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FORM 10-K
United States Securities and Exchange Commission
Washington, DC 20549
Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of
1934 For the fiscal year ended December 31, 1998 Commission File Number
001-13405
ALLIANCE BANCORP OF NEW ENGLAND, INC.
Incorporated in the State of Delaware
IRS Employer Identification Number 06-1495617
Address and Telephone:
348 Hartford Turnpike, Vernon, Connecticut 06066, (860) 875-2500
Securities registered pursuant to Section 12(b) of the Act: Common Stock -- $.01
par value, which is registered on the American Stock Exchange.
Alliance Bancorp of New England (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days.
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
contained in definitive proxy statements incorporated by reference in Part III
of 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 November 2, 1998, as reported by
American Stock Exchange, was approximately $24,065,506.
The number of shares outstanding of common stock was 2,291,953 as of February 1,
1999.
Documents Incorporated by Reference
The Alliance Bancorp of New England, Inc. Proxy Statement for the Annual Meeting
of Stockholders to be held on April 7, 1999 is incorporated by reference into
Part III of this Form 10-K.
FORM 10-K CROSS REFERENCE INDEX
PAGE
PART I Item 1 - Business 2
Item 2 - Properties 6
Item 3 - Legal Proceedings 6
Item 4 - Submission of Matters to a Vote of Security Holders 6
PART II Item 5 - Market for Registrants Common Equity and Related Shareholder Matters 7
Item 6 - Selected Consolidated Financial Data 8
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 7A- Quantitative and Qualitative Disclosures about Market Risk 26
Item 8 - Consolidated Financial Statements and Supplementary Data 29
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 29
PART III The information called for by Part III (Items 10
through 13) is incorporated herein by reference from
Alliance's Proxy Statement for the 1999 Annual Meeting
of Shareholders to be filed with the Securities and
Exchange Commission.
PART IV Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K 29
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 eight 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 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, 1998, Tolland Bank had total deposits of $240.0 million, total
loans of $184.7 million, and total assets of $283.6 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 eight 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. The
Bank's business strategy is 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.
The loan loss allowance is determined based on a methodology described in the
Company's policies. This methodology evaluates commercial loans based on their
risk ratings, and residential mortgages and consumer loans are evaluated in
aggregate pools. Allowance percentages are applied to loan pools to calculate
allocations of the allowance. These factors are evaluated at least annually
based on trends in the Company's credit experience, and on peer group and other
industry information. The unallocated portion of the loan loss allowance is
based on management's assessment of the overall level of the allowance, of
trends in the growth of the portfolio, of long term objectives for loan
portfolio coverage, and of subjective considerations of economic and credit
conditions and outlooks. The Company does not prepare formal projections of loan
losses. The allowance is evaluated quarterly by management and the Board and
changes are compared to prior period and historic data. The assessment of the
allowance also includes an analysis of the coverage ratios of loan outstandings,
non-performing loans, and annualized charge-offs. The detailed methodology and a
summary narrative analysis are approved by the Credit Committee and the Board.
The narrative analysis includes consideration of trends in the performance and
mix of the components of the loan portfolio. At least annually an analysis is
made of the charge-off and allowance trends with peer group comparison. Adverse
developments in credit performance in the Company'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 $142.5 million (77.1% of total loans) at
year-end 1998. 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 three 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 1998, 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, U.S.
corporate capital trust preferred securities, and U.S. 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.
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. 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 1998, the Company had 92 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
Bank is subject to 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, 1998. 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 in Management's Discussion
and Analysis of Financial Condition and Results of Operation.
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 8
Average Balance Sheet, Net Interest Income
and Interest Rates 10
Loan Portfolio 16
Nonaccruing Loans 17
Provision and Allowance for Loan Losses 17
Interest Rate Sensitivity 22
Maturity of Securities Exhibit 99
Foreclosed Properties Exhibit 99
Time Deposits of $100 Thousand or More Exhibit 99
Deposits Exhibit 99
Short-term Borrowings Exhibit 99
Volume and Rate Analysis-FTE Basis Exhibit 99
Selected Quarterly Financial Data Exhibit 99
Construction and Commercial Loans Exhibit 99
Securities Cost and Fair Value Exhibit 99
Market Risk Sensitive Instruments Exhibit 99
ITEM 2. PROPERTIES
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):
Owned/ Year Lease
Location - Town (Street) 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 - (215 Merrow Road) Leased 2023
o Hebron - (31 Main Street) Leased 2003
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.
At December 31, 1998, the Company had entered into a conditional contract to
sell its premises at Olde Tolland Common in 1999 for an amount which will not
materially impact income. Additionally, at that date, the Company had entered
into a conditional contract to purchase premises for a planned new location at
1665 Ellington Rd. in South Windsor.
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.
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 956,800 shares of the Company's stock, or 42% of
year-end outstanding shares, were traded on AMEX in 1998. As of February 1,
1999, the Company had 531 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 1, 1999 was
$11.25. Dividends declared and paid in 1998 and 1997 totaled $0.17 and $0.12 per
share, respectively. 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, together with dividends declared per share.
Dividends Declared
Quarter Ended High Low Per Share
- --------------------------------------------------------------------------
March 31, 1997 8.06 5.75 .03
June 30, 1997 10.00 6.87 .03
September 30, 1997 12.17 8.69 .03
December 31, 1997 12.00 10.92 .03
March 31, 1998 14.25 10.92 .03
June 30, 1998 16.67 14.00 .03
September 30, 1998 15.75 9.75 .05
December 31, 1998 13.00 9.00 .05
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
December 31 1998 1997 1996 1995 1994
- ------------------------------------------------- -------------- -------------- -------------- -------------- --------------
For the Year (in thousands)
Net interest income $ 9,028 $ 7,960 $ 7,663 $ 7,364 $ 6,954
Provision for loan losses 179 829 978 1,975 639
Service charges and fees 1,226 1,148 1,115 1,005 789
Net gain (loss) on securities 1,204 961 (40) 22 (16)
Net gain (loss) on assets (11) (148) 200 (967) (28)
Non-interest expense 7,347 6,411 6,640 6,582 6,545
Income (loss) before income taxes 3,921 2,681 1,320 (1,133) 515
Income tax expense (benefit) 1,363 664 (118) 12 61
Net income (loss) $ 2,558 $ 2,017 $ 1,438 $(1,145) $ 454
- ------------------------------------------------- -------------- -------------- -------------- -------------- --------------
Per Share
Basic earnings (loss) $ 1.07 $ 0.85 $ .62 $ (.49) $ .19
Diluted earnings (loss) 1.03 0.82 .61 (.49) .19
Dividends declared 0.17 .12 .01 - -
Book value 7.94 7.66 6.65 5.73 5.71
Common stock price:
High 16.67 12.17 6.69 5.19 4.81
Low 9.00 5.75 4.63 3.50 3.63
Close 11.75 11.00 6.00 4.75 3.81
- ------------------------------------------------- -------------- -------------- -------------- -------------- --------------
At Year End (in millions)
Total assets $ 283.6 $ 247.1 $ 232.3 $ 214.1 $ 201.1
Total loans 184.7 157.5 147.8 152.9 131.4
Other earning assets 87.4 78.4 71.2 47.8 52.1
Deposits 240.0 221.7 205.6 193.4 180.4
Borrowings 23.6 5.7 10.4 6.9 6.9
Shareholders' equity 18.2 18.8 15.6 13.3 13.2
- ------------------------------------------------- -------------- -------------- -------------- -------------- --------------
Operating Ratios (in percent)
Return (loss) on average assets 1.02% .86% .65% (.54)% .24%
Return (loss) on average equity 14.24 12.29 9.84 (8.37) 3.19
Equity % total assets (period end) 6.42 7.61 6.71 6.20 6.57
Net interest spread (fully taxable equivalent) 3.48 3.30 3.34 3.35 3.72
Net interest margin (fully taxable equivalent) 4.02 3.80 3.78 3.71 3.95
Dividend payout ratio 15.46 13.78 2.43 - -
- ------------------------------------------------- -------------- -------------- -------------- -------------- --------------
ITEM 7
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS
1998 Summary
Alliance Bancorp of New England, Inc. ("Alliance" or the "Company") recorded
record net profit of $2.56 million for the year 1998 ($1.03 per diluted share),
up 26.8% from 1997 earnings of $2.02 million ($.82 per diluted share). As of
year-end, Alliance had recorded eleven consecutive quarters of increasing
earnings, together with three consecutive years of record earnings.
For the year 1998, the Company achieved a return on average assets of 1.02% and
a return on average equity of 14.2%. Return on average equity increased to 15.6%
in the last quarter of the year. 1998 results reflect growth in the marketplace.
The Company's loans grew by 17.3% and deposits grew by 8.2% over the year. The
Company also announced steps to expand its market into two new towns, Hebron and
South Windsor, as well as to reposition its Tolland offices to better serve this
community.
Earnings growth in 1998 was primarily due to growth in the bank's business
volume and to improved loan quality. This strong growth in business volume
produced a $1.07 million (13.4%) increase in net interest income for the year.
Higher net interest income resulted from $36.3 million (15.3%) of growth in
earning assets to $272.2 million. Interest income also benefited from an
improvement in the tax equivalent net interest margin to 4.02% in 1998 compared
to 3.80% in the previous year.
The resolution of problem assets resulted in a $2.0 million reduction in
nonperforming assets to $0.7 million at year-end 1998 from $2.7 million at
year-end 1997. In conjunction with this improvement, the provision for loan
losses declined by $650 thousand compared to 1997. Problem asset reductions also
resulted in $175 thousand in additional interest income recognition. At year-end
1998, nonperforming assets measured 0.2% of total assets, compared to 1.1% a
year ago.
Total non-interest income increased by $458 thousand and non-interest expense
increased by $936 thousand in the year 1998 compared to 1997. Non-interest
income benefited from growth of $78 thousand (6.9%) in service charges and fees
due to higher account volumes. Additionally, net gains on securities contributed
$243 thousand in increased earnings for 1998, realizing the benefits of
improving market valuations and active portfolio management. Compensation
expense in 1998 included staff additions related to growth in commercial lending
and to branch expansion. Growth in other expense in 1998 included expenses
related to increased business volume, computer system upgrades, and branch
expansion. Non-interest expense was flat across most other categories from year
to year.
The effective tax rate increased due to a $106 thousand second quarter charge
related to an increase in the deferred tax asset valuation allowance. The
Company has initiated steps toward the formation of a passive investment
subsidiary in accordance with changes in Connecticut tax statutes, which is
expected to reduce the effective tax rate beginning in 1999. Additionally, 1997
results included the benefit of a reduction in the valuation allowance on the
deferred tax asset totaling $150 thousand.
Total assets at year-end 1998 were $283.6 million, an increase of $36.4 million
(14.8%) over the prior year-end. During the last quarter, the Company took
advantage of favorable market conditions to increase its debt security portfolio
by about $20 million, funded by intermediate term borrowings. Year-end
shareholders' equity totaled $18.2 million, representing a book value of $7.94
per share, and measuring 6.42% of assets. The Company's capital remains in
excess of all regulatory requirements.
Diluted earnings per share of $1.03 in 1998 benefited from a treasury stock
repurchase of 200,599 shares in the amount of $3.1 million, which was announced
on July 2, 1998. Additionally, the quarterly cash dividend to shareholders
increased by 50% as a result of a three-for-two common stock split effected as a
stock dividend which was paid on May 26, 1998. Prior period earnings, dividends,
and book value per share have been restated for this change. The Company had
completed a four-for-three common stock split in 1997 which, together with the
1998 split, accomplished a cumulative two-for-one split over the last two years.
The quarterly cash dividend to shareholders was $.05 per share as of the most
recent quarter.
Alliance is the holding company for Tolland Bank (the "Bank").
Results Of Operations - 1998 Versus 1997
Net Interest Income - Fully Taxable Equivalent (FTE) Basis
(dollars in thousands) Average Balance Rate (FTE Basis)
- ---------------------------------------------------------------------------------------------------------------------
Years ended December 31 1998 1997 1996 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
Loans $ 166,908 $ 148,601 $ 150,636 8.33% 8.17% 8.20%
Securities available for sale 43,131 48,159 32,663 7.74 7.39 7.29
Securities held to maturity 18,336 20,634 22,204 5.87 5.85 5.73
Other earning assets 11,944 5,618 4,876 5.79 5.70 5.43
- ----------------------------------------------------------------------------------------------------------------------
Total earning assets 240,319 223,012 210,379 7.91 7.72 7.73
Other assets 10,751 10,965 11,744
- ----------------------------------------------------------------------------------------------------------------------
Total assets $ 251,070 $ 233,977 $ 222,123
- ----------------------------------------------------------------------------------------------------------------------
Interest bearing deposits $ 204,869 $ 193,371 $ 182,379 4.39 4.39 4.33
Borrowings 6,190 4,244 7,012 5.80 6.22 5.92
- ----------------------------------------------------------------------------------------------------------------------
Interest bearing liabilities 211,059 197,615 189,391 4.43 4.43 4.39
Other liabilities 23,068 19,947 18,116
Shareholder's equity 16,943 16,415 14,616
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 251,070 $ 233,977 $ 222,123
- ----------------------------------------------------------------------------------------------------------------------
Net Interest Spread 3.48% 3.30% 3.34%
Net Interest Margin 4.02% 3.80% 3.78%
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) 1998 1997 1996
- --------------------------------------------------------------------------------------------
Loan interest $ 13,896 $ 12,138 $ 12,347
Securities available for sale (FTE) 3,340 3,561 2,380
Securities held to maturity 1,076 1,207 1,272
Other earning assets interest (FTE) 691 320 265
- --------------------------------------------------------------------------------------------
Total interest income (FTE) 19,003 17,226 16,264
Total interest expense 9,343 8,751 8,309
- --------------------------------------------------------------------------------------------
Net interest income (FTE) 9,660 8,475 7,955
Less tax equivalent adjustment (632) (515) (292)
- --------------------------------------------------------------------------------------------
Net interest income (Financial Statement) $ 9,028 $ 7,960 $ 7,663
- --------------------------------------------------------------------------------------------
Net interest income on an FTE basis increased in 1998 by $1.068 million (13.4%)
due to a $17.3 million (7.8%) increase in average earnings assets and to a 6.8%
increase in the net interest margin to 4.02% in 1998 from 3.80% in 1997.
The growth in average earning assets was due to growth in average loans and
growth in average short term investments. Loan growth included growth in all
major loan categories. Average investment securities decreased although total
securities increased at year-end 1998 compared to a year earlier. Average
securities declined due to sales and calls recorded in the first half of the
year, while the majority of securities purchases were in the last quarter of the
year. As a result, liquidity was held in short term investments during the
middle of the year, resulting in a higher average balance even though the
year-end balance was little changed from the prior year-end.
The increase in the net interest margin was primarily due to a 5.4% increase in
the net interest spread. The yield on all major categories of earning assets
increased in 1998 compared to 1997. The yield on loans benefited from lower
nonaccruing loans as well as collection of previously nonaccrued interest
related to the liquidation of problem loans. The yield on investment securities
increased due to purchases of corporate debt securities in the fourth quarter,
along with maturities and calls on lower yielding government agency securities
during the year. The cost of deposits remained flat. The net interest margin
also benefited from a $3.1 million (15.6%) increase in average non-interest
bearing liabilities due to growth in demand deposit accounts. These deposits
helped provide funds for growth in earning assets as discussed above.
Interest rates declined during the second half of the year to historically low
levels. The Company entered 1998 with a positive one year interest rate
sensitivity (asset sensitive gap) and ended the year with a negative one year
sensitivity (liability sensitive gap). The one year interest rate sensitivity
gap was ($22) million at year-end 1998, compared to $20 million twelve months
earlier; these changes are described under Interest Rate Sensitivity. This
change in interest rate sensitivity benefited net interest income in the
prevailing interest rate environment. The cost of interest bearing liabilities
decreased to 4.34% in the fourth quarter of 1998 compared to 4.48% in the same
quarter of 1997, due to reductions in the cost of time accounts and borrowings.
While the average cost of interest bearing liabilities remained unchanged at
4.43% in both years, these improvements in the cost of time deposits and
borrowings offset the increased use of money market deposits to fund growth in
earning assets. The decline in interest rates contributed to a decrease in the
yield on residential mortgages and consumer loans. This was offset by higher
yields on commercial loans and investment securities as discussed above.
As a result of the securities purchases in the fourth quarter, average earning
assets increased by $18.4 million (7.8%) in the fourth quarter of 1998, compared
to the first nine months of 1998. The annualized earnings impact of this growth
was therefore not fully reflected in 1998 results, and will contribute to
earnings in future periods.
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 1998 totaled $179 thousand, compared to $829 thousand in
1997. The loan loss allowance increased to $3.06 million at year-end 1998,
compared to $3.00 million at year-end 1997. Please see the later discussion on
the Allowance for Loan Losses and the Summary of Significant Policies in the
Notes to the Consolidated Financial Statements.
Non-Interest Income
Years ended December 31 (in thousands) 1998 1997 Change %
- ---------------------------------------------------------------------------------------------------
Loan related income $ 500 $ 453 $ 47 10.5%
Deposit related income 541 528 13 2.3
Miscellaneous charges and other income 185 167 18 11.2
- ---------------------------------------------------------------------------------------------------
Total service charges and fees 1,226 1,148 78 6.9
Gross gains on securities 1,264 961 303 31.5
Gross losses on securities (60) - (60) -
- ---------------------------------------------------------------------------------------------------
Net gains (losses) on securities 1,204 961 243 25.3
Gross gains on assets 34 31 3 9.7
Gross losses on assets (45) (179) 134 (74.7)
- ---------------------------------------------------------------------------------------------------
Net gains (losses) on assets (11) (148) 137 (92.8)
- ---------------------------------------------------------------------------------------------------
Total non-interest income $ 2,419 $ 1,961 $ 458 23.4%
- ---------------------------------------------------------------------------------------------------
Total service charges and fees increased by $78 thousand (6.9%) due to growth in
all major categories. The increase in loan related income was primarily due to
penalty fees received in relation to problem asset liquidations. Growth in
deposit and miscellaneous fee income was related to increased fee income in
several business lines, including debit cards, investment fees, and mutual fund
sweep fees. The Company recorded $1.204 million in net gains on investment
securities in 1998, reflecting an ongoing process of active investment portfolio
management, including realizing the benefits of improving market valuations.
Gains and losses on assets related to liquidations of problem assets in 1998.
Non-Interest Expense
Years ended December 31 (in thousands) 1998 1997 Change %
- ------------------------------------------------------------------------------------------
Staff $ 3,632 $ 3,199 $ 433 13.5%
Occupancy 618 586 32 5.5
Equipment 265 283 (18) (6.2)
Data processing services 564 620 (56) (9.0)
FDIC, office and insurance 524 553 (29) (5.3)
Problem asset related expense 100 88 12 13.9
Other 1,644 1,082 562 52.1
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
Total non-interest expense $ 7,347 $ 6,411 $ 936 14.6%
- ------------------------------------------------------------------------------------------
Non-interest expense increased due to higher compensation expense and higher
other expense. The remaining categories of expense were little changed in 1998
compared to 1997. The $433 thousand increase in compensation expense in 1998
included approximately $150 thousand in higher commissions and bonuses,
approximately $100 thousand in merit related increases, $54 thousand in higher
benefits expenses, and approximately $130 thousand in higher salaries due to
staff expansion in the lending and branch divisions. Compensation expense is
stated net of deferred salaries totaling $448 thousand in 1998, which increased
by $94 thousand from 1997 due to higher loan originations activities. The $562
thousand increase in other expense included $131 thousand in higher consulting
fees due to lending related growth and higher investment management fees; $73
thousand in higher appraisal and credit report fees related to increased loan
originations; $94 thousand in increased shareholder and director related
expenses; $77 thousand in higher marketing and association related expenses; and
costs related to branch relocations and to the formation of a passive investment
corporation.
Income Tax Expense
Total income tax expense increased by $699 thousand in 1998. The effective tax
rate increased due primarily to a $106 thousand second quarter charge related to
an increase in the deferred tax asset valuation allowance. The Company has
initiated steps toward the formation of a passive investment subsidiary in
accordance with changes in Connecticut tax statutes, which is expected to result
in a reduction in the effective tax rate beginning in 1999. Additionally, 1997
results included a reduction in the valuation allowance on the deferred tax
asset totaling $150 thousand. Net of changes in the valuation allowance, the
effective tax rate measured 32.1% in 1998, compared to 30.4% in 1997. This
increase resulted from the lower proportional benefit of the dividends received
deduction as a result of growth in other pretax income.
Comprehensive Income
In addition to net income recorded in the Income Statement, comprehensive income
includes unrealized gains on securities available for sale, net of income tax
expense. Comprehensive income totaled $2.666 million in 1998, compared to $2.893
million in 1997. Comprehensive income decreased due to a lower unrealized
holding gain on investments, net of income tax expense. This gain totaled $830
thousand in 1998, compared to $1.453 million in 1997.
Financial Condition - Fiscal Year-End 1998 Versus 1997
Cash and Cash Equivalents
Short term investments at year-end consisted of federal funds sold to the
Federal Home Loan Bank of Boston. During the year, short term investments on a
daily basis are primarily invested in short term money market mutual funds.
Short term investments include amounts expected to be reinvested in future loan
and investment growth.
Securities
Average investment securities decreased although total securities increased at
year-end 1998 compared to a year earlier. Average securities declined due to
sales and calls recorded in the first half of the year, while the majority of
securities purchases were in the last quarter of the year. As a result of these
purchases, securities available for sale (AFS) increased by $14.8 million
(33.9%) at year-end 1998 compared to the previous year-end. Securities held to
maturity (HTM) decreased by $4.5 million (22.6%) as a result of amortization and
calls.
AFS securities totaling $58.6 million at year-end 1998 consisted primarily of
$37.0 million in investment grade corporate debt and equity securities, composed
primarily of financial services and electric utilities companies. These
securities are publicly traded and were purchased primarily to provide yield
income, including tax benefits on the dividends received deduction on equity
securities. These securities included $17.7 million in marketable equity
securities and $19.3 million in debt securities, consisting primarily of capital
trust preferred securities. Year-end AFS securities also included $16.7 million
in U.S. Government and agency securities, consisting primarily of deleveraged
notes. HTM securities totaling $15.4 million at year-end 1998 consisted
primarily of U.S. agency mortgage-backed securities, which are primarily planned
amortization class collateralized mortgage obligations.
Securities transactions in 1998 included sales of $12.1 million and securities
purchases of $49.7 million. The sales produced realized gains of $1.204 million,
and the calls produced gains of $40 thousand. Securities sold were marketable
equity securities. Securities called included government agency securities and
preferred equity securities. Securities purchased were primarily corporate debt
and equity securities. Securities transactions resulted from a program of active
portfolio management, including realizing the benefits of improving market
valuations. This program also included activity to lengthen the duration,
increase the yield, and increase the diversification of the portfolio. As a
result, the fully taxable equivalent yield on the securities portfolio increased
to 7.74% in 1998, compared to 7.39% in 1997. Additionally, securities with a
repricing horizon over five years increased to $33 million at year-end 1998,
compared to $12 million at the previous year-end. At year-end 1998, most
callable securities were analyzed based on expected repricing to anticipated
call dates. Callable securities at year-end 1998 totaled $26 million, compared
to $23 million at year-end 1997.
At year-end 1998, AFS securities included $1.380 million in net unrealized gains
(2.4% of fair value), compared to $1.430 million in net unrealized gains (3.3%
of fair value) at the previous year-end. At year-end 1998, the AFS portfolio
included $1.639 million in gross unrealized gains and $259 thousand in gross
unrealized losses, compared to $1.649 million in gains and $219 thousand in
losses at the prior year-end.
Lending Activities
December 31 (dollars in millions) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
Residential mortgages $ 57.6 31.2% $ 39.3 25.0% $ 41.7 28.2% $ 44.0 28.8% $ 44.6 33.9%
Commercial mortgages 46.7 25.3 45.5 28.9 40.5 27.4 40.7 26.6 37.2 28.3
Other commercial loans 25.1 13.6 18.3 11.6 15.3 10.4 18.8 12.3 20.0 15.2
Consumer loans 32.5 17.6 29.5 18.7 26.1 17.7 22.4 14.7 23.6 18.0
- ------------------------------------------------------------------------------------------------------------------------------
Total regular loans 161.9 87.7 132.6 84.2 123.6 83.7 125.9 82.4 125.4 95.4
Government guaranteed loans 22.8 12.3 24.9 15.8 24.2 16.3 27.0 17.6 6.0 4.6
- ------------------------------------------------------------------------------------------------------------------------------
Total loans $ 184.7 100.0 $ 157.5 100.0 $ 147.8 100.0 $ 152.9 100.0 $ 131.4 100.0
- ------------------------------------------------------------------------------------------------------------------------------
Total loans increased by $27.2 million (17.3%) at year-end 1998, compared to the
previous year-end. Growth was spread across all major categories, and was
concentrated in residential mortgages and other commercial loans. Residential
mortgages increased by $18.3 million, and other commercial loans increased by
$8.0 million. Total loans originated in 1998 were approximately $102.3 million,
compared to about $53.2 million in 1997. Most loans were real estate secured.
Total real estate secured loans increased by $22.2 million (19.9%) in 1998 to
$133.9 million at year-end. As a result of the decrease in interest rates during
the year, the volume of prepayments and refinances increased in 1998, and the
interest rates on existing loans decreased in certain segments of the portfolio.
Total residential mortgages originated during the year were $50.9 million. This
total included $36.6 million of traditional residential first mortgages, and
$14.3 million of the new Free-Refi mortgage product introduced by the Company in
the second quarter of 1998. Traditional first mortgages are originated with a
full documentation process and are primarily intended for sale on a servicing
released basis to secondary market investors. Loan originations in 1998 included
$27.1 million of first mortgages originated for sale, and $9.5 million in
mortgages retained in the Bank's portfolio, including loans held for sale
totaling $5.3 million. The new Free-Refi first mortgage product is originated
with streamlined documentation requirements consistent with the methodology used
in originating home equity lines of credit. During 1998, Free-Refi mortgages
included five year adjustable rate mortgages and fifteen year fixed rate
mortgages, all of which were retained in the Company's portfolio.
During 1998, the Company originated $38.2 million in commercial mortgages and
commercial loans. The $8.0 million increase in commercial loan balances at
year-end 1998 included a $2.1 million increase in SBA loans originated by the
Company, a $2.5 million increase in commercial term loans not secured by real
estate, a $1.4 million increase in commercial construction loans, and a $1.2
million increase in commercial mortgages.
Consumer loans increased by $3.0 million in 1998, reflecting growth in home
equity loans and automobile loans. Total consumer loan originations were
approximately $13.2 million in 1998.
Government guaranteed loans are purchased in the secondary market and are 100%
guaranteed either by the Small Business Administration (SBA) or the U. S.
Department of Agriculture (USDA). These are business term loans and mortgages
originated by U.S. banks, and are primarily loan certificates registered with
and serviced by a national servicing corporation. These loans declined by $2.0
million (8.1%) in 1998 due to higher prepayments.
At year-end 1998, outstanding commitments to originate new loans totaled $21.2
million, compared to $8.2 million at the previous year-end. Additionally, total
unadvanced lines and letters of credit were $33.4 million at year-end 1998,
compared to $24.3 million a year earlier.
Nonperforming Assets
December 31 (dollars in millions) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
Nonaccruing loans $ 0.6 $ 2.1 $ 3.4 $ 4.4 $ 0.7
Foreclosed assets 0.1 0.6 1.0 2.0 5.4
- ------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 0.7 $ 2.7 $ 4.4 $ 6.4 $ 6.1
- ------------------------------------------------------------------------------------------------------------------------------
Nonperforming assets as a 0.2% 1.1% 1.9% 3.0% 3.0%
percentage of total assets
Total nonperforming assets decreased during the year by $2.0 million to $0.7
million at year-end 1998. Nonaccruing loans were $0.6 million, and foreclosed
assets were $0.1 million. Total nonperforming assets measured 0.2% of assets at
year-end 1998, compared to 1.1% at year-end 1997. Accruing loans delinquent more
than 30 days increased by $1.3 million to $2.7 million at year-end 1998 compared
to the previous year-end, primarily due to higher residential mortgage
delinquencies in the fourth quarter. At year-end 1998, accruing loans included
$1.2 million of classified loans with a potential to become nonperforming based
on identified credit weaknesses. This total decreased from $1.5 million at
year-end 1997.
Allowance for Loan Losses
December 31 (in thousands) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------
Beginning balance $ 3,000 $ 2,850 $ 2,340 $ 2,090 $ 2,070
Charge-offs:
Residential mortgages (150) (108) (74) (102) (177)
Consumer (200) (366) (273) (252) (251)
Commercial (51) (294) (220) (1,438) (288)
- -------------------------------------------------------------------------------------------------------
Total Charge-offs (401) (768) (567) (1,792) (716)
- -------------------------------------------------------------------------------------------------------
Recoveries:
Residential mortgages 1 11 12 8 1
Consumer 101 45 61 53 89
Commercial 180 33 26 6 7
- -------------------------------------------------------------------------------------------------------
Total Recoveries 282 89 99 67 97
- -------------------------------------------------------------------------------------------------------
Net Charge-offs (119) (679) (468) (1,725) (619)
Provision for losses 179 829 978 1,975 639
- -------------------------------------------------------------------------------------------------------
Ending balance $ 3,060 $ 3,000 $ 2,850 $ 2,340 $ 2,090
- -------------------------------------------------------------------------------------------------------
The total allowance for loan losses increased to $3.06 million at year-end 1998,
compared to $3.00 million a year earlier. Net chargeoffs were $119 thousand in
1998, compared to $679 thousand in 1997. Gross chargeoffs decreased to $401
thousand in 1998 compared to $768 thousand in 1997. Gross recoveries increased
to $282 thousand in 1998 compared to $89 thousand in the prior year. Net
chargeoffs were at the lowest level in the last five years. Both the lower
chargeoffs and the higher recoveries were due to the liquidation of problem
assets during the year 1998. Additionally, recoveries benefited from $58
thousand in proceeds from the sale of charged-off loans in 1998.
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 Company, (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 (dollars in thousands) 1998 1997 1996 1995 1994
- ---------------------------------------- ------------- ----------------- ---------------- ----------------- ----------------
Allowance for loan losses by type of loan:
Residential mortgage $ 334 10.9% $ 202 6.7% $ 304 10.7% $ 173 7.4% $ 118 5.6%
Consumer 426 13.9 399 13.3 416 14.6 276 11.8 300 14.4
Commercial 1,340 43.9 1,749 58.3 1,860 65.3 1,743 74.5 1,481 70.9
Unallocated 960 31.3 650 21.7 270 9.4 148 6.3 191 9.1
- ------------------------------------- ------- -------- -------- -------- -------- ------- -------- -------- -------- -------
Total $ 3,060 100.0 $ 3,000 100.0 $ 2,850 100.0 $ 2,340 100.0 $ 2,090 100.0
- ------------------------------------- ------- -------- -------- -------- -------- ------- -------- -------- -------- -------
The major changes in the components of the allowance in 1998 were a $409
thousand reduction in the allowance for commercial loans, and a $310 thousand
increase in the unallocated portion of the allowance. The commercial allowance
decreased primarily due to the resolution of problem assets and criticized loans
during the year. The increase in the unallocated component includes management's
assessment of economic and credit conditions and the volume of increased
commitments and credit lines. Additionally, the residential mortgage allowance
was increased due to portfolio growth, higher chargeoffs and delinquencies. The
consumer allowance was increased due to portfolio growth. No reserves are
assigned to Government guaranteed loans, which are 100% backed by U.S. agency
guarantees.
Net loan charge-offs were a comparatively low .07% in 1998. The allowance
provided adequate coverage of chargeoffs based on historic experience. All
components also provided adequate coverage of nonperforming loans at year-end
1998. The ratio of the allowance to total nonperforming loans measured 533% at
year-end 1998, compared to 141% at year-end 1997. The ratio of the allowance to
total regular loans decreased to 1.89% at year-end 1998, compared to 2.26% at
year-end 1997.
Net charge-offs as a percentage of
average loans by type: 1998 1997 1996 1995 1994
------------------------------------------------- -------------- -------------- -------------- -------------- -------------
Residential mortgage 0.32% 0.24% 0.15% 0.21% 0.42%
Consumer 0.32 1.21 0.84 0.88 0.77
Commercial (0.20) 0.46 0.34 1.77 0.50
Total 0.07 0.46 0.31 1.16 0.52
Allowance as a percentage of
outstanding loans by type:
Residential mortgage 0.58% 0.51% 0.75% 0.39% 0.26%
Consumer 1.31 1.35 1.59 1.23 1.29
Commercial 1.86 2.74 3.33 2.93 2.35
Unallocated - - - - -
Subtotal Regular Loans 1.89 2.26 2.33 1.86 1.67
Government guaranteed loans - - - - -
Total 1.66 1.91 1.95 1.53 1.59
Deposits and Borrowings
December 31 (dollars in millions) 1998 1997 % change
- ------------------------------------------------------------------------------------------------------------
Demand deposits $ 25.3 $ 21.9 15.4%
NOW deposits 25.2 22.3 13.0
Money market deposits 29.6 15.4 91.5
Savings deposits 37.2 34.7 7.4
Time deposits < $100 thousand 106.5 112.2 (5.1)
Time deposits > $100 thousand 16.2 15.2 6.4
- ------------------------------------------------------------------------------------------------------------
Total deposits $ 240.0 $ 221.7 8.2
- ------------------------------------------------------------------------------------------------------------
Personal $ 202.1 $ 190.4 6.1
Commercial 32.5 25.9 25.4
Municipal 5.4 5.4 (.4)
- ------------------------------------------------------------------------------------------------------------
Total deposits $ 240.0 $ 221.7 8.2%
- ------------------------------------------------------------------------------------------------------------
Total deposits increased by $18.3 million (8.2%) at year-end 1998 compared to a
year earlier. All major categories of deposits increased except for time
deposits under $100 thousand. The strongest growth was in money market accounts,
which increased by $14.2 million (91.5%). The Company introduced its new
WiseMoney savings account with higher yielding tiered interest rates in the
second half of 1997, which has propelled growth in this category for the last
eighteen months. Total transactions accounts increased by $6.3 million (14.3%)
at year-end 1998 compared to year-end 1997. Average transactions account
balances increased by 9.9% in the fourth quarter of 1998 compared to 1997. This
growth reflected higher business volumes in 1998. The year-end growth also
reflected temporary year-end balance increases, particularly for accounts which
also use the Company's money market mutual fund sweep product. Growth was also
registered in savings accounts and jumbo time deposits as a result of overall
business volume growth. Time deposits under $100 thousand decreased by $5.7
million (5.1%). Due to the decrease in interest rates in 1998, the Company
experienced some outflow of maturing higher rate two and three year deposits
which had been booked in earlier years.
Time deposits greater than or equal to $100 thousand were comprised of $5.2
million maturing within three months, $8.3 million maturing after three months
and within twelve months, and $2.7 million maturing after twelve months.
Total borrowings increased by $17.9 million to $23.6 million at year-end 1998
compared to year-end 1997. During the fourth quarter, the Company borrowed $20
million under intermediate term notes from the Federal Home Loan Bank of Boston
to fund the purchase of corporate debt securities. These notes are callable
notes with final maturities of ten to fifteen years, and call periods of three,
five, and ten years.
Interest Rate Sensitivity
The following table presents a breakdown of the Company's interest rate
sensitive assets and liabilities on December 31, 1998 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. Repricing
characteristics of borrowings include expected remaining lives, taking into
account call provisions.
Total
Interest Rate Sensitivity - Repricing Horizon Within 1-5 Over 5
(dollars in millions) One Year Years Years
- ---------------------------------------------------------------------------------------------------------
December 31, 1998
Earning Assets:
Loans $ 91 $ 26 $ 68
Securities available for sale 12 14 33
Securities held to maturity 8 7 -
Other assets 13 - -
- ---------------------------------------------------------------------------------------------------------
Total earning assets $ 124 $ 47 $ 101
- ---------------------------------------------------------------------------------------------------------
Funds Supporting Earning Assets:
NOW deposits $ 18 $ 7 $ -
Savings & Money Market 40 27 -
Time deposits < $100,000 74 33 -
Time deposits > $100,000 13 3 -
-
Borrowings 1 18 5
Non-interest bearing funds - - 33
- ---------------------------------------------------------------------------------------------------------
Total funds supporting earning assets $ 146 $ 88 $ 38
- ---------------------------------------------------------------------------------------------------------
December 31, 1998
- ---------------------------------------------------------------------------------------------------------
Gap for period $ (22) $ (41) $ 63
Cumulative gap (22) (63) -
Cumulative gap as percent of total earning assets (8)% (23)% -
December 31, 1997
- ---------------------------------------------------------------------------------------------------------
Cumulative gap $ 20 $ (22) -
Cumulative gap as percent of total earning assets 9% (11)% -
The Company's Asset Liability Committee (ALCO) meets weekly to manage net
interest income and its sensitivity to interest rates. ALCO strategies 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, 1998, the Company had a negative twelve month gap of $22
million, compared to a positive twelve month gap of $20 million at the prior
year-end. As a result of the decrease in interest rates in 1998, the demand for
loans shifted toward fixed rate products, the supply of variable rate purchased
assets decreased, and consumer demand for time deposits shifted to maturities of
one year and less. Under these circumstances, the maturities of the Company's
assets lengthened and the maturities of deposits shortened. Loans with repricing
horizons over one year increased by $36 million (62.1%). Deposits with
maturities over one year decreased by $15 million (17.6%). The above combined
shift of $51 million in loans and deposits created the shift in the twelve month
gap described above. Additionally, total securities with repricing horizons over
one year increased by $17 million based on the investment portfolio management
program. This increase was funded by a $19 million increase in borrowings with
repricing horizons over one year.
The one year gap as a percentage of total earning assets was less than 10% at
both year-end 1998 and year-end 1997. The Company generally targets a one year
gap that is near zero or slightly positive. This provides protection to net
interest income in case interest rates increase. The change in the one year gap
from a positive to a negative position was beneficial to earnings during 1998.
Under the Company's methodology, short term liabilities include $28 million in
NOW and savings deposits. While these deposits have some short term interest
sensitivity, it has been minimal in this decade. The cumulative five year gap
measured ($63) million at year-end 1998, compared to ($22) million, as
intermediate term liabilities were used to fund a $49 million increase in assets
repricing over five years.
Liquidity and Cash Flows
The Company's primary source of funds is dividends from 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. In 1998, the purchase of treasury
stock in an amount of $3.1 million by the Company was also funded by a dividend
from the Bank.
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 $12 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 1998, the primary use of funds were the
origination of loans and the purchase of investment securities, and the primary
sources of funds were growth in money market deposits and new FHLBB borrowings.
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
decreased by $0.6 million, with net income of $2.6 million offset by the
purchase of treasury stock. The Company increased the quarterly cash dividend to
five cents per share in the third quarter of 1998, from three cents per share in
previous quarters, due to the effect of the three for two stock split declared
and paid 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.
Year 2000 Considerations
All disclosure concerning Year 2000 Considerations should be considered "Year
2000 Readiness Disclosure" pursuant to the Year 2000 Information and Readiness
Disclosure Act. The Year 2000 modification information provided herein should be
read in connection with the Year 2000 Information and Readiness Disclosure Act
which, among other things, mandates that certain Year 2000 readiness disclosures
may not be used in litigation.
The Company has established a Year 2000 project plan to address systems and
facilities changes necessary to properly recognize dates after 1999, has
assigned implementation responsibilities and has established management and
Board reporting processes. All of the Company's significant information
technology systems are provided under contract with major national banking
systems providers who are progressing under their own Year 2000 plans. Most
significant systems changes were reported to be completed at December 31, 1998.
The Company's plan follows the five step approach required by its regulators:
Awareness, Assessment, Modification, Verification, and Implementation. As of
December 31, 1998, the Company believes that its progress under its plan was
satisfactory in accordance with plan objectives, and the Company expects to
complete its plan in accordance with regulatory guidelines. The Company's
project also addresses its other suppliers, customers, and other constituents,
as well as remediation and business resumption contingency plans.
The Company has arranged for temporary consulting help and has purchased
diagnostic software to assist with this project. The costs of the project, which
are not expected to be significant, and the dates in the Company's plans are
based on management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of certain
resources, third party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved and actual results could
differ materially from those plans.
The primary uncertainty facing the Company is the ability of third party systems
providers to identify and modify software as planned. Specific factors that
might cause material differences from plans include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties. Additional
information about the Company's Year 2000 status at December 31, 1998 was as
follows:
Readiness: The Company's plans include both information technology ("IT") and
non-IT systems. Most of the Company's primary Year 2000 exposures relate to IT
systems, primarily to the vendor of its account processing systems. This is a
large national banking systems vendor. Additionally, as of the date of this
report, this vendor has reported that it has substantially completed
remediation, testing, and implementation actions for substantially all of the
major processing systems which it is providing to the Company. The Company has
substantially completed its own testing of these systems, and its plan calls for
further testing and evaluation of these systems through the first half of 1999.
The Company currently anticipates that its major IT vendors will comply with
federal regulatory guidelines for Year 2000 readiness.
Costs: The Company has not incurred material costs related to its Year 2000
program. The Company is being charged approximately $25 thousand by its account
processing vendor for testing arrangements, which is being billed over twelve
months. The Company has accelerated certain capital expenditure plans, totaling
approximately $150 thousand, related to computer upgrades, which it implemented
in 1998. Additionally, the Company has budgeted further computer and equipment
upgrades totaling up to $200 thousand in 1999, which include expenditures
related to the execution of the Company's Year 2000 program. Additionally, the
Company will evaluate capital expenditures totaling up to approximately $50
thousand related to general contingency capabilities.
Risks: The most significant risk anticipated by the Company is the possibility
of interruptions to its account processing systems. Due to the progress
described above, the Company does not presently foresee any material
interruptions to these systems. The next most significant risk relates to
interruptions in the payment processing systems, which are integrated with the
Company's account processing systems. The Company is working with its payment
processing vendors, the most significant of which are reported to be making
satisfactory progress in complying with federal regulatory guidelines for Year
2000 readiness. These guidelines include the substantial completion of
remediation of mission critical systems and the initiation of testing in 1998.
The Company is also exposed to various non-IT systematic risks which it cannot
fully monitor and test, including the supply of electric power,
telecommunications services, and postal services.
Contingency Plans: The Company has taken actions to comply with federal
regulatory requirements for Year 2000 contingency planning. The Company has
established a contingency planning committee representing all of its major
functional areas. The Company has established a contingency plan timetable and
developed risk analyses for its high priority business functions; in the first
half of 1999, the Company will be developing contingency timetables and action
plans in accordance with federal regulatory guidelines. The Company has taken
steps to increase its available staffing as necessary to respond to Year 2000
contingencies.
Comparison of 1997 VERSUS 1996
Alliance earned $2.02 million ($.82 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 over 1996 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 1997, 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 larger 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 earlier. 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
1997, and from the introduction of a new money market account during the second
half of 1997. Loan growth was mostly during the second half of 1997, 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 $7.66. 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.
On October 3, 1997, the Company completed formation of Alliance Bancorp of New
England as the holding Company for Tolland Bank. 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.
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 1998 were 10% for residential mortgages, 27% for consumer loans and 32%
for commercial loans, compared to 15%, 21% and 17%, respectively, at year-end
1997. Principal cash flows for mortgage backed securities were determined based
on market prepayment speeds ("PSAs") at year-end 1998. 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 8%
for savings accounts, 2% for checking accounts and 3% for money market deposit
accounts in the one year or less category, compared to 9%, 2% and 7%,
respectively, at year-end 1997. 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 at
December 31, 1998 exceeded carrying value by 3.7% due to the decrease in
interest rates; these values were approximately equal in 1997. Fair values of
market sensitive liabilities at both year-ends approximately equaled carrying
value. Market risk sensitive assets are spread among several categories of loans
and investments; fixed interest rate commercial loans were the largest category,
totaling $49 million (19% of total market risk sensitive assets). In 1997, the
largest category was variable interest rate commercial loans (28.0% of total
market risk sensitive assets). Market risk sensitive liabilities were primarily
concentrated in time deposits, which totaled $122.7 million (46.6% of total
market risk sensitive liabilities); this decreased from 55.9% at year-end 1997.
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. There were no significant changes
in the qualitative aspects of market risk management in 1998 compared to 1997.
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 Scurities 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 Scurities 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 Scurities 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 Scurities 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 for Fourth Quarter
(i) On November 27, 1998, the Company filed a Form 8-K reporting,
under Item 6, the resignation of one of the Company's directors.
(ii) On December 2, 1998, the Company filed a Form 8-K reporting,
under Item 5, an appointment to the Board of Directors.
(iii) On December 23, 1998, the Company filed a Form 8-K reporting,
under Item 5, the appointment of two individuals to the Board of
Directors to serve the remainder of the terms of two directors
who announced their retirement.
(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 (Exhibit 10(i) to the Report on Form
10-K filed March 27, 1998).
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
(Exhibit 10(iii) to the Report on Form 10-K filed March 27,
1998).
10(iv) Directors' Deferred Compensation Plan (Exhibit 10(iv) to the
Report on Form 10-K filed on March 27, 1998).
10(v) Tolland Bank 1997 Employee Stock Purchase Plan (Exhibit 10(v) to
the Report on Form 10-K filed on March 27, 1998).
10(vi) Cash Bonus Plan (Exhibit 10(vi) to the Report on Form 10-K filed
on March 27, 1998).
21. Subsidiaries of Registrant.
23. Independent Auditors' Consent
27. Financial Data Schedule.
99. Consolidated Financial Statements of the Registrant.
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 23, 1999.
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 23, 1999:
/s/ Dr. Howard G. Abbott /s/ Patricia A. Noblet
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Dr. Howard G. Abbott Patricia A. Noblet
Director Director
/s/ Robert C. Boardman /s/ Kenneth R. Peterson
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Robert C. Boardman Kenneth R. Peterson
Director Director
/s/ William E. Dowty, Jr. /s/ Francis J. Prichard, Jr.
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William E. Dowty, Jr. Francis J. Prichard, Jr.
Director Chairman
/s/ D. Anthony Guglielmo /s/ Mark L. Summers
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D. Anthony Guglielmo Mark L. Summers
Vice Chairman Director
/s/ Reginald U. Martin /s/ Joseph H. Rossi
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Reginald U. Martin Joseph H. Rossi
Director Director/President/CEO
/s/ Douglas J. Moser /s/ David H. Gonci
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Douglas J. Moser David H. Gonci
Director Senior Vice President/
Chief Financial Officer/Treasurer