olde Tolland Common) Owned
o Vernon - (348 Hartford Turnpike) Owned
o Coventry - (Routes 31 and 44) Owned
o Ellington - (287 Somers Road) Owned
o Stafford Springs - (34 West Stafford Road) Leased 1999
o Willington - (Routes 74 and 32) Leased 2005
o Tolland - (Merrow Road) Leased 2000
o Approximately 9 acres of land adjacent to the Company's office on Olde Tolland
Common in Tolland.
o A commercial property leased to a child care operation adjacent to the
Company's office on Olde Tolland Common in Tolland.
o Approximately 10 acres of land adjacent to the Company's office in Coventry,
Connecticut.
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company is not involved in any material legal proceedings other than
ordinary routine litigation incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
5
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY & RELATED SHARE HOLDER MATTERS
--------------------------------------------------------------------
The Company's common stock is listed on the American Stock Exchange (AMEX) under
the symbol "ANE." A total of 752,400 shares of the Company's stock, or 47% of
outstanding shares, were traded on AMEX in 1997. As of January 31, 1998, the
Company had 524 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 January 31, 1998 was $17.63. The Company
declared and paid a $.05 cent dividend in the fourth quarter of 1997. A $0.02
cent dividend was declared and paid in 1996. Dividends are subject to the
restrictions of applicable regulations. See the "Shareholders' Equity" note 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.
Quarter Ended High Low Dividends Declared Per Share
- ---------------------------------------------------------------------------------------------------------
March 31, 1996 $ 7.88 $ 6.94 $ 0
June 30, 1996 7.78 7.13 0
September 30, 1996 9.28 7.22 0
December 31, 1996 10.03 8.25 .02
March 31, 1997 12.09 8.63 .04
June 30, 1997 15.00 10.31 .04
September 30, 1997 18.25 13.03 .05
December 31, 1997 18.00 16.38 .05
6
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
December 31 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
For the Year (in thousands)
Net interest income $ 7,960 $ 7,663 $ 7,364 $ 6,954 $ 6,923
Provision for loan losses 829 978 1,975 639 191
Service charges and fees 1,148 1,115 1,005 789 828
Net gain (loss) on securities 961 (40) 22 (16) 66
Net gain (loss) on assets (148) 200 (967) (28) (438)
Non-interest expense 6,411 6,640 6,582 6,545 6,850
Income (loss) before income taxes 2,681 1,320 (1,133) 515 338
Income tax expense (benefit) 664 (118) 12 61 94
Cumulative effect of change in accounting
principle - - - - 189
Net income (loss) $ 2,017 $ 1,438 $(1,145) $ 454 $ 433
- ---------------------------------------------------------------------------------------------------------------------------
Per Share
Diluted earnings (loss) $ 1.23 $ .92 $ (.74) $ .29 $ .28
Basic earnings (loss) 1.27 .93 (.74) .29 .28
Dividends declared .18 .02 - - -
Book value 11.49 9.98 8.60 8.56 9.58
Common stock price:
High 18.25 10.04 7.79 7.22 7.41
Low 8.63 6.94 5.25 5.44 4.79
Close 16.50 9.00 7.12 5.72 5.44
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At Year End (in millions)
Total assets $ 247.1 $ 232.3 $ 214.1 $ 201.1 $ 193.7
Total loans 157.5 147.8 152.9 131.4 115.2
Other earning assets 78.4 71.2 47.8 52.1 58.0
Deposits 221.7 205.6 193.4 180.4 166.2
Borrowings 5.7 10.4 6.9 6.9 12.0
Shareholders' equity 18.8 15.6 13.3 13.2 14.8
- ---------------------------------------------------------------------------------------------------------------------------
Operating Ratios (in percent)
Return (loss) on average assets .86% .65% (.54)% .24% .22%
Return (loss) on average equity 12.29 9.84 (8.37) 3.19 2.90
Equity % total assets (period end) 7.61 6.71 6.20 6.57 7.63
Net interest spread (fully taxable equivalent) 3.30 3.34 3.35 3.72 3.90
Net interest margin (fully taxable equivalent) 3.80 3.78 3.71 3.95 4.00
Dividend payout ratio 13.78 2.43 - - -
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7
ITEM 7. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS
1997 SUMMARY
Alliance Bancorp of New England, Inc. ("Alliance" or the "Company") earned a
record $2.02 million ($1.23 per diluted share) for the year ended December 31,
1997. Net income increased by 40.3% from $1.44 million in 1996. As of year-end,
Alliance had recorded seven consecutive quarters of increasing earnings.
1997 results benefited from improvements in all major areas of operations. Net
interest income increased by 3.9%, total service charges and fees increased by
2.9%, and non-interest expense declined by 3.4%. Collectively, these
improvements contributed $559 thousand to 1997 earnings, providing an increase
of 42.3% over 1996 pre-tax earnings.
During the year, the Company realized securities gains totaling $961 thousand as
a result of an ongoing restructuring of the investment portfolio. The gains
offset losses of $148 thousand on foreclosed assets and a $782 thousand increase
in tax expense. Certain foreclosed assets were written down to accelerate
liquidation. Tax expense in 1996 included the benefit of a reduction in the
valuation allowance on the deferred tax asset.
The Company reduced its nonperforming assets to 1.11% of total assets at
year-end 1997, compared to 1.88% a year ago. The loan loss allowance increased
by 5.3% to $3.0 million, providing 140.7% coverage of nonaccruing loans,
compared to 84.3% a year earlier. Net loan charge-offs totaled $679 thousand in
1997, compared to $468 thousand in 1996, as a result of a reassessment of
probable consumer loan losses. Total nonaccruing loans were reduced to $2.1
million at year-end 1997, compared to $3.4 million a year earlier.
Total assets at year-end 1997 were $247.1 million, 6.4% higher than a year
earlier. Total loans grew by a similar 6.5%, while total deposits grew by 7.8%.
Deposit growth resulted from time account promotions during the first half of
the year, and from the introduction of a new money market account during the
second half of the year. Loan growth was mostly during the second half of the
year, and consisted primarily of commercial loan growth, along with originations
of home equity loans.
Shareholders' equity increased 20.6% from a year earlier to $18.8 million at
December 31, 1997, representing a book value per share of $11.49. At year-end,
the equity to asset ratio stood at 7.61%, up from 6.71% a year earlier. The
Company's capital remained in excess of all regulatory requirements. In addition
to retained earnings, sources of equity growth included option exercises and
unrealized securities gains, which together provided a $1.5 million increase in
net worth.
On July 17, 1997 a 33.33% stock dividend was paid to shareholders, providing one
additional share for each three shares held, as a result of a four-for-three
stock split. Prior period earnings and book value per share have been restated
for this change. Due to the effect of the stock split and a dividend increase in
1997, cash dividends paid to shareholders were 122% higher in the fourth quarter
of 1997 than in the same period of the prior year. Prior period earnings per
share were also restated for the adoption of Statement of Financial Accounting
Standards #128.
On October 3, 1997, the Company completed formation of Alliance Bancorp of New
England as the holding company for Tolland Bank (the "Bank"), in accordance with
an Agreement and Plan of Reorganization adopted by the shareholders at the 1997
Annual Meeting. Under the plan, shareholders of the Bank became shareholders of
the Company on a share for share basis. All existing Tolland Bank shares are
treated the same as Alliance shares, with no need for shareholders to exchange
them.
8
RESULTS OF OPERATIONS - 1997 VERSUS 1996
Net Interest Income - Fully Taxable Equivalent (FTE) Basis
(dollars in thousands) Average Balance Rate (FTE Basis)
- ---------------------------------------------------------------------------------------------------------------------------
Years ended December 31 1997 1996 1995 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Loans $ 148,601 $ 150,636 $ 148,605 8.17% 8.20% 8.19%
Securities available for sale 48,159 32,663 16,926 7.39 7.29 5.38
Securities held to maturity 20,634 22,204 31,270 5.85 5.73 5.95
Other earning assets 5,618 4,876 1,897 5.70 5.43 5.17
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Total earning assets 223,012 210,379 198,698 7.72 7.73 7.57
Other assets 10,965 11,744 13,460
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Total assets $ 233,977 $ 222,123 $ 212,158
===========================================================================================================================
Interest bearing deposits $ 193,371 $ 182,379 $ 170,038 4.39 4.33 4.08
Borrowings 4,244 7,012 11,876 6.22 5.92 6.25
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Interest bearing liabilities 197,615 189,391 181,914 4.43 4.39 4.22
Other Liabilities 19,947 18,116 16,567
Shareholder's equity 16,415 14,616 13,677
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Total liabilities and equity $ 233,977 $ 222,123 $ 212,158
===========================================================================================================================
Net Interest Spread 3.30% 3.34% 3.35%
Net Interest Margin 3.80% 3.78% 3.71%
Note: The average balance of loans included nonaccruing loans and deferred
costs. Also, the balance and yield on all securities is based on amortized cost
and not on fair value.
Net Interest Income FTE (in thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Loan interest $ 12,138 $ 12,347 $ 12,170
Securities available for sale(FTE) 3,561 2,380 911
Securities held to maturity 1,207 1,272 1,860
Other earning assets interest (FTE) 320 265 98
- ---------------------------------------------------------------------------------------------------------------------------
Total interest income(FTE) 17,226 16,264 15,039
Total interest expense 8,751 8,309 7,675
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income (FTE) 8,475 7,955 7,364
Less tax equivalent adjustment (515) (292) -
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income (Book) $ 7,960 $ 7,663 $ 7,364
===========================================================================================================================
Net interest income on an FTE basis increased by $520 thousand (6.5%) in 1997
due to a $12.6 million (6.0%) increase in average earning assets and a $779
thousand (6.6%) decrease in average non-earning assets. The Company's average
interest-bearing liabilities grew by $8.2 million (4.3%), while average
shareholders' equity grew by $1.8 million (12.3%).
The above favorable shift in the balance of earning assets versus interest
bearing liabilities produced a slight increase in the net interest margin to
3.80% in 1997 from 3.78% in 1996. This offset a decrease in the net interest
spread to 3.30% in 1997 compared to 3.34% in the prior year. The narrowing of
the interest spread was primarily due to a 4 basis point increase in the cost of
interest bearing liabilities as a result of higher rates paid on deposits to
promote growth during the year. This rate increase resulted in a $112 thousand
increase in deposit interest expense in 1997 over 1996. Most of the remaining
$442 thousand increase in interest expense, and the $962 thousand increase in
interest income, was due to higher average balances rather than due to rate
changes.
Approximately 51.7% of the Company's loan growth was booked in the last month of
the year due to scheduled closings of loan applications which had been
originated earlier in the year. Average loans declined by $2.0 million (1.4%)
for the year, and consequently the net interest margin declined throughout the
year. The earnings impact of the loan growth in the last month was generally not
reflected in the above statistics, and will contribute to earnings in future
periods. Conversely, securities contributed most of the growth in average
earning assets, even though they were lower at year-end 1997 compared to 1996.
The growth in average securities reflected the initiation of a new investment
strategy in mid-year 1996 and the first full year results in 1997.
9
Provision for Loan Losses
The provision for loan losses is made to establish the allowance for loan losses
at a level estimated to be adequate by management and the Board. The provision
for loan losses in 1997 totaled $829 thousand, compared to $978 thousand in
1996. The loan loss allowance increased to $3.00 million at year-end 1997,
compared to $2.85 million at year-end 1996. Please see the later discussion on
the Allowance for Loan Losses and the Summary of Significant Accounting Policies
in the Notes to the Consolidated Financial Statements.
Non-Interest Income
Years ended December 31 (in thousands) 1997 1996 Change %
- ---------------------------------------------------------------------------------------------------------------------------
Loan related income $ 453 $ 412 $ 41 9.8%
Deposit related income 528 510 18 3.6
Miscellaneous charges and other income 167 193 (26) (13.5)
- ---------------------------------------------------------------------------------------------------------------------------
Total service charges and fees 1,148 1,115 33 2.9
Gross gains on securities 961 12 949 -
Gross losses on securities - (52) 52 -
- ---------------------------------------------------------------------------------------------------------------------------
Net gains (losses) on securities 961 (40) 1,001 -
Gross gains on assets 31 341 (310) (90.7)
Gross losses on assets (179) (141) (38) 27.4
- ---------------------------------------------------------------------------------------------------------------------------
Net gains (losses) on assets (148) 200 (348) (173.7)
- ---------------------------------------------------------------------------------------------------------------------------
Total non-interest income $ 1,961 $1,275 $ 686 53.8
===========================================================================================================================
Total service charges and fees increased by $33 thousand (2.9%) due to increases
in both loan and deposit related service charges, including originations fees on
residential mortgages. During the year, the Company introduced several fee based
services, including life insurance product sales, business PC banking and
telephone bill payment. Additionally, the new money market account includes a
monthly service fee. The Company recorded $961 thousand in gains on investment
securities as a result of ongoing portfolio restructuring in order to balance
the duration and increase the diversification of the investment portfolio. The
net loss on assets in 1997 was due to losses on foreclosed assets; the Company
had recorded a net gain on assets in 1996 primarily due to the sale of
foreclosed assets.
Non-Interest Expense
Years ended December 31 (in thousands) 1997 1996 Change %
- ---------------------------------------------------------------------------------------------------------------------------
Staff $ 3,199 $ 3,253 $ (54) (1.7)%
Occupancy 586 597 (11) (1.8)
Equipment 283 285 (2) (.5)
Data processing services 620 476 144 30.2
FDIC insurance 87 57 30 53.1
Office and other insurance 466 452 14 3.1
Other 1,082 971 111 11.4
- ---------------------------------------------------------------------------------------------------------------------------
Subtotal - non-interest expense
before problem asset related expenses 6,323 6,091 232 3.8
Problem asset related expense 88 549 (461) (84.0)
- ---------------------------------------------------------------------------------------------------------------------------
Total non-interest expense $ 6,411 $ 6,640 $ (229) (3.4)
===========================================================================================================================
Total non-interest expense decreased by $229 thousand (3.4%) in 1997. Problem
asset related expense decreased by $461 thousand (84.0%), offsetting a $232
thousand (3.8%) increase in total non-interest expense before problem asset
related expense. The Company recorded higher problem asset related expense in
1996 in relation to actions taken to accelerate the resolution of problem assets
and delinquent loan situations. This expense decreased in 1997 as a result of
these resolutions, and included the benefit of recoveries of previously charged
expenses on the liquidation of certain problem assets.
Total non-interest expense before problem asset related expense benefited from
decreases in staff expense, occupancy, and equipment expense, reflecting ongoing
expense controls. Staff expense also benefited from a $216 thousand increase in
salary deferrals related to higher loan originations activities, and an increase
in the deferral rates based on updated analyses of originations costs.
Additionally, staff expense in 1996 included $272 thousand in one-time charges
related to an agreement described in the Commitments and Contingencies note to
the financial statements. All other operating non-interest expenses
10
increased by $299 thousand (15.3%). Contributing to this increase were increases
in data processing expenses ($144 thousand due to higher charges under a service
bureau contract), marketing costs ($50 thousand due to loan promotions),
consulting fees ($49 thousand due to higher loan originations) and FDIC premiums
($30 thousand due to the FDIC recapitalization).
Income Tax Expense
The Company recorded a $782 thousand increase in income tax expense in 1997. In
1996, the Company recorded a $118 thousand income tax net benefit, primarily due
to a $554 thousand reduction in the valuation allowance on the deferred tax
asset related to the restoration of taxable earnings in 1996, along with the
resolution of problem assets. In 1997, total income tax expense of $664 thousand
reflected a 24.8% effective tax rate. This tax rate included benefits of $237
thousand related to the federal dividend received deduction on investment income
and $150 thousand due to the reduction and elimination of the valuation
allowance on the deferred tax asset (except for a balance of $85 thousand
related to the tax effect of the net unamortized loss on securities held to
maturity). The Company's net deferred tax asset (net of deferred tax
liabilities) was $73 thousand at year-end 1997. Management believes that it is
more likely than not that the net deferred tax asset is realizable.
FINANCIAL CONDITION - FISCAL YEAR-END 1997 VERSUS 1996
Securities
Securities balances declined nominally in 1997, with available for sale (AFS)
securities down $1.7 million (3.7%) and held to maturity (HTM) securities down
$741 thousand (3.6%). There were no purchases or sales of HTM securities. The
primary component of HTM securities is U.S. agency mortgage-backed securities,
which consist principally of planned amortization class collateralized mortgage
obligations.
While period-end AFS security balances were down slightly, average balances
increased $15.5 million (47.4%), primarily reflecting purchases of U.S. agency
securities and preferred equity securities in the second and third quarters of
1996. During 1997, the Company sold and purchased AFS securities in amounts of
$16.7 million and $23.6 million, respectively. This activity was part of an
ongoing program to lengthen the duration and increase the diversification of
this portfolio. At year-end 1997, the AFS security portfolio included $24.6
million in debt securities and $18.3 million in marketable equity securities.
The debt securities included callable U.S. agency securities and structured
agency securities, consisting primarily of deleveraged notes. Marketable equity
securities included preferred stock (primarily national financial institutions)
and common equity (primarily utilities). All of the Bank's marketable debt and
equity securities were rated in one of the top three rating categories by at
least one rating agency, except for common equities totaling $2.45 million which
were in the fourth highest rating category.
The Company recorded total gains of $961 thousand on the sale of AFS securities
in 1997. The unrealized gain on AFS securities was $1.4 million at year-end
1997, compared to $243 thousand a year earlier, and the average FTE yield on
this portfolio increased to 7.39% in 1997 from 7.29% in 1996.
Lending Activities
December 31 ($ in millions) 1997 1996 1995 1994 1993
---------------------------------------------------------------------------------------------------------------------------
Residential mortgages $ 39.3 25.0% $ 41.7 28.2% $ 44.0 28.8% $ 44.6 33.9% $ 42.1 36.5%
Commercial mortgages 45.5 28.9 40.5 27.4 40.7 26.6 37.2 28.3 38.0 33.0
Other commercial loans 18.3 11.6 15.3 10.4 18.8 12.3 20.0 15.2 13.7 11.9
Consumer loans 29.5 18.7 26.1 17.7 22.4 14.7 23.6 18.0 21.4 18.6
---------------------------------------------------------------------------------------------------------------------------
Total regular loans 132.6 84.2 123.6 83.7 125.9 82.4 125.4 95.4 115.2 100.0
Government guaranteed loans 24.9 15.8 24.2 16.3 27.0 17.6 6.0 4.6 - -
---------------------------------------------------------------------------------------------------------------------------
Total loans $ 157.5 100.0 $ 147.8 100.0 $ 152.9 100.0 $ 131.4 100.0 $ 115.2 100.0
===========================================================================================================================
Total loans increased by $9.6 million (6.5%) during 1997, primarily in
commercial mortgages and loans ($8.0 million) and consumer loans ($3.4 million).
Commercial loan growth reflected a higher level of originations activity in
1997. Consumer loan growth was due to ongoing promotions of home equity loans
and lines of credit. While residential mortgage originations were nearly
unchanged from the prior year, the majority of new mortgages were sold to the
secondary market, and regular amortization and prepayments contributed to a $2.4
million decrease in residential mortgage outstandings. Government guaranteed
loans were purchased in the secondary market and are 100% guaranteed by either
the Small Business Administration (SBA) or the U.S. Department of Agriculture
(USDA). These are business term loans and mortgages, and are primarily loan
certificates registered with and serviced by a national servicing corporation.
11
Nonperforming Assets
December 31 (dollars in millions) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
Nonaccruing loans $ 2.1 $ 3.4 $ 4.4 $ 0.7 $ 1.1
Foreclosed assets 0.6 1.0 2.0 5.4 9.8
- ---------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 2.7 $ 4.4 $ 6.4 $ 6.1 $ 10.9
===========================================================================================================================
Nonperforming assets as a 1.1% 1.9% 3.0% 3.0% 5.7%
percentage of total assets
Total nonperforming assets decreased by $1.7 million (38.6%) to $2.7 million, or
1.1% of total assets at year-end 1997. The largest nonperforming assets at
year-end were two nonaccruing loans: a $1.0 million secured commercial loan and
a $424 thousand commercial mortgage in foreclosure. Accruing loans delinquent
more than 30 days decreased by $1.4 million (50.3%) to $1.4 million during 1997;
the largest such loan was a $225 thousand real estate secured commercial loan.
At year-end 1997, loans more than ninety days past due and still accruing
interest totaled $86 thousand. Also, at that date, accruing loans included $1.5
million of classified and/or impaired loans with a potential to become
nonperforming based on identified credit weaknesses.
Allowance for Loan Losses
December 31 (in thousands) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
Beginning balance $ 2,850 $ 2,340 $ 2,090 $ 2,070 $ 2,100
Charge-offs:
Residential mortgages (108) (74) (102) (177) (6)
Consumer (366) (273) (252) (251) (230)
Commercial (294) (220) (1,438) (288) (106)
- ---------------------------------------------------------------------------------------------------------------------------
Total Charge-offs (768) (567) (1,792) (716) (342)
- ---------------------------------------------------------------------------------------------------------------------------
Recoveries:
Residential mortgages 11 12 8 1 -
Consumer 45 61 53 89 96
Commercial 33 26 6 7 25
- ---------------------------------------------------------------------------------------------------------------------------
Total Recoveries 89 99 67 97 121
- ---------------------------------------------------------------------------------------------------------------------------
Net Charge-offs (679) (468) (1,725) (619) (221)
Provision for losses 829 978 1,975 639 191
- ---------------------------------------------------------------------------------------------------------------------------
Ending balance $ 3,000 $ 2,850 $ 2,340 $ 2,090 $ 2,070
===========================================================================================================================
In allocating the allowance for loan losses, amounts allocated to the individual
categories of loans include (1) allowances for specific impaired loans, (2) an
allocation of remaining allowance amounts based on the experience of management
and the Bank, (3) the overall risk characteristics of the individual loan
category and (4) the current economic conditions that could affect the
individual loan categories.
December 31 ($ in thousands) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses by type of loan:
Residential mortgage $ 202 6.7% $ 304 10.7% $ 173 7.4% $ 118 5.6% $ 96 4.6%
Consumer 399 13.3 416 14.6 276 11.8 300 14.4 371 17.9
Commercial 1,749 58.3 1,860 65.3 1,743 74.5 1,481 70.9 1,415 68.4
Unallocated 650 21.7 270 9.4 148 6.3 191 9.1 188 9.1
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 3,000 100.0 $ 2,850 100.0 $ 2,340 100.0 $ 2,090 100.0 $ 2,070 100.0
===========================================================================================================================
Management increased the allowance by $150 thousand in 1997; the increase was in
the unallocated portion of the allowance as a general reserve. Allocated
portions of the allowance decreased due to lower nonperforming assets, but
management increased the overall allowance based on loan growth and based on the
age of the current economic cycle. The ratio of the allowance to regular loans
was 2.26% at year-end 1997, down slightly from 2.33% a year earlier due to loan
growth during the year. No reserves are assigned to Government guaranteed loans,
which are 100% backed by U.S. agency guarantees. The allowance measured 141% of
total nonaccruing loans at December 31, 1997, an increase compared to 84% at the
prior year-end. The year-end allowance was equal to 442% of 1997 net loan
charge-offs, compared to 609% at year-end 1996.
12
Net loan charge-offs increased by $211 thousand (45.1%) to $679 thousand in
1997. The net charge-off rate measured 0.46% of average loans outstanding,
compared to 0.31% in 1996. The charge-off rate increased in all three categories
(residential, consumer, and commercial), but the primary increase was in
consumer loans, which registered a $109 thousand increase in net charge-offs,
with the loss rate increasing to 1.21% from 0.84%. Residential and commercial
losses remained within the general range for several previous years, but the
consumer loss rate was the highest in five years. These losses were due to a
decision by management to charge-off the full balance of delinquent mobile home
loans after 150 days delinquency. The mobile home loan portfolio is seasoned
about ten years, but collateral values have not recovered as local economic
conditions have improved. As a result of these actions, total nonaccruing
consumer loans declined to only $69 thousand at year-end 1997, compared to $424
thousand at the prior year-end.
Net charge-offs as a percentage of
average loans by type: 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
Residential mortgage 0.24% 0.15% 0.21% 0.42% 0.01%
Consumer 1.21 0.84 0.88 0.77 0.52
Commercial 0.46 0.34 1.77 0.50 0.15
Total 0.46 0.31 1.16 0.52 0.18
Allowance as a percentage of
outstanding loans by type:
Residential mortgage 0.51% 0.75% 0.39% 0.26% 0.23%
Consumer 1.35 1.59 1.23 1.29 1.76
Commercial 2.74 3.33 2.93 2.35 2.74
Unallocated - - - - -
Subtotal Regular Loans 2.26 2.33 1.86 1.67 1.80
SBA guaranteed certificates - - - - -
Total 1.91 1.95 1.53 1.59 1.80
Deposits and Borrowings
December 31 (dollars in millions) 1997 1996 % change
- ---------------------------------------------------------------------------------------------------------------------------
Demand deposits $ 21.9 $ 19.7 11.2%
NOW deposits 22.3 20.5 8.8
Money market deposits 15.4 6.5 136.9
Savings deposits 34.7 38.1 (8.9)
Time deposits < $100 thousand 112.2 105.4 6.5
Time deposits > $100 thousand 15.2 15.4 (1.3)
- ---------------------------------------------------------------------------------------------------------------------------
Total deposits $ 221.7 $ 205.6 7.8
===========================================================================================================================
Personal $ 190.4 $ 173.9 9.5
Commercial 25.9 26.0 (.4)
Municipal 5.4 5.7 (5.3)
- ---------------------------------------------------------------------------------------------------------------------------
Total deposits $ 221.7 $ 205.6 7.8%
===========================================================================================================================
Total deposits increased by $16.1 million (7.8%) at year-end 1997 compared to a
year earlier. All major categories of deposits increased except savings
accounts, which declined by 8.9%. Time deposits increased by $6.6 million due to
regular promotions of accounts primarily in the one to three year maturities. In
the second half of the year, the Company introduced a new money market savings
account with tiered interest rates approaching the yield on mutual funds for the
highest balance accounts. Total money market accounts increased by $8.9 million
due to the introduction of this product. Total borrowings decreased by $4.7
million (44.8%) in 1997. Deposit and equity growth exceeded the growth rate of
loans and investments, with the result that short term borrowings were paid down
and excess funds were invested in short term investments.
Time deposits greater than or equal to $100 thousand maturing within one year
were comprised of $3 million maturing within three months, $3 million maturing
after three months but within six months, and $3 million maturing after six
months at year-end 1997. Time deposits greater than or equal to $100 thousand
maturing after one year totaled $6 million at year-end 1997.
13
Interest Rate Sensitivity
The following table presents a breakdown of the Company's interest rate
sensitive assets and liabilities on December 31, 1997 by specific time frames
and cumulatively. Balances of fixed rate assets are reported by their expected
prepayment schedules or by their expected remaining lives taking into account
call provisions. These estimates are provided by a correspondent bank and are
based on market estimates. Balances of deposit liabilities without a contractual
maturity date are reported by their repricing characteristics. These repricing
characteristics are determined by Management in accordance with an analysis of
the market sensitivity of specific deposit product types.
Total
Interest Rate Sensitivity - Repricing Horizon Within 1-5 Over 5
(dollars in millions) One Year Years Years
- ---------------------------------------------------------------------------------------------------------------------------
December 31, 1997
Earning Assets:
Loans $ 99 $ 19 $ 39
Securities available for sale 22 10 12
Securities held to maturity 5 14 1
Other assets 15 - -
- ---------------------------------------------------------------------------------------------------------------------------
Total earning assets $ 141 $ 43 $ 52
===========================================================================================================================
Funds Supporting Earning Assets:
NOW deposits $ 15 $ 7 $ -
Savings & Money Market 26 25 -
Time deposits < $100,000 69 43 -
Time deposits > $100,000 9 6 -
Borrowings 2 4 -
Non-interest bearing funds - - 30
- ---------------------------------------------------------------------------------------------------------------------------
Total funds supporting earning assets $ 121 $ 85 $ 30
===========================================================================================================================
December 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------
Gap for period $ 20 $ (42) $ 22
Cumulative gap 20 (22) -
Cumulative gap as percent of total earning assets (9)% (11)% -
December 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------
Cumulative gap $ 16 $ (17) -
Cumulative gap as percent of total earning assets 7% (8)% -
The Company's Asset Liability Committee (ALCO) meets weekly to manage net
interest income and its sensitivity to interest rates. ALCO reports are reviewed
by the Board monthly. ALCO monitors risk and establishes long term strategies.
ALCO also manages the interest rates and other pricing features of the Company's
products.
At December 31, 1997, the Company had a positive twelve month gap of $20
million, which was up from $16 million at the previous year-end. The gap
increased due to growth in time deposits with a maturity over one year. This
growth was invested in part in short term assets, in anticipation of further
growth in loans in 1998. Time deposit growth also was invested in common equity
securities which are included with assets maturing over five years. The Company
generally targets a one year gap that is near break-even or slightly positive.
This provides protection to net interest income in case interest rates increase.
With interest rates near record lows in recent years, the Company's priority has
been to protect against increases rather than decreases in interest rates. Due
to the positive one year gap, the Company benefited from the .25% increase in
the prime interest rate on March 27, 1997. Most of the Company's variable rate
loans are based on the prime rate. The prime rate remained at 8.50% for the rest
of 1997, despite a decrease in interest rates at year-end 1997 to levels below
those prevailing a year earlier. The cumulative five year gap at year-end 1997
was ($22) million compared to ($17) million a year earlier. This liability
sensitivity increased due to the previously mentioned growth in equity
investments funded by time deposit growth.
14
Liquidity And Cash Flows
The Company's primary source of funds is dividends form the Bank and its primary
use of funds is dividends to shareholders. Dividends from the Bank are primarily
paid from current period cash earnings of the Bank, and secondarily from other
liquid assets of the Bank. Dividends from the Bank to the Company are subject to
restrictions as is further described in the Shareholder's Equity note to the
consolidated financial statements.
Liquidity is also needed by the Bank to fund loan originations and the use of
credit commitments, along with deposit withdrawals and maturing borrowings. The
Bank manages its day-to-day liquidity by maintaining short term investments
and/or utilizing short term borrowings. In addition to its FHLBB relationship,
the Bank maintains $8.8 million in credit facilities for short term borrowings
and repurchase agreements. Over the year, loan originations and asset purchases
are funded by amortization of loans and investments, as well as by deposit
growth and FHLBB borrowings. In 1997, the primary use of funds was the
origination of loans and the primary source of funds was growth in time and
money market deposits. In the event of additional funds needs, the Bank could
choose to liquidate short term investments or to obtain funds from the
investment portfolio either by selling securities available for sale or
obtaining loans backed by investment securities. Additionally, the portfolio of
Government guaranteed loan certificates represents a readily marketable pool of
assets.
Capital Resources
Capital ratios for the Company and the Bank were in excess of all applicable
regulatory requirements for all periods presented. Total shareholders' equity
increased by $3.2 million (20.6%) in 1997 due to improved earnings, to
unrealized gains on the market value of securities, and to the exercise of stock
options. The Company increased the quarterly cash dividend to four cents per
share from two cents per share in the first quarter of 1997, and then
effectively to five cents per share as a result of the stock split in the second
quarter.
Impact of New Accounting Standards
Certain new accounting standards apply to future period reporting, as is more
fully discussed in the Recent Accounting Developments section of the Summary of
Significant Accounting Policies in the notes to the Consolidated Financial
Statements.
15
Year 2000 Considerations
The Company has established a Year 2000 project plan to address systems and
facilities changes necessary to properly recognize dates after 1999, and has
assigned implementation responsibilities and has established management and
Board reporting processes. All of the Company's significant financial accounting
systems are provided under contract with major national banking systems
providers which are progressing under their own Year 2000 plans. Most
significant systems changes are scheduled to be completed by December 31, 1998.
The Company's plan follows the following five step approach required by its
regulators: Assessment, Modification, Verification, Implementation, and Client
Testing. The Company has completed the Assessment phase and is currently working
with its vendors on the Modification phase. The Company has arranged for
temporary consulting help and has purchased diagnostic software to assist with
this project. The Company's project also addresses its other suppliers,
customers, and other constituents. The costs of the project, which are not
expected to be significant, and the date on which the Company plans to complete
the Year 2000 modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. The
primary uncertainty facing the Company is the ability of third party systems
providers to identify and modify software as planned. Specific factors that
might cause material differences from plans include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
COMPARISON OF 1996 AND 1995
The Company earned $1.44 million ($.92 per diluted share) for the year ended
December 31, 1996. This compared to a loss of $1.15 million ($.74 per diluted
share) in 1995, which reflected significant write-downs and reserves on problem
assets. The Company also made significant progress in reducing nonperforming
assets during 1996 to $4.4 million from $6.4 million, representing 1.9% of total
assets by year-end 1996.
The increased earnings in 1996 resulted largely from the Company's strategy of
increasing its asset size and its volume of business, while minimizing increases
in expenses. On a fully taxable equivalent (FTE) basis, 1996 earnings included
an 8.0% increase in net interest income and a 10.9% increase in service charge
and fee income, while non-interest expense increased by only 0.9%. Additionally,
the Company recognized an income tax benefit of $118 thousand for the year. This
benefit was primarily related to a reduction of $554 thousand in the valuation
allowance on the Company's deferred tax asset due to the restoration of
profitability, and to the resolution of problem assets.
In the fourth quarter of 1996, the Company reinstated a quarterly cash dividend,
which had been suspended in 1990. The Company declared a quarterly dividend of
three cents per share following the close of the third quarter of 1996. The
Company's capital increased by $2.3 million (17.4%) during the year, due to
retained earnings and a reduction in the unrealized loss on the market value of
securities. Year-end 1996 equity measured 6.7% of assets and the Company
exceeded all regulatory capital requirements. Book value per share increased to
$9.98 at December 31, 1996 from $8.60 at the previous year-end.
Total assets were $232.3 million at December 31, 1996, representing an 8.5%
increase from the previous year-end. Total loans decreased by 4.2% due primarily
to paydowns and to the resolution of problem assets. Total deposits increased by
6.3% due largely to growth in checking accounts and time deposits. Funds from
deposit growth and problem asset resolutions were primarily invested in
investment securities during the year.
Net loan charge-offs totaled $468 thousand in 1996, measuring about .31% of
total average loans. The loan loss allowance increased to $2.85 million at
December 31, 1996, measuring 1.95% of total loans, compared to $2.34 million at
year end 1995. The loan loss provision declined to $978 thousand in 1996,
compared to $1.975 million in the previous year. Additionally, the Company
realized a net gain on assets of $200 thousand in 1996, primarily from the sale
of foreclosed land. Total loans nonaccruing and/or delinquent ninety days or
more at year-end 1996 included $1.5 million which was paid off in January, 1997.
Net of this amount, these loans totaled $3.7 million, which was down from $4.5
million at the previous year-end.
Quarterly earnings comparisons improved in each successive quarter from $302
thousand in the first quarter to $420 thousand in the fourth quarter. During the
fourth quarter, the Company recognized an income tax net benefit of $451
thousand, related primarily to the reduction in the valuation allowance on the
deferred tax asset, discussed above. For the fourth quarter, before taxes, the
Company recorded a loss of $31 thousand. Contributing to this result was a
charge of $132 thousand on the writedown of foreclosed assets, problem asset
related expenses totaling $226 thousand, and a similar amount of one time
operating accruals.
16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
A table of market risk sensitive instruments is included in the Supplementary
Financial Data section. For loans, securities and liabilities with contractual
maturities, this table presents projected principal cash flows and related
weighted-average interest rates by contractual maturities. Additionally
reflected is the Company's historical experience of the impact of interest rate
fluctuations on the prepayment of residential mortgages, consumer loans,
commercial loans and mortgage-backed securities. Projected principal cash flows
and prepayment assumptions utilized as a percentage of outstanding balances at
year-end 1997 were 15% for residential mortgages, 21% for consumer loans and 17%
for commercial loans. Principal cash flows for mortgage backed securities were
determined based on market prepayment speeds ("PSAs") at year-end 1997. Equity
securities are reported as variable rate instruments with maturities of greater
than five years, except for callable equities which are reported by the next
call date. Time deposits and borrowings are presented based on contractual
maturities and weighted-average interest rates. For core deposits (e.g.,
checking, savings and money market deposits) that have no contractual maturity,
the table presents principal cash flows and related weighted-average interest
rates based on the Company's historical experience and management's judgement
concerning expected customer withdrawal behavior. The Company utilized decay
rate assumptions of 9% for savings accounts, 2% for checking accounts and 7% for
money market deposit accounts in the one year or less category. Expectations
regarding originations, prepayments and customer behavior are reviewed during
the Company's budget preparation process and approved by the Asset/Liability
Committee and the Board.
The table shows that the total fair values of market sensitive assets and
liabilities at December 31, 1997 differed from book value by less than 1%.
Market risk sensitive assets are spread among several categories of loans and
investments; variable interest rate commercial loans were the largest category,
totaling $61 million (28.0% of total market risk sensitive assets). Market risk
sensitive liabilities were primarily concentrated in time deposits, which
totaled $127 million (55.9% of total market risk sensitive liabilities).
Qualitative Disclosures About Market Risk
On a quarterly basis, management analyzes the sensitivity of net income and net
worth to changes in interest rates and the Board reviews reports of the status
of this sensitivity in comparison to approved internal guidelines. Quarterly
reviews of market risk sensitivity are conducted in conjunction with reviews of
the interest rate repricing horizon as previously described. Management and the
Board manage market risk exposures based on an evaluation of changes in the
composition of assets and liabilities, and management's plans for originating
and promoting market risk sensitive instruments. Through weekly meetings of its
Asset/Liability Committee, management is constantly adjusting its products,
prices, and promotions to achieve all Asset/Liability objectives, including the
management of interest rate sensitivity. Strategies utilized include changing
the mix of new loan and deposit originations, establishing repricing targets for
assets and liabilities which are repricing or maturing, and adjusting the level
and mix of short term investments, securities available for sale, borrowings,
and the potential utilization of hedging instruments. Because most market
sensitive instruments are contracted with local customers in the context of
multiple service relationships, and recognizing the generally level volume of
annual sensitivity of existing instruments, management believes that it has the
flexibility and capability to consider and successfully implement a variety of
strategies in the normal course of business.
17
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY
---------------------------------------------------
DATA--SEE EXHIBIT 99
--------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------
Incorporated by reference from Alliance's Proxy Statement for the 1998 Annual
Meeting of the Shareholders to be filed with the Securities and Exchange
Commission.
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
Incorporated by reference from Alliance's Proxy Statement for the 1998 Annual
Meeting of the Shareholders to be filed with the Securities and Exchange
Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
Incorporated by reference from Alliance's Proxy Statement for the 1998 Annual
Meeting of the Shareholders to be filed with the Securities and Exchange
Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
Incorporated by reference from Alliance's Proxy Statement for the 1998 Annual
Meeting of the Shareholders to be filed with the Securities and Exchange
Commission.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- ------------------------------------------------------------------------
(a) All schedules have been omitted as the required information is either
included herein or in the Proxy Statement, or is inapplicable.
(b) Reports on Form 8-K
On December 5, 1997, the Company filed on Form 8-K, reporting, under Items
1 and 2, the Bank's Form F-4 filed with the FDIC.
(c) Exhibit Index
The exhibits listed below are included in this report or are incorporated herein
by reference to the identified document previously filed with the Securities and
Exchange Commission as set forth parenthetically.
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) Change in Control Agreement between Tolland Bank and Joseph H.
Rossi, dated January 5, 1996.
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 16, 1996.
10(iv) Directors' Deferred Compensation Plan.
10(v) Tolland Bank 1997 Employee Stock Purchase Plan.
10(vi) Cash Bonus Plan.
21. Subsidiaries of Registrant.
23. Independent Auditors' Consent
27. Financial Data Schedule.
99. Consolidated Financial Statements of the Registrant.
18
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 February 12, 1998.
ALLIANCE BANCORP OF NEW ENGLAND, INC.
by
/s/ Joseph H. Rossi
- ----------------------
Joseph H. Rossi
President/CEO
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 February 12, 1998:
/s/ Dr. Howard G. Abbott /s/ Thomas S. Moore
- ------------------------------ ------------------------------
Dr. Howard G. Abbott Thomas S. Moore
Director Director
/s/ Lawrence J. Becker /s/ Douglas J. Moser
- ------------------------------ ------------------------------
Lawrence J. Becker Douglas J. Moser
Director Director
/s/ Robert C. Boardman /s/ Kenneth R. Peterson
- ------------------------------ ------------------------------
Robert C. Boardman Kenneth R. Peterson
Director Director
/s/ Theresa L. Dansky
- ------------------------------
Theresa L. Dansky Francis J. Prichard
Director Chairman
/s/ William E. Dowty, Jr. /s/ Joseph H. Rossi
- ------------------------------ ------------------------------
William E. Dowty, Jr. Joseph H. Rossi
Director Director/President/CEO
/s/ D. Anthony Guglielmo /s/ David H. Gonci
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D. Anthony Guglielmo David H. Gonci
Vice Chairman Vice President/Chief Financial
Officer/Treasurer
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