-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RyrGfP+11k9DxUr4Qx7e77rRMWnmjfABZHk3EoC5OO+e7GB+gjGQ3bLzTV6RhwxF MkvPvf9YOyd5fgKCCjDVuA== 0000950116-98-000667.txt : 19980330 0000950116-98-000667.hdr.sgml : 19980330 ACCESSION NUMBER: 0000950116-98-000667 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIANCE BANCORP OF NEW ENGLAND INC CENTRAL INDEX KEY: 0001046002 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13405 FILM NUMBER: 98576522 BUSINESS ADDRESS: STREET 1: 348 HARTFORD TURNPIKE CITY: VERNON STATE: CT ZIP: 06066 BUSINESS PHONE: 8608752500 MAIL ADDRESS: STREET 1: 348 HARTFORD TURNPIKE STREET 2: 348 HARTFORD TURNPIKE CITY: VERNON STATE: CT ZIP: 06066 10-K 1 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 ---------------------------------------------- ALLIANCE BANCORP OF NEW ENGLAND, INC. (Exact Name of Registrant as Specified in its Charter) ---------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------- PART IV Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K 18 - ----------------------------------------------------------------------------------------------------
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 ---------- 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 - --------------------------------------------------------------------------------------------------------------------------- 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 - - - - ---------------------------------------------------------------------------------------------------------------------------
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 - --------------------------------------------------------------------------------------------------------------------------- Total earning assets 223,012 210,379 198,698 7.72 7.73 7.57 Other assets 10,965 11,744 13,460 - --------------------------------------------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------------------------------------------- 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 - ------------------------------ ------------------------------ D. Anthony Guglielmo David H. Gonci Vice Chairman Vice President/Chief Financial Officer/Treasurer 19 EX-10.I 2 EXHIBIT 10.I AGREEMENT THIS AGREEMENT, made this 5th day of January, 1996, by and between Tolland Bank, a state-chartered savings bank ("Bank"), and Joseph H. Rossi, an individual ("Employee"). In consideration of the mutual agreements herein contained, the parties hereto, intending to be legally bound, agree as follows: 1. Need for Agreement (a) Because of the prospects of sweeping changes in the industry (e.g., interstate banking, mergers, the continuing transition from traditional savings bank powers to full commercial bank powers, etc.), and (b) because of the need for the Employee to perform his job without undue fear of (a) above, this Agreement sets forth the following: 2. Term of Agreement and Renewal Term (a) This Agreement shall commence on January 1, 1996, and shall continue in effect through December 31, 1997. The term of the agreement shall automatically be extended for an additional period of one year ("Renewal Term") upon each successive anniversary of January 1 if neither party hereto, within not more than 60 days prior to the date two (2) years before the expiration date of this agreement including any extensions hereof, has provided the other with a written notice to terminate this agreement. Any such renewal shall be upon the terms and conditions set forth herein unless the parties have agreed in writing to different terms and conditions. It is provided, further, that notwithstanding any such notice by the Bank not to extend, this Agreement shall continue in effect for a period of 24 months beyond the term provided herein if a "change in control of the Bank" or a "potential change in control of the Bank", as defined in Section 3, below, shall have occurred during such term. 3. Change in Control (a) No benefits shall be payable hereunder unless there shall have been a change in control of the Bank, as set forth below, and the Employee's employment by the Bank shall thereafter have been terminated in accordance with Section 4. For purposes of this Agreement, a "change in control of the Bank" shall mean a change in control of a nature that would be required to be reported in response to Item 5(f) of Schedule 14A of Regulation 14a promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act"); provided that, without limitation, such a change in control shall be deemed to have occurred if: (1) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Bank representing 25% or more of the combined voting power of the Bank's then outstanding securities; (2) during any period of twelve consecutive months, individuals who at the beginning of such period constitute the Board cease for any reason to constitute a majority thereof unless the election, or the nomination for election by the Bank's shareowners, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. (b) For purposes of this Agreement, a "potential change in control of the Bank" shall be deemed to have occurred if: (1) the Bank enters into an agreement, the consummation of which would result in the occurrence of a change in control of the Bank; or (2) any person (including the Bank) publicly announces an intention to take or to consider taking actions which if consummated would constitute a change in control of the Bank; or (3) any person becomes the beneficial owner, directly or indirectly, of securities of the Bank representing 10% or more of the combined voting power of the Bank's then outstanding securities; or (4) the Board of Directors adopts a resolution to the effect that a potential change in control of the Bank for purposes of this Agreement has occurred. 4. Termination Following Change in Control If any of the events described in Section 3 hereof constituting a change in control of the Bank shall have occurred, the Employee shall be entitled to benefits provided in Section 5, below, upon the subsequent termination of his employment during the term of this Agreement: (a) If the Employee becomes, in the business judgment of the Board of Directors, physically, mentally, or otherwise disabled such that he is unable to perform his duties under this Agreement for a period of six (6) consecutive months; provided, however, such determination by the Board of Directors shall be based on the unanimous opinion of a physician selected each by the Employee and the Bank. If such physicians are not in agreement, the Employee and the Bank shall select a third physician whose decision shall be used by the Board of Directors for their determination. (b) Without cause, provided, however, that: (1) sixty (60) days prior written notice is delivered to Employee, and (2) notice of such termination has been delivered after, simultaneously with, or is in any way connected with a "potential change in control of the Bank" or a "change in control in the Bank" as defined in Subsections (a) and (b) of Section 3, above. (c) With cause: cause shall include personal dishonesty; willful misconduct; breach of fiduciary duty involving personal profit; intentional failure to perform stated duties (other than such failure resulting form the Employee's incapacity due to physical or mental illness or any such actual or anticipated failure resulting from the Employee's termination for "Good Reason" as defined in Subsection (d) of this Section 4, below); willful violation of any law, rule, regulation (other than traffic violations or similar offenses), or final cease and desist order or the Federal Deposit Insurance Corporation, or material breach of any provisions of this contract. For purposes of this Subsection, no act, or failure to act, on the Employee's part shall be considered "willful" unless done, or omitted to be done, by the Employee not in good faith and without reasonable belief that the Employee's action or omission was in the best interest of the Bank. Notwithstanding the foregoing, the Employee shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Employee a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to the Employee and an opportunity for the Employee, together with his counsel, to be heard before the Board), finding that in the good faith opinion of the Board the Employee was guilty of conduct set forth above in this Subsection (c) of this Section 4 and specifying the particulars thereof in detail: (d) With Good Reason The Employee shall be entitled to terminate his employment for Good Reason. "Good Reason" shall mean: (1) the assignment to the Employee of any duties inconsistent with the Employee's status as a senior executive officer of the Bank or any significant or inconsistent alteration in the nature or status of the Employee's responsibilities from those in effect immediately prior to a change in control of the Bank; or (2) a reduction by the Bank in the Employee's annual salary as in effect on the date hereof or as the same may be increased from time to time; or a reduction in fringe benefits, unless such reduction is made equitably or is applicable to other Bank employees on a non-discriminatory basis; or (3) the relocation of the Bank's principal executive offices to a location outside the greater Hartford area or the Bank's requiring the Employee to be based anywhere other than the Bank's principal executive offices. The Employee's right to terminate his employment pursuant to this Subsection shall not be affected by his incapacity due to physical or mental illness. 5. Compensation Upon Termination or During Disability (a) During any period that the Employee fails to perform his duties under this Agreement as a result of incapacity due to physical or mental illness, the Employee shall continue to receive his full salary at the rate then in effect, including all compensation, for a period not to exceed 12 months or until the Employee is eligible for Long Term Disability benefits, whichever occurs first. Thereafter, the Employee's benefits shall be determined in accordance with the Bank's insurance programs, pension plan, profit sharing and retirement plan then in effect. (b) If the Employee's employment shall be terminated for "Cause" pursuant to Subsection (c) of Section 4 above, the Bank shall pay the Employee his full salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and the Bank shall have no further obligations to the Employee under this Agreement. (c) If the Employee's employment shall be terminated "Without Cause" pursuant to Subsection (b) of Section 4 above, or with "Good Reason" pursuant to Subsection (d) of Section 4 above, the Employee shall be entitled to the benefits provided below: (1) The Bank shall pay the Employee his full salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and any incentives earned prior to the Date of Termination but as yet not paid, and (2) the Bank shall pay $25,000 to the Employee at the time of termination. Such sum shall be paid, at the Employee's election either in a lump sum or on a salary continuation basis, and (3) the Bank shall continue to pay to the Employee his full salary at his rate of compensation until such payments, including the payment made pursuant to paragraph 5 (c) (2) above, have reached 2.9 times the sum of the Employee's average annual salary and bonuses for the preceding five years and (4) the Bank shall arrange to provide the Employee with life, disability, accident and health insurance benefits equal to those which the Employee was receiving immediately prior to the Notice of Termination for two years, and (5) the Employee shall not be required to mitigate the amount of any payment provided for in this Section 5 by any compensation earned by the Employee as the result of part-time or temporary employment by another employer, and (6) in addition to all other amounts payable to the Employee under this Section 5, the Employee shall be entitled to receive all benefits payable to the Employee under the Bank's vacation policy, pension plan, profit sharing plan and any other plan or agreement relating to retirement benefits. 6. Notice of Termination (a) Any purported termination by the Bank or by the Employee communicated by written Notice of Termination to the other party hereto in accordance with Subsection (b) of this Section 6 shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Employee's employment under the provision so indicated. (b) A notice, request, demand or other communication required or permitted to be given under this Agreement shall be sufficient if in writing and if delivered personally, or sent by certified or registered mail to the address below or to other such addressee or address as shall be set forth in a notice given in the same manner: If to the Employee: Joseph H. Rossi 45 Washburn Rd. Canton, CT 06019 If to the Bank (mail): Tolland Bank Olde Tolland Common P. O. Box 156 Tolland, CT 06084 If to the Bank (deliver): Tolland Bank 348 Hartford Tpke. Vernon, CT 06066 7. Date of Termination "Date of Termination" shall mean: (a) if the Employee's employment is terminated for Disability, thirty (30) days after Notice of Termination is given, provided that the Employee shall not have returned to the performance of his duties on a full-time basis during such thirty (30) day period, and (b) if the Employee's employment is terminated "Without Cause" pursuant to Subsection (b) of Section 4 or for "Good Reason" pursuant to Subsection (d) of Section 4, above, sixty (60) days from the date shown Notice of Termination is given, and (c) if the Employee's employment is terminated for "Cause" pursuant to Subsection (c) of Section 4, above, the date of the Notice of Termination. Notwithstanding Subsections (a), (b), and (c) of this Section 7, the party receiving such Notice of Termination shall have thirty (30) days to notify the other party that a dispute exists concerning the termination, and the Date of Termination shall be the date finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected); and provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Bank will continue to pay the Employee his full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, base salary) and continue the Employee as a participant in all compensation, benefit and insurance plans in which the Employee was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with this subsection except if such Employee is terminated for "Cause". Amounts paid under this Subsection are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. 8. Successors; Binding Agreement (a) The Bank will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Bank to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Bank would be required to perform it if no such succession had taken place. Failure of the Bank to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Employee to terms as the Employee would be entitled under this Agreement if the Employee terminated his employment for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Bank" shall mean the Bank as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. (b) This Agreement shall inure to the benefit of and be enforceable by the Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Employee should die while any amount would still be payable to the Employee under this Agreement if the Employee had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this agreement to the Employee's devisee, legatee or other designee or if there is no designee, to the Employee's estate. 9. Validity If for any reason any provision hereof shall be determined to be invalid or unenforceable, the validity and effect to the other provisions hereof shall not be affected thereby. 10. Waiver of Breach The waiver by the Bank or by the Employee of a breach of any provision of the Agreement by the other party shall not operate, or be construed, as a waiver of any other breach of such other party. 11. Entire Agreement and Modification This Agreement constitutes the entire agreement between the parties and supersedes all other agreements, arrangements, representations, and communications, oral or written, so that except for the provisions of this agreement the employment relationship between the parties is an at-will relationship which may be terminated at any time by either party. This Agreement shall not be modified or amended except by written agreement of the parties hereto. 12. Arbitration and Attorney Fees Claims, disputes or other matters in question between the parties to this Agreement arising out of or relating to this Agreement or breach thereof, shall be subject to and decided by arbitration in accordance with the appropriate rules of the American Arbitration Association currently in effect, unless the parties mutually agree otherwise. The Employee seeking to enforce the terms of this Agreement who prevails is entitled to reasonable attorney fees. 13. Applicable Law The parties hereto agree that this Agreement shall be construed and enforced pursuant to the laws of the State of Connecticut except to the extent that such law may be preempted by applicable Federal Law, including regulation, or orders duly issued by the FDIC ("Federal Law"), in which event this Agreement shall be governed and be interpreted by Federal Law. IN WITNESS WHEREOF, the parties hereto have set their hands as of the day and year first above written. EMPLOYEE: FOR THE BANK: /s/ Joseph H. Rossi /s/ Francis J. Prichard - ---------------------- -------------------------- Joseph H. Rossi Francis J. Prichard President & CEO Its Chairman of the Board /s/ Evi S. Connors - ---------------------- Witness /s/ Cynthia S. Harris CORPORATE SEAL: - ---------------------- Witness EX-10.III 3 EXHIBIT 10.III SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN AND AGREEMENT THIS AGREEMENT, made this 16th day of December, 1996, by and between Tolland Bank, a state-chartered savings bank ("Bank"), and Joseph H. Rossi, an individual ("Employee"). In consideration of the mutual agreements herein contained, the parties hereto, intending to be legally bound, agree as follows: 1. Need for Agreement (a) Because of the prospects of sweeping changes in the industry (e.g., interstate banking, mergers, the continuing transition from traditional savings bank powers to full commercial bank powers, etc.), and (b) because of the need for the Employee to perform his job without undue fear of the loss of pension benefits this Agreement sets forth the following: 2. Term of Agreement (a) This Agreement shall commence on October 1, 1996, and shall continue in effect until the time Employee is fully vested in the Bank's Defined Benefit Plan and 401k Savings Plan. 3. Qualifying Termination of Employment Benefits shall be payable under this Agreement only if the Employee's employment is terminated prior to the expiration of this Agreement under one of the following circumstances: (a) Employee shall have been involuntarily terminated from employment without cause. (i) Cause shall include personal dishonesty; willful misconduct; breach of fiduciary duty involving personal profit; intentional failure to perform stated duties (other than such failure resulting from the Employee's incapacity due to physical or mental illness or any such actual or anticipated failure resulting from the Employee's termination for "Good Reason" as defined in Subsection (b) of this Section below); willful violation of any law, rule, regulation (other than traffic violations or similar offenses), or final cease and desist order of the Federal Deposit Insurance Corporation. (ii) For purposes of this Subsection, no act, or failure to act, on the Employee's part shall be considered "willful" unless done, or omitted to be done, by the Employee not in good faith and without reasonable belief that the Employee's action or omission was in the best interest of the Bank. (iii) Notwithstanding the foregoing, the Employee shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Employee a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to the Employee and an opportunity for the Employee, to be heard before the Board), finding that in the good faith opinion of the Board the Employee was guilty of conduct set forth above and specifying the particulars thereof in detail. (b) Employee terminates his employment with Good Reason. (i) The Employee shall be entitled to terminate his employment for Good Reason. "Good Reason" shall mean: (1) the assignment to the Employee of any duties inconsistent with the Employee's status as a senior executive officer of the Bank or any significant change in the Employee's responsibilities or duties that negatively alters the nature and status of his position. (2) a reduction by the Bank in the Employee's annual salary as in effect on the date hereof or as the same may be increased from time to time; or a reduction in fringe benefits, unless such reduction is made equitably or is applicable to other Bank employees on a non-discriminatory basis; or (3) unless otherwise mutually agreed upon, the relocation of the Bank's principal executive offices to a location outside the greater Hartford area or the Bank's requiring the Employee to be based anywhere other than the Bank's principal executive offices. 2 (ii) The Employee's right to terminate his employment pursuant to this Subsection shall not be affected by his incapacity due to physical or mental illness. (c) If the Employee becomes, in the business judgment of the Board of Directors, physically, mentally, or otherwise disabled such that he is unable to perform his duties for such a period of time that his employment is terminated or he is replaced without right of returning to his former position upon becoming able to perform such duties. (i) Such determination by the Board of Directors shall be based on the unanimous opinion of two physicians, one selected by the Employee and one by the Bank. (ii) If such physicians are not in agreement, the Employee and the Bank shall select a third physician whose decision shall be used by the Board of Directors for their determination. 4. Benefits Payable Following Qualifying Termination of Employment In the event that the Employee's employment is terminated under one of the circumstances described in this paragraph 3 above, the Bank shall pay the Employee the amount described in paragraph 4 reduced by applicable withholding taxes: (a) In the event that the employee is not 100% vested in his accrued benefits under the Defined Benefit Plan at the time of termination, the Bank shall pay him a lump sum amount equal to the excess, if any, of: (i) the lump sum value of his vested and unvested accrued benefit under the pension plan at the time of his termination reduced by; (ii) the lump sum value of his vested accrued benefit under the Plan. For purposes of this Agreement, the amount to be determined under this Clause (a) will be calculated by applying the provisions of the pension plan then in effect. (b) In the event that the Employee is not 100% vested in his account benefit under the 401k Savings Plan at the time of his termination, the Bank shall make the lump sum payment to him in an amount equal to the excess, if any, of: 3 (i) the vested and unvested account balance determined as of the most recent valuation date immediately preceding the date of his termination of employment reduced by; (ii) his vested account balance under the plan as of the most recent valuation date immediately preceding the date of his termination of employment. (c) A lump sum in the amount of 18% of the sum of (a) and (b) above. 5. Notice of Termination (a) Any purported termination by the Bank or by the Employee communicated by written Notice of Termination to the other party hereto in accordance with Subsection (b) of this Section 6 shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Employee's employment under the provision so indicated. (b) A notice, request, demand or other communication required or permitted to be given under this Agreement shall be sufficient if in writing and if delivered personally, or sent by certified or registered mail to the address below or to other such addressee or address as shall be set forth in a notice given in the same manner: If to the Employee: Joseph Rossi 45 Washburn Road Canton, CT 06019 If to the Bank (mail): Tolland Bank Olde Tolland Common P. O. Box 156 Tolland, CT 06084 If to the Bank (deliver): Tolland Bank 348 Hartford Tpke. Vernon, CT 06066 4 6. Successors; Binding Agreement (a) The Bank will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Bank to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Bank would be required to perform it if no such succession had taken place. Failure of the Bank to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Employee to terms as the Employee would be entitled under this Agreement if the Employee terminated his employment for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Bank" shall mean the Bank as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. (b) This Agreement shall inure to the benefit of and be enforceable by the Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Employee should die while any amount would still be payable to the Employee under this Agreement if the Employee had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this agreement to the Employee's devisee, legatee or other designee or if there is no designee, to the Employee's estate. 7. Validity If for any reason any provision hereof shall be determined to be invalid or unenforceable, the validity and effect to the other provisions hereof shall not be affected thereby. 8. Waiver of Breach The waiver by the Bank or by the Employee of a breach of any provision of the Agreement by the other party shall not operate, or be construed, as a waiver of any other breach of such other party. 9. Modification of Agreement This Agreement shall not be modified or amended except by written agreement of the parties hereto. 5 10. Arbitration and Attorney Fees Claims, disputes or other matters in question between the parties to this Agreement arising out of or relating to this Agreement or breach thereof, shall be subject to and decided by arbitration in accordance with the appropriate rules of the American Arbitration Association currently in effect, unless the parties mutually agree otherwise. The Employee seeking to enforce the terms of this Agreement who prevails is entitled to reasonable attorney fees. 11. Applicable Law The parties hereto agree that this Agreement shall be construed and enforced pursuant to the laws of the State of Connecticut except to the extent that such law may be preempted by applicable Federal Law, including regulation, or orders duly issued by the FDIC ("Federal Law"), in which event this Agreement shall be governed and be interpreted by Federal Law. IN WITNESS WHEREOF, the parties hereto have set their hands as of the day and year first above written. EMPLOYEE: FOR THE BANK: /s/ Joseph H. Rossi /s/ William Dowty, Jr. Joseph Rossi William Dowty, Jr. President & CEO Chairman of Personnel Committee, Board of Directors /s/ Patrick J. Logiudice Witness /s/ Cynthia S. Harris CORPORATE SEAL: Witness 6 EX-10.IV 4 EXHIBIT 10.IV TOLLAND BANK DIRECTOR'S DEFERRED COMPENSATION PLAN 1. Purpose. The purpose of this Directors' Deferred Compensation Plan ("Plan") is twofold. First, the Plan enables directors of Tolland Bank to elect to receive payment of their annual retainer fees in the form of stock of the Bank in lieu of cash. Second, the Plan enables directors who elect payment in the form of stock to elect to defer receipt and taxation of their annual retainer fees that are payable in such form. To the extent possible, the Plan shall be construed and administered in a manner consistent with the foregoing purposes. 2. Definitions. Where the following words and phrases appear in this Plan, they shall have the respective meanings set forth below, unless the context clearly indicates to the contrary: (a) Bank. Tolland Bank (b) Beneficiary. The person or persons designated in writing by a Participant to receive the balance credited to the Participant's Deferred Compensation Account upon his death. If no effective Beneficiary designation is on file, the Participant's Beneficiary shall be his estate. (c) Board. The Board of Directors of the Bank. (d) Committee. The Personnel Committee of the Board. (e) Deferred Compensation Account or Account. The separate bookkeeping account maintained by the controller of the Bank to record each Participant's interest in the Plan, consisting of deferred Retainer Fees and any amounts credited thereon. (f) Director. A Director of the Bank. (g) Participant. Any Director or former Director who has elected to participate in the Plan, or who retains a balance in his Deferred Compensation Account. (h) Retainer Fee. The retainer payable to a Director with respect to services to be rendered during the year, which retainer is paid on the first business day of the calendar quarter, in advance. A Retainer Fee shall not include any fee or remuneration payable for attending Board or committee meetings, or for any other purpose. (i) Stock. Common stock of Tolland Bank. In the event of a stock dividend, split-up, combination or reclassification of shares, recapitalization or other similar capital change relating to the Stock, the aggregate number and kind of shares or securities of the Bank and the value of such shares, shall be appropriately adjusted by the Committee (whose determination shall be conclusive and binding upon both the Bank and the participant) so that the proportionate number of shares or securities shall be maintained hereunder as before the occurrence of such event 3. Eligibility and Participation. Effective January 1, 1997, any Director whether elected or appointed is eligible to participate in the Plan and to defer payment of his or her Retainer Fees in accordance with the terms of the Plan. A Director may commence participation in the Plan at any time by filing a written election form with the controller. 2 4. Deferral Election. A Director may elect to receive payment of all of the Director's Retainer Fees in Stock rather than cash; any change in such election shall be effective only as of the January 1 next following filing of the election change. In addition, a Director who elects to receive payment in the form of Stock may elect to defer the payment of Retainer Fees payable to the Participant in such form after the election has been filed. The Participant may terminate the election to defer payment under the Plan at any time by delivery to the controller of the Bank of a written termination notice, but such termination notice shall be effective only with respect to Retainer Fees payable after the controller's receipt thereof. Initial elections under the Plan shall be effective January 1, 1997. Any subsequent election to receive payment in the form of Stock rather than cash and any election to defer payment of Stock shall be effective only as of the January 1 next following the delivery of the election. Any Retainer Fees previously deferred while the election was in effect shall remain in the Participant's Deferred Compensation Account subject to all of the terms of the Plan. 5. Deferred Compensation Accounts. The Controller shall maintain separate bookkeeping Deferred Compensation Accounts for each Participant to which all of the Participant's deferred Retainer Fees shall be credited as of the first business day of a calendar quarter. Any such deferred Retainer Fees shall be credited as units (including fractional units) of common stock of Tolland Bank, based on the average of the high and low values of such stock on the date of crediting. Any such units shall be considered unissued stock, and the Participant shall have no rights as a shareholder with respect to such units until distributed as Stock. Cash shall be credited to the Participant's Account equal to the amount of any cash dividends paid on Bank stock from time to time. Upon distribution as provided in Section 7, the Deferred Compensation Account shall be paid in kind as shares of stock, with cash representing dividends paid since crediting and any fractional share. No interest shall accrue on the balance in a Participant's Account attributable to cash dividends. 3 6. Unfunded Plan. The Deferred Compensation Accounts provided for herein are unfunded accounts established solely for internal bookkeeping purposes, and neither the Participant nor any person claiming by, through or under the Participant shall acquire any property interest in any specific assets of the Bank. In the event the Bank segregates any particular assets to provide the benefits payable under the Plan, said assets shall continue to be part of the general assets of the Bank and shall remain subject to the claims of its unsecured general creditors at all times. Nothing contained herein shall require the Bank to segregate any of its assets for the purpose of providing benefits hereunder. 7. Benefit Payments. The balance in a Participant's Account shall be paid or commence to be paid in a lump sum within sixty (60) days after the Participant ceases to be a Director for any reason. In the event of the Participant's death before complete distribution of the Account, any remaining Account balance shall be paid to the Participant's Beneficiary in a lump sum as soon as administratively practical after his death. 8. Committee. The Plan shall be administered by the Committee, whose determinations of all administrative matters hereunder and interpretations of terms hereunder shall be final and conclusive on all parties. 9. Withholding. The Bank shall have the right to withhold from payment of benefits hereunder or from other amounts payable to a participant such amount of income, payroll, and other taxes as the Bank determines is appropriate. 4 10. Amendment and Termination. The Plan may be amended at any time and from time to time, or terminated in whole or in part, by action of the Board; provided, however, that no such amendment or termination shall divest a Participant of any amount credited to his Account under the Plan. 11. Assignment of Benefits. The interest of a Participant in his Deferred Compensation Account shall not be subject to execution, attachment or other similar process, and a Participant's interest in his Account may not be assigned, transferred, pledged or encumbered except by will or by the laws of descent and distribution. Any attempted assignment, alienation, levy or similar process shall be null and void. 12. Applicable Law. The Plan shall be administered, construed and interpreted in accordance with the laws of the State of Connecticut. IN WITNESS WHEREOF, the Bank has caused this Plan to be executed by its officers thereunto duly authorized this 20th day of December, 1996. TOLLAND BANK By /s/ Joseph H. Rossi ------------------------- Title President & CEO 5 EX-10.V 5 EXHIBIT 10(V) TOLLAND BANK 1997 EMPLOYEE STOCK PURCHASE PLAN Purpose of the Plan The purpose of this Plan is to provide eligible employees of Tolland Bank (the "Bank") with an opportunity to become stockholders of the Bank through the purchase of shares of Common Stock, par value $1.00 per share, of the Bank ("Common Stock") at full fair market value. Except as otherwise provided herein, the Bank will absorb the cost of fee and brokerage charges in connection with the administration of and purchases made pursuant to the Plan. Participation in the Plan is entirely voluntary. Effective Date This Plan shall be effective as of May 1, 1997. Eligibility All employees of the Bank are eligible to participate in the Plan at their election except for i. Any person who owns (either individually or through attribution from siblings, spouse, ancestors and lineal descendants, or from a corporation, partnership, estate or trust of which the person is shareholder, partner, or beneficiary) 5% or more of the total combined voting power of the Bank or of any parent or subsidiary corporation; ii. Employees who have been employed fewer than 30 days; iii. Employees whose customary employment is fewer than 20 hours per week or for not more than 5 months in any calendar year; The right to purchase stock under this Plan may not be transferred by an eligible employee; it may be exercised only by the employee. Method of Operation The Bank shall designate a brokerage or other financial services firm (the "Broker") to open and maintain an account in the name of each participant in the Plan. Nothing in the Plan shall restrict the substitution by the Bank in its discretion of a firm other than the one originally named as the Broker under the Plan, or the right of any such Broker to terminate its services as the Broker under the Plan. The Bank will deduct funds from each participant's pay as authorized by the participant in accordance with the Plan and shall, as promptly as practicable following the end of each calendar month, forward to the Broker the amounts deducted for all participants during such month, a list of such participants and the amount allocable to the account of each such participant. No interest will be paid on payroll deductions. The Bank will pay the Broker's administrative charges for maintaining accounts of participants in the Plan, and, as shares of Common Stock for such accounts are purchased by the Broker, all brokerage commissions on such purchases of shares of Common Stock. Payroll Deductions Payroll deductions may be authorized by eligible employees in specified amounts not less than $5 per pay period and not greater than the lesser of $300 per pay period or $1,000 per month. Such payroll deduction authorization will remain effective until terminated in writing by a participant. The option to purchase lapses with each pay period; a failure to participate in payroll deduction in a particular pay period shall not increase the limit for any subsequent period. A payroll deduction may be revised or terminated at any time by a participant's written request submitted to the Bank; provided, however, that a participant may not recommence a payroll deduction for a period of six months after the participant has terminated such deduction, nor may a participant make more than two revisions of a payroll deduction authorization in any twelve month period. Commencement, revision or termination of deductions will become effective as soon as practicable after a participant's written request is received by the Bank. Amendment or Termination The Bank reserves the right to discontinue use of its payroll deduction facilities for the purposes of the Plan at any time such action is deemed advisable in its judgment, and it also reserves the right to amend or terminate the Plan at any time. In any event the Plan shall terminate no later than April 30, 2007. Any such amendment or termination will not result in the forfeiture of any funds deducted from the salary of any participant effective before the effective date of amendment or termination of the Plan. Participant's Account with the Broker A participant's account will consist of the shares of Common Stock purchased by the Broker and allocated to the account. Within five (5) business days following receipt of cash funds from the Bank, the Broker will purchase, as agent for the participants, as many shares of Common Stock as such funds will permit. Such purchases shall be made on the open market. -2- The number of shares of Common Stock purchased by the Broker with funds provided to it pursuant to the Plan will depend upon the market price of shares of Common Stock at the time such purchases are made. Such purchases will be allocated by the Broker, at the average cost thereof, to the individual accounts established for participants, in proportion to the respective amount received for each participant's account. Allocation will be made in full shares of Common Stock and in fractional interests in shares of Common Stock. All purchases will be made in accordance with any conditions imposed upon the Broker by the Securities and Exchange Commission which are designed to guard against undue impact on the market price of Common Stock by reason of purchases made pursuant to the Plan. Each participant will acquire full ownership of all full and any fractional interest in shares of Common Stock allocated to the participant's account at the time of such allocation. All such shares of Common Stock will be registered in the name of the Broker or its nominee and will remain so registered until delivery is requested by a participant. A participant may request that a certificate for any or all of the participant's full shares be delivered to the participant at any time; provided, however, that any fee or charge imposed by the Broker in connection with the delivery of a certificate to a participant shall be paid by such participant or charged to such participant's account. A participant's account will be credited with all dividends paid in respect of the full shares of Common Stock and of any fractional interest in shares of Common Stock held in a participant's account. Cash dividends will be reinvested in Common Stock as promptly as practicable following receipt thereof by the Broker unless a participant instructs the Broker to reinvest no cash dividends. Brokerage commissions on purchases made with reinvested dividends will be paid by the Bank. Any stock dividends or stock splits in respect of full and any fractional interest in shares of Common Stock held in a participant's account will be credited to the account without charge. Any distributions to holders of Common Stock of other securities and rights to subscribe for additional shares will be sold and the proceeds will be handled in the same manner as a cash dividend. A participant may instruct the Broker at any time to sell any or all of the participant's full shares of Common Stock and the fractional interest in any share of Common Stock allocated to the participant's account. Upon such sale the Broker will mail to the participant a check for the proceeds, less a brokerage commission and any applicable transfer tax, each of which is payable by the participant. Such instruction to the Broker will not affect a participant's status under the Plan unless the participant also terminates the participant's payroll deduction authorization. -3- Each participant will receive a confirmation from the Broker of changes in the number of shares of Common Stock held for the participant's account. The relationship between the Broker and a participant is the normal relationship of a broker and client, and the Bank assumes no responsibility in this respect. The Broker may offer custodial services for certificates for share of Common Stock transferred by a participant for shares not acquired through the Plan. The Broker will deliver to each participant as promptly as practicable, by mail or otherwise, all notices of meetings, proxy statements and other material distributed by the Bank to its stockholders. There will be no charge to a participant for the Broker's delivery of such notices, proxy statements or other material. The full shares of Common Stock in each participant's account will be voted in accordance with the participant's signed proxy instructions duly delivered to the Broker. Assignment; Sale Although a participant may not assign, pledge or hypothecate an interest in the Plan as such, shares of Common Stock allocated to a participant's account may be sold, assigned, pledged, hypothecated or otherwise dealt with as would be the case with respect to any other shares of Common Stock a participant might own. Closing Participant's Account A participant who terminates a payroll deduction authorization may request the Broker to maintain or to close the participant's account. A participant may direct that all full shares of Common Stock and any fractional interest in shares of Common Stock in the participant's account be sold and the net proceeds remitted to the participant, or the participant may request that the full shares in the account be delivered to the participant along with a check representing the net proceeds of the sale of the fractional interest in shares, less a brokerage commission, any applicable transfer tax, and any fee or charge imposed by the Broker in connection with the delivery of a certificate for such shares, each of which is payable by the participant. An employee may thereafter re-enter the Plan by following the procedure described above under the caption "Payroll Deductions". However, an employee many not recommence payroll deductions during a period of six months after the employee has terminated such deductions. -4- EX-10.VI 6 EXHIBIT 10(VI) TOLLAND BANK BONUS PLAN The purpose of the Tolland Bank Bonus Plan is to provide incentive for each officer and employee of Tolland Bank to be rewarded for contributions toward the corporate objective of enhancing shareholder value through increased market share, higher earnings, and controlled expenses. The Bonus Plan will have three components: 1. Short Term Bonus 2. Long Term Bonus 3. Instant Reward SHORT TERM BONUS Under this plan, the bonus pool is determined annually by measurement of the Bank's annual average return on assets (ROA). For the purposes of calculating the Short Term Bonus pool, the following schedule will be used: ROA of .80 through .99 = 80% payout ROA of 1.00 through 1.19 = 100% payout ROA of 1.20 and above = 120% payout The 100% guideline will equal up to 12% of estimated net operating income (net income before taxes, plus loan loss provision, plus net gains/losses on securities and assets, minus net loan chargeoffs). The bonus pool amount will be recommended by management to the Personnel Committee for its approval and ratification by the Board of Directors. It is not the intention of management to duplicate bonus payments which may be made through other incentive arrangements. Therefore, employees will not receive a bonus under this plan unless the amount from this plan is greater than the incentive bonus payable for the same year under the other incentive arrangement, in which case the difference will be paid under this plan. The amount payable from other incentives will be deducted from the bonus pool for this plan up to the bonus amount payable under this plan for each employee involved. For payment of bonuses once the bonus pool is determined, the following guidelines of percentage of base salary will apply: Senior Officers: Level 10 0 - 30% Level 09 & 08 0 - 25% Level 07 0 - 20% Level 06 0 - 15% 1 All Other Officers: All levels 0 - 10% All Non-Officer Exempt Employees:* All levels 0 - 10% Non-Exempt Employees:* All levels 0 - 5%, or a flat amount to be determined by management * These components of the short term bonus may be paid even if the ROA target is not reached, upon recommendation of management and approval of the Personnel Committee and ratification by the Board of Directors. Eligibility: All classes of employees are eligible. Bonuses for part-time employees will be adjusted to a portion of the full-time bonus as determined by management. The employee must have been with the Bank for the full year for which results are measured, and the recipient must be in the Bank's employ at the time the bonus is paid. Employees with a performance rating of 3 (does not meet expectations) are not eligible to receive a bonus. The Personnel Committee will recommend the bonus allotment for the President/Chief Executive Officer. The percentage of base salary to be awarded as a bonus to policy making officers other than the CEO will be based on the recommendation of the CEO after evaluation of achievement of objective and subjective goals established during the applicable calendar year. Bonus amounts for other officers/employees will be approved by the CEO within the guidelines established, and will be reported to the Personnel Committee. The Personnel Committee may vote to amend or rescind the plan at any time. Bonuses are awarded entirely at the discretion of management and the Board and are not intended to be binding on the company and may be withdrawn at any time. 2 LONG TERM BONUS Officers and key employees may receive long term bonus awards as provided for by the 1997 Stock Incentive Plan for Directors, Officers and Key Employees. This plan is intended to provide additional incentives to promote the future success and growth of the Bank by providing participants with a direct stake in the Bank and, in the case of officers and key executives, to encourage qualified persons to seek and accept employment with the Bank. INSTANT REWARD The purpose of this plan is to reward an employee for an outstanding accomplishment, upon recommendation by the employee's supervisor or another manager, and upon approval by the senior officer in charge of the department and the senior management team. Policy making officers are not eligible for the instant reward bonus. Instant Rewards may be made for the following: 1. Outstanding effort beyond normal job responsibilities. This could be project related, or for coverage in the absence of another employee. 2. A suggestion which, when implemented, will solve a problem, save the Bank expense, or increase income. 3. A situation which is exposure related (e.g. check kiting scheme, potential fraud, etc.). 4. Significant deposit or loan account relationship success. 5. Outstanding customer service. 6. Any act or effort deemed worthy of this reward by management. Reward amounts may range in size from $50 to $500. Management will recommend a flat amount to be set aside annually for Instant Rewards as part of the budget process. Unused funds may be carried over to the next calendar year. 3 EX-21 7 EXHIBIT 21 Exhibit 21 Subsidiaries of Registrant Subsidiary of Alliance Bancorp of New England, Inc.: Tolland Bank Subsidiary of Tolland Bank: Asset Recovery Systems, Inc. EX-23 8 EXHIBIT 23 Exhibit 23 INDEPENDENT AUDITORS' CONSENT The Board of Directors Alliance Bancorp of New England, Inc.: We consent to incorporation by reference in the Registration Statement No. 333-39645 on Form S-8 of Alliance Bancorp of New England, Inc. of our report dated January 27, 1998, relating to the consolidated balance sheets of Alliance Bancorp of New England, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated income statements, consolidated statements of changes in shareholders' equity and consolidated statements of cash flows for each of the years in the three-year period ended December 31, 1997, which report is included herein. /s/ KPMG PEAT MARWICK LLP Hartford, Connecticut March 23, 1998 EX-99 9 EXHIBIT-99 Independent Auditors' Report To the Shareholders and Board of Directors of Alliance Bancorp of New England, Inc.: We have audited the accompanying consolidated balance sheets of Alliance Bancorp of New England, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated income statements, consolidated statements of changes in shareholders' equity, and consolidated statements of cash flows for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Alliance Bancorp of New England, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP - -------------------------- KPMG Peat Marwick LLP Hartford, Connecticut January 27, 1998 1 Management's Report on the Financial Statements The Management of Alliance Bancorp of New England, Inc. is responsible for the accuracy and content of the consolidated financial statements and other information in this annual report. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis in all material respects, and information presented relies on Management's judgment where material estimates are required. The consolidated financial statement disclosures include the fair values of financial instruments, which include many assets and liabilities. They are not a representation of the fair values or liquidation values of total assets and liabilities, or the value of present and future business activities of the Company. The accounting systems which record, summarize, and report data are supported by internal controls that are augmented by written policies, internal audits and staff training programs. The Audit Committee of the Board of Directors is made up solely of outside directors who are not employees of the Company. It directs and reviews the activities of the internal audit function and meets at least annually with representatives of KPMG Peat Marwick LLP, the Company's independent auditors. KPMG Peat Marwick LLP, a firm of Certified Public Accountants, has been appointed by the Audit Committee of the Board of Directors to conduct an independent audit and to express an opinion as to the fairness of the presentation of the consolidated financial statements of Alliance Bancorp of New England, Inc., in accordance with generally accepted accounting principles. 2 Consolidated Balance Sheets
December 31 (in thousands except share data) 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------ Assets Cash and due from banks $ 6,652 $ 7,463 Short-term investments 14,765 5,100 - ------------------------------------------------------------------------------------------------------------------------------ Total cash and cash equivalents 21,417 12,563 Securities available for sale (at fair value) 43,729 45,386 Securities held to maturity 19,949 20,690 (fair value of $20,021 in 1997 and $20,649 in 1996) Residential mortgage loans 39,319 41,669 Commercial mortgage loans 45,511 40,494 Other commercial loans 18,270 15,287 Consumer loans 29,504 26,118 Government guaranteed loans 24,846 24,263 - ------------------------------------------------------------------------------------------------------------------------------ Total loans 157,450 147,831 Less: Allowance for loan losses (3,000) (2,850) - ------------------------------------------------------------------------------------------------------------------------------ Net loans 154,450 144,981 Premises and equipment, net 4,151 4,416 Foreclosed assets, net 617 980 Other assets 2,816 3,266 - ------------------------------------------------------------------------------------------------------------------------------ Total assets $ 247,129 $ 232,282 - ------------------------------------------------------------------------------------------------------------------------------ Liabilities and Shareholders' Equity Demand deposits $ 21,918 $ 19,673 NOW deposits 22,260 20,522 Money market deposits 15,447 6,469 Savings deposits 34,677 38,102 Time deposits 127,431 120,842 - ------------------------------------------------------------------------------------------------------------------------------ Total deposits 221,733 205,608 Borrowings 5,739 10,406 Other liabilities 854 679 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities 228,326 216,693 Commitments and contingencies (Note 16) Preferred stock, ( $.01 par value; 100,000 shares - - authorized, none issued) Common stock, ($.01 par value; authorized 4,000,000 shares; issued and outstanding 1,636,269 in 1997 and 1,172,500 in 1996 ) 16 1,173 Additional paid-in capital 11,073 8,918 Retained earnings 7,071 5,731 Unrealized gain (loss) on securities, net 643 (233) - ------------------------------------------------------------------------------------------------------------------------------ Total shareholders' equity 18,803 15,589 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $ 247,129 $ 232,282 - ------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements 3 Consolidated Income Statements
Years ended December 31 (dollars in thousands except share data) 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------- Interest Income Loans $ 12,138 $ 12,347 $ 12,170 Debt Securities 3,233 2,780 2,714 Dividends on equity securities 1,047 601 57 Other earning assets 293 244 98 - ----------------------------------------------------------------------------------------------------------------------------- Total interest and dividend income 16,711 15,972 15,039 - ----------------------------------------------------------------------------------------------------------------------------- Interest Expense Deposits 8,487 7,894 6,933 Borrowings 264 415 742 - ----------------------------------------------------------------------------------------------------------------------------- Total interest expense 8,751 8,309 7,675 - ----------------------------------------------------------------------------------------------------------------------------- Net interest income 7,960 7,663 7,364 Provision For Loan Losses 829 978 1,975 - ----------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 7,131 6,685 5,389 Non-Interest Income Service charges and fees 1,148 1,115 1,005 Net gain (loss) on securities 961 (40) 22 Net (loss ) gain on assets (148) 200 (967) - ----------------------------------------------------------------------------------------------------------------------------- Total non-interest income 1,961 1,275 60 Non-Interest Expense Compensation and benefits 3,199 3,253 3,444 Occupancy 586 597 576 Equipment 283 285 296 Data processing services 620 476 518 FDIC insurance 87 57 255 Office and other insurance 466 452 497 Problem asset related expense 88 549 279 Other 1,082 971 717 - ----------------------------------------------------------------------------------------------------------------------------- Total non-interest expense 6,411 6,640 6,582 - ----------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes 2,681 1,320 (1,133) Income tax expense (benefit) 664 (118) 12 - ----------------------------------------------------------------------------------------------------------------------------- Net Income (Loss) $ 2,017 $ 1,438 $ (1,145) - ----------------------------------------------------------------------------------------------------------------------------- Per Share Data Basic earnings (loss) per share 1.27 .93 (0.74) - ----------------------------------------------------------------------------------------------------------------------------- Diluted earnings (loss) per share $ 1.23 $ .92 $ (0.74) - ----------------------------------------------------------------------------------------------------------------------------- Average basic shares outstanding 1,588,436 1,544,145 1,543,295 Average additional dilutive shares 51,391 21,197 33,848 - ----------------------------------------------------------------------------------------------------------------------------- Average diluted shares outstanding 1,639,827 1,565,342 1,577,143 - -----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements 4 Consolidated Statements of Changes in Shareholders' Equity
Net Additional unrealized Total Years ended December 31 Common paid-In Retained gain (loss) on shareholders' (in thousands except share data) stock capital earnings securities equity - ---------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1994 $ 1,158 $ 8,795 $ 5,473 $ (2,224) $ 13,202 Net Loss - - (1,145) - (1,145) Change in net unrealized gain (loss) on securities - - - 1,224 1,224 - ---------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1995 1,158 8,795 4,328 (1,000) 13,281 Net Income - - 1,438 - 1,438 Dividends declared and paid ($0.0225 per share) - (35) - (35) Issuance of shares pursuant to exercise of stock options 15 123 - - 138 Change in net unrealized gain (loss) on securities - - - 767 767 - ---------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 $ 1,173 $ 8,918 $ 5,731 $ (233) $ 15,589 Net Income - - 2,017 - 2,017 Dividends declared and paid - - (278) - (278) ($0.175 per share) Issuance of shares pursuant to exercise of stock options 17 185 - - 202 Four for three stock split effected as a stock dividend 399 - (399) - - Conversion of par value to $.01 per share from $1.00 due to formation of Alliance Bancorp (1,574) 1,574 - - - Issuance of shares pursuant to exercise of stock options 1 396 - - 397 Change in net unrealized gain (loss) on securities - - - 876 876 - ---------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 $ 16 $ 11,073 $ 7,071 $ 643 $ 18,803 - -------------------------------------------------- -------------- -------------- -------------- ------------- --------------
See accompanying notes to consolidated financial statements 5 Consolidated Statements of Cash Flows
Years ended December 31 (in thousands) 1997 1996 1995 ---------------------------------------------------------------------------------------------------------------------------- Operating Activities: Net income (loss) $ 2,017 $ 1,438 $ (1,145) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Provision for loan losses 829 978 1,975 Depreciation and amortization 500 513 509 Net investment security (gains) losses (961) 40 (22) Net asset losses (gains) 148 (200) 967 Loans originated for sale (14,741) (17,719) (15,253) Proceeds from loans sold 15,962 18,230 13,419 Increase (decrease) in other liabilities 175 207 (109) Decrease (Increase) in other assets 348 (803) 17 ---------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 4,277 2,684 358 Investing Activities: Securities available for sale: Proceeds from amortization and maturities 9,940 2,447 214 Proceeds from sales of securities 16,732 3,759 3,461 Purchases of securities (23,585) (28,422) (3,067) Securities held to maturity: Proceeds from amortization and maturities 741 2,060 3,681 Proceeds from sales of securities - 806 - Purchases of securities - - (959) Net (increase) decrease in loans (12,963) 5,517 (23,312) Proceeds from sales of foreclosed assets 2,021 1,530 2,620 (Increase) decrease in foreclosed assets - - (151) Purchases of premises and equipment (88) (157) (232) Proceeds from sales of premises and equipment - 102 - ---------------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (7,202) (12,358) (17,745) Financing Activities: Net increase in interest-bearing deposits 13,880 10,177 11,415 Net increase in demand deposits 2,245 1,993 1,622 Proceeds from issuance of FHLB advances 6,052 12,203 41,710 Principal repayments of FHLB advances (9,719) (11,572) (41,827) Net increase (decrease) in other borrowings (1,000) 2,890 110 Stock options exercised 599 138 - Cash dividends paid (278) (35) - ---------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 11,779 15,794 13,030 ---------------------------------------------------------------------------------------------------------------------------- Net Change in cash and cash equivalents 8,854 6,120 (4,357) Cash and cash equivalents at beginning of the year 12,563 6,443 10,800 ---------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of the year $ 21,417 $ 12,563 $ 6,443 ---------------------------------------------------------------------------------------------------------------------------- Supplemental Information On Cash Payments Interest expense $8,737 $ 8,309 $ 7,577 Income taxes 494 460 37 Supplemental Information On Non-cash Transactions Net loans transferred to foreclosed assets 2,128 369 93 Securities transferred from available for sale to held to maturity, net - - 5,942
See accompanying notes to consolidated financial statements 6 Notes to Consolidated Financial Statements 1. Summary Of Significant Accounting Policies Formation of Bank Holding Company. On October 3, 1997, Alliance Bancorp of New England, Inc. (the "Company") acquired all of the outstanding common stock of Tolland Bank (the "Bank") on a one-for-one basis, in accordance with an Agreement and Plan of Reorganization. The accompanying consolidated financial statements give effect to the Company's reorganization and the exchange of stock, which have been accounted for in a manner similar to a pooling-of-interests transaction. Principles of Business and Consolidation. The Company is a one bank holding company, chartered in Delaware. The Bank is a Connecticut chartered savings bank with deposits insured up to applicable limits by the Federal Deposit Insurance Corporation ("FDIC"). The Bank provides consumer and commercial banking services from its seven offices located in Tolland County, Connecticut. Tolland Bank maintains a wholly owned forclosed asset liquidation subsidiary named Asset Recovery Systems, Inc. ("ARS"). The consolidated financial statements include the Company, the Bank, and ARS. All significant intercompany accounts and transactions have been eliminated in consolidation. Basis of Preparation and Presentation. The consolidated financial statements have been prepared and presented in conformity with generally accepted accounting principles. Unless otherwise noted, all dollar amounts presented in the financial statements and note tables are rounded to the nearest thousand dollars, except share data. Certain prior period amounts have been reclassified to conform with current financial statement presentation. The Company uses the accrual method of accounting for all material items of income and expense. The Company is required to make certain estimates and assumptions in preparing these statements. The most significant estimates are those necessary in determining the allowance for loan losses, the valuation of foreclosed assets, and the determination of fair values of financial instruments. Factors affecting these estimates include national economic conditions, the level and trend of interest rates, local market conditions, and real estate trends and values. Securities. Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held to maturity securities and reported at amortized cost. Trading securities, if any, will consist of securities bought principally for the purpose of selling them in the near term. Unrealized gains and losses on trading securities are included in earnings. Securities not classified as either held to maturity securities or trading securities are classified as available for sale securities and reported at fair value, with unrealized net gains or losses excluded from earnings and reported in a separate component of shareholders' equity net of applicable income taxes. Any decline in the value of a security below its cost considered to be other than temporary is reflected as a realized loss in the Consolidated Income Statements. Realized gains or losses on the sale of securities are generally computed on a specific identified cost basis and reported as Net Gains (Losses) on Securities in the Consolidated Income Statement. Premiums and discounts are recognized as an adjustment of yield by the interest method. Loans. Total loans are reported at the principal amount outstanding, and adjusted for the net amount of deferred fees and costs, premiums and discounts, except for charged-off loans as discussed below. Net loans are total loans less the amount of the allowance for loan losses. Residential mortgage loans held for sale, included in residential mortages on the balance sheet, are stated at the lower of amortized cost or market value. Gains or losses are determined using the specific identification method. Premiums and discounts are recognized as an adjustment of yield by the interest method based on the contractual terms of the loan. Commitment fees are considered to be an adjustment to the loan yield. Loan origination fees and certain direct costs of loan origination are also deferred and accounted for as an adjustment to yield. The unamortized balance of deferred fees and costs is credited or charged to the income statement at the time a loan repays. Interest income receivable is included in Other Assets on the Consolidated Balance Sheet. Most of the Company's loans require interest payments monthly in arrears. The Company generally places loans on nonaccrual when a payment becomes more than three months past due. The Company may also place a loan on nonaccrual sooner if a concern develops as to the ultimate collection of principal or interest. The Company may grant a waiver from nonaccrual status on certain commercial loans which are well secured and in the process of collection. Generally, when a commercial loan is placed on nonaccrual status, any interest receivable over 90 days is charged-off; interest receivable on all other loans is charged off entirely. Payments received on nonaccruing loans are normally applied first against unpaid interest. The Company recognizes as separate assets, rights to service mortgage loans for others, regardless of how those servicing rights are acquired. Mortgage servicing rights are assessed for impairment based on the fair value of those rights, and any impairment is recognized through a valuation allowance. Mortgage servicing rights are amortized in proportion to and over the period of, estimated net servicing income. All related amortization and impairment valuations are charged to mortgage servicing income. 7 Allowance for Loan Losses and Provision for Loan Losses. The allowance for loan losses is maintained at a level estimated by the Company to be adequate to absorb estimated credit losses associated with the loan portfolio, including all binding commitments to lend. The Company's estimation of the adequacy of the allowance is based on an evaluation of the portfolio, past loan loss and recovery experience, current economic conditions, the age and composition of the portfolio, loan loss experience at peer group competitors and other relevant factors. The provision for loan losses is a charge to current period income necessary to establish the loan loss allowance at the level estimated to be adequate by the Company. A loan is considered impaired when it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the agreement. Management excludes large groups of smaller balance homogeneous loans, including residential mortgages and consumer loans, which are evaluated collectively for impairment. The amount of impairment for all impaired loans is determined by the difference between the present value of the expected cash flows related to the loan, using the original contractual interest rate, and its recorded value, or as a practical expedient, for collateral dependent loans, the difference between the appraised value of the collateral and the recorded amount of the loan. When foreclosure is probable, impairment is measured based on the fair value of the collateral. The Company's method of recognition of interest income on impaired loans is consistent with the method of recognition of interest on all loans. The Company's estimates of the collectibility of principal and interest rely in many cases on estimates of future borrower cash flows and market conditions and expectations. In addition, federal and state regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for losses on loans. Based on information available to them at the time of their examination, and on regulatory guidelines then in effect, such agencies may require the Company to recognize additions to the allowance for loan losses. Accordingly, current estimates of loan losses may vary from future estimates and from ultimate loan loss experience. Loan Charge-offs. Most nonaccruing consumer loans are automatically charged-off once they become 150-180 days past due depending on the circumstances, regardless of how well secured they are. Other nonaccruing loans are charged off in whole or in part when it has been determined that there has been a loss of principal. For real estate secured loans, this determination is normally made in conjunction with a current appraisal analysis and the transfer of the loan to foreclosed assets. Charge-offs and recoveries are booked to the allowance for loan losses. Initial write-downs on recently acquired foreclosed assets are also booked to the allowance for loan losses. Foreclosed Assets. Foreclosed assets include foreclosed real estate, real estate deeded to the Company, and personal property repossessed by the Company, net of a valuation allowance for specific properties. Foreclosed assets are transferred from loans at the lower of cost or fair value less selling costs, with any necessary write down from carrying value being charged against the allowance for loan losses. The Company periodically obtains and analyzes appraisals of foreclosed real estate. If the fair value less selling costs is less than the carrying value of these assets, these assets are written down to that value by increasing the amount of the valuation allowance. Additionally, the Company may recognize a gain or loss on the ultimate disposition of foreclosed assets. The net amount of these gains and provisions to increase the valuation allowance are shown as Net Gain (Loss) on Assets in the Consolidated Income Statements. The carrying value of foreclosed real estate is subject, in general, to the same uncertainties discussed above regarding the Allowance for Loan Losses. Net receipts and disbursements related to the operations of foreclosed real estate are included in Problem Asset Related Expense in the Consolidated Income Statements. Premises and Equipment. Property and equipment are stated at cost less accumulated depreciation. Depreciation is charged to operations on a straight-line basis over the estimated useful lives of the related assets. Intangible Assets. Intangible assets related to branch acquisitions are being amortized on a straight line basis over 10-15 years. On a periodic basis, the Company reviews the intangible assets for events or changes in circumstances that may indicate the carrying value of the assets may not be recoverable. Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carry-forwards. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that such deferred tax assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 8 Stock Options. The Company measures the compensation cost for its stock option plans using the intrinsic value method prescribed by Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued to Employees. No compensation cost is recognized if, at the grant date, the exercise price of the options is equal to the fair market value of the Company's common stock. In the notes to its consolidated financial statements, the Company makes pro forma disclosures of net income and earnings per share as if the fair value method of accounting in Statement of Financial Accounting Standards (SFAS), Accounting for Stock-Based Compensation (SFAS 123), has been applied. Under this method, compensation cost of stock options is measured at the grant date based on the fair market value of the award and is recognized over the service period. Disclosures of Fair Values of Financial Instruments. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale, at one time, the Company's entire holdings of a particular financial instrument. Because no market exists for a portion of the Company's financial instruments, fair value estimates were based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could effect the estimates significantly. Fair value estimates were based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications relating to the realization of the unrealized gains and losses may have a significant effect on fair value estimates and have not been considered in the estimates. Fair value methods and assumptions are set forth below for the Company's financial instruments. The carrying amounts reported in the balance sheets for cash and short-term instruments approximate those assets' fair values. Fair values of investment securities were based on quoted market prices where available. If quoted market prices were not available, fair values were based on quoted market prices of comparable instruments. The carrying values, reduced by estimated inherent credit losses, of variable-rate loans and other loans with short-term characteristics were considered fair values. The fair value of residential mortgages was based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics and credit losses inherent in the portfolio. For other loans, the fair market values were calculated by discounting scheduled future cash flows using current interest rates offered on loans with similar terms adjusted to reflect the estimated credit losses inherent in the portfolio. The carrying amounts of accrued interest receivable approximates fair values. The fair values of deposits with no stated maturity, was, by definition, equal to their carrying value. The fair value of time deposits was based on the discounted value of contractual cash flows, calculated using the discount rates that equaled the interest rates offered at the valuation date for deposits of similar remaining maturities. The carrying amounts of short-term borrowings approximated their fair values. Rates currently available for debt with similar terms and remaining maturities were used to estimate fair value of long-term borrowings. The carrying amount of accrued interest payable approximates fair value. The fair value of off balance sheet instruments is based on fees currently charged for such instruments. Cash Flow Reporting. The Company uses the indirect method to report cash flows from operating activities. Under this method, net income is adjusted to reconcile it to net cash flow from operating activities. Net reporting of cash transactions affecting balance sheet items has been used where permitted. The Company considers due from banks and short-term investments to be cash equivalents. Earnings Per Share (EPS). In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS 128, Earnings Per Share. SFAS 128 is effective for periods ending after December 15, 1997, and requires restatement of all prior period EPS data. Under SFAS 128, basic EPS is calculated by dividing net income by the average number of common shares outstanding. The calculation of diluted EPS includes common stock equivalents in the average number of common shares outstanding. All prior period EPS data has been restated to comply with SFAS 128. Recent Accounting Developments. In June 1997, the FASB issued SFAS 130, Reporting Comprehensive Income, and SFAS 131, Disclosures About Segments of an Enterprise and Related Information. These standards establish new reporting rules and are effective for periods beginning after December 15, 1997. SFAS 130 establishes standards for reporting and displaying comprehensive income, which is defined as all changes to equity except investments by and distributions to shareholders. Net income is a component of comprehensive income, with all other components referred to in the aggregate as other comprehensive income. SFAS 131 establishes standards for reporting information about operating segments. This state-ment requires a company to disclose certain income statement and balance sheet information by operating segment. An operating segment is a revenue producing component of a business for which separate financial information is produced and evaluated internally by the chief operating decision maker in allocating resources to segments. 9 2. Cash And Cash Equivalents
Short-term investments at December 31 (in thousands) 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- Federal funds sold $ 14,760 $ 4,000 Money market preferred stock - 1,000 Interest bearing deposits due from other banks - 100 FHLBB Ideal Way account 5 - - ---------------------------------------------------------------------------------------------------------------------------- Total short-term investments $ 14,765 $ 5,100 - ----------------------------------------------------------------------------------------------------------------------------
The Company is required to maintain certain average vault cash and cash reserve balances with the Federal Reserve Bank of Boston. Cash and due from banks included amounts so required of $714,000 and $677,000 at December 31, 1997 and December 31, 1996, respectively. 3. Securities
Amortized Unrealized Unrealized Fair December 31, 1997 (in thousands) Cost Gains Losses Value - ---------------------------------------------------------------------------------------------------------------------------- Securities available for sale U.S. Government and agency $ 18,081 27 $ (217) $ 17,891 U.S. Agency mortgage-backed 5,366 27 (2) 5,391 Other debt securities 1,312 9 - 1,321 Marketable equity 16,710 1,586 - 18,296 FHLBB stock 830 - - 830 - ---------------------------------------------------------------------------------------------------------------------------- Total available for sale $ 42,299 $ 1,649 $ (219) $ 43,729 - ---------------------------------------------------------------------------------------------------------------------------- Securities held to maturity U.S. Government and agency $ 2,901 $ 45 $ (5) $ 2,941 U.S. Agency mortgage-backed 15,214 48 (38) 15,224 Other debt securities 1,834 25 (3) 1,856 - ---------------------------------------------------------------------------------------------------------------------------- Total held to maturity $ 19,949 $ 118 $ (46) $ 20,021 - ---------------------------------------------------------------------------------------------------------------------------- Amortized Unrealized Unrealized Fair December 31, 1996 (in thousands) Cost Gains Losses Value - ---------------------------------------------------------------------------------------------------------------------------- Securities available for sale U.S. Government and agency $ 25,314 $ 34 $ (366) $ 24,982 U.S. Agency mortgage-backed 3,375 20 (5) 3,390 Other debt securities 1,745 - (11) 1,734 Marketable equity 13,989 598 (27) 14,560 FHLBB stock 720 - - 720 - ---------------------------------------------------------------------------------------------------------------------------- Total available for sale $ 45,143 $ 652 $ (409) $ 45,386 - ---------------------------------------------------------------------------------------------------------------------------- Securities held to maturity U.S. Government and agency $ 2,876 $ 19 $ - $ 2,895 U.S. Agency mortgage-backed 15,757 - (47) 15,710 Other debt securities 2,057 - (13) 2,044 - ---------------------------------------------------------------------------------------------------------------------------- Total held to maturity $ 20,690 $ 19 $ (60) $ 20,649 - ----------------------------------------------------------------------------------------------------------------------------
The amortized cost, estimated fair value and average yield of debt securities are shown below by contractual maturity, except for mortgage-backed (including collateralized mortgage obligations) and asset-backed instruments, which are classified based on their expected average lives. The expected average lives have been determined based on prepayment and related assumptions. Accordingly, the expected average lives may differ from actual lives. 10
Amortized Fair Average December 31, 1997 (in thousands) Cost Value Yield - ----------------------------------------------------------------------------------------------------------------------------- Securities available for sale Due in 1 year or less $ 6,479 $ 6,477 5.86% Due after 1 to 5 years 12,358 12,173 5.85 Due after 5 to 10 years 2,595 2,614 6.84 Due after 10 years 3,327 3,339 7.70 - ----------------------------------------------------------------------------------------------------------------------------- Total available for sale $ 24,759 $24,603 6.20% - ----------------------------------------------------------------------------------------------------------------------------- Securities held to maturity Due in 1 year or less $ 2,855 $ 2,838 5.49% Due after 1 to 5 years 15,154 15,198 6.03 Due after 5 to 10 years 1,940 1,985 5.81 - ----------------------------------------------------------------------------------------------------------------------------- Total held to maturity $ 19,949 $ 20,021 5.93% - -----------------------------------------------------------------------------------------------------------------------------
As of December 31, 1997, securities having an amortized cost of $1,782,000 were pledged to secure treasury, tax and loan and other deposits, and securities with an amortized cost of $4,516,000 were pledged to secure federal funds borrowings. Two held to maturity securities with an amortized cost totaling $856,000 were sold in 1996 at a total loss of $50 thousand. These two securities evidenced significant deterioration in the issuer's creditworthiness through the downgrading by a credit agency and other relevant factors. Under state statutes the Company was required to evaluate these securities for sale, and the Company made a determination that they be sold due to uncertainties about their credit quality. All securities sold in 1997 and all other securities sold in 1996 were securities available for sale. The book value of debt and equity securities sold, together with gross gains and gross losses, were as follows:
Years ended December 31 (in thousands) 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------- Debt securities sold Book value at sale $ 2,216 $4,267 $ 3,439 Gross gains 7 11 31 Gross losses - (52) (9) Equity securities sold Book value at sale $ 13,555 $338 - Gross gains 954 1 - Gross losses - - -
4. Total Loans
December 31 (in thousands) 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Residential mortgage loans $ 39,319 $ 41,669 Commercial mortgage loans 45,511 40,494 Other commercial loans: Construction 4,642 3,827 Other commercial real estate secured 5,645 3,004 Other commercial, not real estate secured 7,983 8,456 - --------------------------------------------------------------------------------------------------------------------------- Total other commercial loans 18,270 15,287 Consumer loans: Installment 11,133 10,736 Home equity loan 16,569 13,828 Other consumer loans 1,802 1,554 - --------------------------------------------------------------------------------------------------------------------------- Total consumer loans 29,504 26,118 - --------------------------------------------------------------------------------------------------------------------------- Total regular loans 132,604 123,568 Purchased SBA guaranteed loan certificates 24,846 24,263 - --------------------------------------------------------------------------------------------------------------------------- Total loans $ 157,450 $ 147,831 - --------------------------------------------------------------------------------------------------------------------------- Net deferred costs included in total loans $ 401 $ 290
11 The majority of the Company's loans are secured by real estate located within Tolland County or surrounding communities. Real estate loan activities are governed by the Company's loan policies, and loan to value ratios are based on an analysis of the collateral backing each loan. Following is additional information about the Company's nonaccruing loans, delinquent loans, impaired loans, and loans restructured prior to January 1, 1995. At December 31, 1997 and 1996 residential mortgage loans held for sale totaled $102,000 and $1,323,000, respectively.
December 31 (in thousands) 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- Total nonaccruing loans $ 2,133 $ 3,381 Accruing loans past due 90 days or more 86 1,857 Impaired loans: Impaired loans - valuation allowance required 1,607 1,856 Impaired loans - no valuation allowance required 1,576 2,859 - ---------------------------------------------------------------------------------------------------------------------------- Total Impaired Loans $ 3,183 $ 4,715 Total valuation allowance on impaired loans 340 186 Commitments to lend additional funds for impaired loans - - Restructured loans, all of which are performing: Loans restructured prior to January 1, 1995 502 531 Commitments to lend additional funds for restructured loans - -
Years ended December 31 (in thousands) 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------- Additional interest income that would have been earned on year-end loans if they had been accruing based on originals terms: Nonaccruing loans $ 310 $ 198 $ 55 Loans restructured prior to January 1, 1995 17 23 34 Total income recognized on impaired loans 111 311 366 Average recorded investment in impaired loans 3,949 5,779 3,517
In the ordinary course of business, the Company makes loans to its directors and officers and their related interests for substantially the same terms prevailing at the time of origination for comparable transactions with others. As of December 31, 1997, and 1996, loans to related parties totaled $616,000 and $639,000 respectively. During 1997 originations of related party loans totaled $130,000 and payments on related party loans totaled $244,000. Loans serviced for others totaled $7,248,000 and $4,110,000 at December 31, 1997 and 1996, respectively. 5. Allowance For Loan Losses
Years ended December 31 (in thousands) 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------- Balance at beginning of year $ 2,850 $ 2,340 $ 2,090 Charge-offs (768) (567) (1,792) Recoveries 89 99 67 Provision for loan losses 829 978 1,975 - ----------------------------------------------------------------------------------------------------------------------------- Balance at end of year $ 3,000 $ 2,850 $ 2,340 - -----------------------------------------------------------------------------------------------------------------------------
6. Premises and Equipment, Net
December 31 (in thousands) 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- Land $ 1,195 $ 1,195 Buildings 4,292 4,292 Furniture, fixtures, and equipment 3,089 3,013 - ---------------------------------------------------------------------------------------------------------------------------- Total property and equipment 8,576 8,500 Less: accumulated depreciation and amortization (4,425) (4,084) - ---------------------------------------------------------------------------------------------------------------------------- Property and equipment, net $ 4,151 $ 4,416 - ----------------------------------------------------------------------------------------------------------------------------
12 7. Foreclosed Assets, Net
December 31 (in thousands) 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- Foreclosed and repossessed assets $ 977 $ 1,202 Foreclosed asset valuation allowance (360) (222) - ---------------------------------------------------------------------------------------------------------------------------- Net foreclosed assets $ 617 $ 980 - ----------------------------------------------------------------------------------------------------------------------------
Transactions in the valuation allowance for foreclosed assets, and gains and losses included in net gains (loss) on assets in the Consolidated Income Statements, were as follows:
Years ended December 31 (in thousands) 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------- Transactions in the valuation allowance: Balance at beginning of year $ 222 $341 $ 582 Write-downs, net - (188) (1,208) Provision for losses, net 138 69 967 - ---------------------------------------------------------------------------------------------------------------------------- Balance at end of year $ 360 $ 222 $ 341 - ---------------------------------------------------------------------------------------------------------------------------- Gains and losses included in net gain (loss) on assets in the statements of income: Gross gains $ 31 $ 270 $ 92 Gross losses (179) (141) (1,059) - ---------------------------------------------------------------------------------------------------------------------------- Net gain (loss) $ (148) $ 129 $ (967) - ----------------------------------------------------------------------------------------------------------------------------
8. Other Assets
December 31 (in thousands) 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- Accrued loan interest receivable $ 1,190 $ 1,132 Other accrued interest and dividends receivable 434 538 Purchased deposit premium, net 220 330 Goodwill, net 169 199 Mortgage servicing rights 56 17 Deferred tax asset, net 73 496 Income tax receivable 305 305 All other assets 369 249 - ---------------------------------------------------------------------------------------------------------------------------- Total other assets $ 2,816 $ 3,266 - ----------------------------------------------------------------------------------------------------------------------------
9. Deposits
December 31 (dollars in thousands) 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- Amount Avg. Rate Amount Avg. Rate - ---------------------------------------------------------------------------------------------------------------------------- Demand deposits $ 21,918 0.00% $ 19,673 0.00% NOW deposits 22,260 1.80 20,522 1.80 Money market deposits 15,447 4.03 6,469 2.58 Savings deposits 34,677 2.30 38,102 2.31 - ---------------------------------------------------------------------------------------------------------------------------- Total non-time deposits 94,302 1.93 84,766 1.67 Time deposits, by remaining period to maturity: Within 1 year 78,770 5.26 83,299 5.27 After 1, but within 2 years 31,943 5.88 19,511 5.60 After 2, but within 3 years 10,369 6.02 6,606 6.13 After 3 years 6,349 6.17 11,426 6.16 - ---------------------------------------------------------------------------------------------------------------------------- Total time deposits 127,431 5.52 120,842 5.45 - ---------------------------------------------------------------------------------------------------------------------------- Total deposits $ 221,733 3.99 $ 205,608 3.89% - ---------------------------------------------------------------------------------------------------------------------------- Time deposits of $100,000 or more $ 15,210 5.55% $ 15,444 5.49%
13 Interest expense and interest paid on deposits is summarized as follows:
Years ended December 31 (in thousands) 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------- Interest Expense NOW deposits $ 361 $ 342 $ 332 Money market deposits 285 143 149 Savings deposits 850 880 919 Time deposits 6,991 6,529 5,533 - ----------------------------------------------------------------------------------------------------------------------------- Total interest expense $ 8,487 $7,894 $ 6,933 ============================================================================================================================= Interest Paid Time deposits of $100,000 or more $ 773 $ 915 $ 801 Total deposit interest paid 8,470 7,883 6,898 10. Borrowings December 31 (dollars in thousands) 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------- Due Date Amount Rate Amount Rate - ----------------------------------------------------------------------------------------------------------------------------- FHLB advances by remaining period to maturity: Within 1 year $ - -% $ 3,545 7.25% After 1, but within 2 years 239 6.95 - - After 2, but within 3 years 3,500 6.11 361 6.94 After 3 years - - 3,500 6.11 - ----------------------------------------------------------------------------------------------------------------------------- Total FHLB advances 3,739 6.16 7,406 6.70 - ----------------------------------------------------------------------------------------------------------------------------- Federal funds purchased 2,000 6.05 3,000 6.65 - ----------------------------------------------------------------------------------------------------------------------------- Total Borrowings $ 5,739 6.12% $10,406 6.68% =============================================================================================================================
The Company has a line of credit equal to 2% of total assets with the Federal Home Loan Bank of Boston (FHLBB). The Company may borrow additional funds from the FHLBB subject to certain limitations. To secure advances from the FHLBB, the Company has pledged certain qualifying assets, as defined in the FHLBB Statement of Credit Policy. To obtain additional loan advances, the Company may be required to invest in additional amounts of FHLBB stock, per FHLBB guidelines. At December 31, 1997, the Company had a $5,000,000 facility for repurchase agreements, a $3,000,000 line of credit for secured federal funds borrowings and a $750,000 line of credit for unsecured federal funds borrowings. The Company maintains compensating balances of $30,000 related to the secured line of credit. The Company paid $267,000, $426,000, and $679,000, in interest on borrowings during the years ended December 31, 1997, 1996, and 1995, respectively. 11. Shareholders' Equity Net Unrealized Gain (Loss) on Securities
December 31 (dollars in thousands) 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------- Net gain (loss) on securities available for sale $ 1,430 $ 243 Net unamortized loss on securities held to maturity (215) (376) Income tax effect (572) (100) - ----------------------------------------------------------------------------------------------------------------------------- Total Net Unrealized Gain (Loss) $ 643 $ (233) =============================================================================================================================
The net unamortized loss on securities held to maturity relates to securities transferred in 1994 from securities available for sale to securities held to maturity. Dividends The Company's principal asset is its investment in its bank subsidiary. As such, the Company's ability to pay dividends to its shareholders is largely dependent on the ability of the Bank to pay dividends to the Company. The declaration of cash dividends is dependent on a number of factors, including regulatory limitations, and the Bank's operating results and financial conditions. The shareholders of the Company will be entitled to dividends only when, and if, declared by the Company's Board of Directors out of funds legally available therefore. The declaration of future dividends will be subject to favorable operating results, financial conditions, tax considerations and other factors. 14 The Federal Deposit Insurance Corporation regulations require banks to maintain certain capital ratios as noted below which may otherwise restrict the ability of the Bank to pay dividends to the Company. On June 17, 1997, the Company declared a four-for-three common stock split effected as a 33.33% stock dividend which was paid on July 17, 1997. All per share information has been retroactively adjusted to reflect this stock dividend. Additionally, as of October 3, 1997, the Company restated Common Stock and Additional Paid-In Capital to reflect a change in the par value of common stock from $1.00 to $.01 in conjunction with the completion of the formation of Alliance Bancorp of New England, Inc. as the holding company for Tolland Bank. Regulatory Capital Requirements The Company and Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory-and possibly, additional discretionary- actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the Company's and Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's and Bank's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Whereas the regulatory requirement for Tier I Capital to Average Assets is a minimum ratio of 4.0%, a minimum ratio of 6.0% is shown in the table based on the Bank's Board Resolution at December 31, 1997 and 1996. Management believes, as of December 31, 1997, that the Company and Bank meet all capital adequacy requirements to which it is subject. As of December 31, 1997, the most recent notification from the FDIC categorized the Bank as Well Capitalized under the regulatory framework for prompt corrective action. To be categorized as Well Capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events that management believes have changed the institution's category. The Company's and Bank's actual capital amounts and ratios are also presented in the table.
To Be Well Capitalized Under For Capital Prompt Corrective (dollars in thousands ) Actual Adequacy Purposes Action Provisions - ----------------------------------------------------------------------------------------------------------------------------- Amount Ratio => Amount => Ratio => Amount => Ratio - ----------------------------------------------------------------------------------------------------------------------------- Consolidated, December 31, 1997: Risk-based Total Capital $ 19,734 13.2% $ 11,970 8.0% $ 14,962 10.0% Risk-based Tier I Capital 17,850 11.9 5,985 4.0 8,977 6.0 Tier I Leverage Capital 17,850 7.2 9,868 4.0 12,335 5.0 Tolland Bank, December 31, 1997: Risk-based Total Capital $ 19,432 13.1% $ 11,837 8.0% $ 14,796 10.0% Risk-based Tier I Capital 17,569 11.8 5,918 4.0 8,877 6.0 Tier I Leverage Capital 17,569 7.1 14,790 6.0 12,325 5.0 Tolland Bank, December 31, 1996: Risk-based Total Capital $ 17,044 12.3% $11,118 8.0% $13,898 10.0% Risk-based Tier I Capital 15,293 11.0 5,559 4.0 8,339 6.0 Tier I Leverage Capital 15,293 6.8 13,592 6.0 11,327 5.0
Stock Options At December 31, 1997, the Company had two stock option plans, which are described below. As permitted by SFAS 123, the Company applies APB Opinion No. 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its stock option plans. Had compensation cost for the Company's stock options been determined consistent with the fair value method in SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below. There were no stock options granted in 1995. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model in accordance with the weighted-average assumptions indicated as follows: 15
Year ended December 31 (in thousands except share data ) 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------- Net income As Reported $ 2,017 $ 1,438 Pro forma 1,822 1,392 Diluted earnings per share As Reported 1.23 .92 Pro forma 1.11 .89 Basic earnings per share As Reported 1.27 .93 Pro forma 1.15 .90 Assumptions used as of December 31, 1997 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------- Expected dividend yield 1.15% 2.00% Expected volatility 27.00% 27.00% Risk free interest rate 5.75% 5.91% Expected life (years) 10.00 10.00
The Company maintains a Stock Option Incentive Plan for the benefit of officers and other employees of the Company. Under the terms of this Plan, 199,995 shares may be issued or transferred pursuant to the exercise of options to purchase shares of common stock and stock appreciation rights (SARs) and awards of restricted stock. The exercise price of the option is equal to the market price of the common stock on the date of grant. Options granted to officers and other full-time salaried employees may be accompanied by SARs and awards of restricted stock. No SARs or awards of restricted stock have been granted as of December 31, 1997. Total shares reserved for future grants were 148,001 at December 31, 1997. The Company also maintains a Stock Option Plan for Non-Employee Directors. The exercise price of the option is equal to the market price of the common stock on the date of grant. Under this plan, up to 133,330 shares of common stock may be issued or transferred to members of the Company's Board of Directors who are not employees of the Company on the date the options are exercised. This plan expires on February 15, 1998. Total shares reserved for future grants were 66,670 as of December 31, 1997. Under the Company's 1986 Stock Option Plan for the benefit of officers and other employees, 133,330 shares were reserved for issuance. As of December 31, 1996, this plan had expired. All 133,330 of the options for which shares had been reserved had been granted. No SARs or restricted stock awards were granted under the plan. A summary of the status of the Company's stock option plans and changes in them is presented below.
Years ended December 31 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- Weighted-Avg. Weighted-Avg. Weighted-Avg. Exercise Exercise Exercise Shares Price Shares Price Shares Price - --------------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 163,314 $ 7.58 162,755 $ 7.59 171,421 $ 7.57 Granted 58,660 12.88 27,225 7.47 - - Exercised (73,160) 8.24 (20,000) 6.90 - - Forfeited - - (6,666) 9.37 (8,666) 7.12 - --------------------------------------------------------------------------------------------------------------------------- Outstanding at end of year 148,814 $ 9.34 163,314 $ 7.58 162,755 $ 7.59 =========================================================================================================================== Options exercisable at year-end 142,148 $ 9.28 163,314 $ 7.58 160,534 $ 7.62 =========================================================================================================================== Weighted-average fair value of options granted $ 3.34 $3.78 - =========================================================================================================================== Shares reserved for future grants 214,671 - 73,315 - 100,540 -
The following table summarizes information about stock options outstanding at December 31, 1997:
Options Outstanding Options Exercisable - --------------------------------------------------------------------------------------------------------------------------- Range of Number Weighted-Avg. Weighted-Avg. Number Weighted-Avg. Exercise Outstanding Remaining Exercise Outstanding Exercise Prices at 12/31/97 Contractual Life Price at 12/31/97 Price - --------------------------------------------------------------------------------------------------------------------------- $ 2 to 6 20,365 3.8 years $ 4.50 20,365 $ 4.50 6 to 9 49,791 5.9 7.34 49,791 7.34 9 to 12 58,658 6.2 10.07 51,992 9.99 Over $12 20,000 9.9 17.13 20,000 17.13 - --------------------------------------------------------------------------------------------------------------------------- Total 148,814 6.3 years $ 9.34 142,148 $ 9.28 ===========================================================================================================================
16 12. Financial Instruments With Off-Balance Sheet Risk
December 31 ( in thousands) 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Commitments to extend credit: Commitments to originate new loans $ 8,204 $ 5,385 Unadvanced construction lines of credit 1,667 2,380 Unadvanced home equity credit lines 15,847 9,995 Unadvanced commercial lines of credit 5,942 4,951 Unadvanced reserve credit lines 405 427 Standby letters of credit 461 1,462 Commitments to purchase Government guaranteed loans 1,043 1,492
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn on, the total commitment amounts do not necessarily represent future cash requirements or credit risk. Standby letters of credit are commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are generally payable only if the customer fails to perform some specified contractual obligation. Standby letters of credit are generally unconditional and irrevocable, and are generally not expected to be drawn upon. For the above types of financial instruments, the Company evaluates each customer's creditworthiness on a case-by-case basis, and collateral is obtained, if deemed necessary, based on the Company's credit evaluation. In general, the Company uses the same credit policies in providing these financial instruments as it does in making funded loans. 13. Fair Values Of Financial Instruments
Years ended December 31 (in thousands) 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Carrying Fair Carrying Fair Value Value Value Value - --------------------------------------------------------------------------------------------------------------------------- Financial assets: Cash and cash equivalents $ 21,417 $ 21,417 $ 12,563 $ 12,563 Securities available for sale 43,729 43,729 45,386 45,386 Securities held to maturity 19,949 20,021 20,690 20,649 Net loans 154,450 155,997 144,981 143,974 Accrued interest receivable 1,624 1,624 1,670 1,670 Financial liabilities: Deposits with no stated maturity 94,302 94,302 84,766 84,766 Time deposits 127,431 128,176 120,842 120,844 Borrowings 5,739 5,750 10,406 10,413 Accrued interest payable 96 96 82 82 Off balance sheet financial instruments - 189 - 192
14. Retirement Plans The Company sponsors a noncontributory defined benefit pension plan covering all employees who meet certain eligibility requirements. Benefits are based on length of service and qualifying compensation. The Company's policy is to fund the plan in accordance with the requirements of applicable regulations. Plan assets are invested in stock, bond, and money market mutual funds. The plan valuation date is October 1. The pension plan's funded status and amounts recognized in the Company's financial statements are as follows: 17
December 31 ( in thousands) 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Accumulated benefit obligation Vested benefits $ 1,890 $ 1,423 Non-vested benefits 32 70 - --------------------------------------------------------------------------------------------------------------------------- Accumulated benefit obligation $ 1,922 $ 1,493 Effect of projected future compensation levels 404 295 - --------------------------------------------------------------------------------------------------------------------------- Projected benefit obligation for services rendered to date $ 2,326 $ 1,788 Plan assets at fair value 2,564 2,085 - --------------------------------------------------------------------------------------------------------------------------- Plan assets in excess of projected benefit obligation 238 297 Unrecognized net asset being recognized over 15 years (90) (108) Unrecognized net loss (gain) 59 (62) Unrecognized past service liability (88) (105) - --------------------------------------------------------------------------------------------------------------------------- Accrued pension cost 119 22 =========================================================================================================================== Assumptions used as of October 1: Assumed discount rate 7.25% 7.75% Assumed rate of increase in compensation 5.00% 5.00% Expected long-term rate of return on assets 9.25% 9.25% Components of net pension expense cost (excluding administrative cost): Years ended December 31 (in thousands) 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- Service costs earned during the year $ 98 $ 98 $ 85 Interest cost on projected benefit obligation 151 124 115 Actual return on plan assets (398) (238) (272) Net amortization and deferral 176 39 109 - --------------------------------------------------------------------------------------------------------------------------- Net periodic pension expense $ 27 $ 23 $ 37 ===========================================================================================================================
The Company also sponsors a defined contribution 401(k) savings plan. This plan includes a discretionary matching contribution by the Company which was 35% of the employees' contribution up to 6% for the years 1997, 1996, and 1995. Additionally, the Company offers retirees participation in its medical insurance benefit program. The cost of offering this participation is not material to the financial condition or results of operations of the Company. 15. Income Tax Expense (Benefit) Charges (credits) for income taxes (benefits) in the Consolidated Income Statements are composed of the following:
Years ended December 31 ( in thousands) 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- Current: Federal $ 575 $ 246 $ (230) State 131 9 12 - --------------------------------------------------------------------------------------------------------------------------- Total current 706 255 (218) Deferred: Federal 57 (9) (121) State 51 190 ( 90) - --------------------------------------------------------------------------------------------------------------------------- Total deferred 108 181 (211) Change in valuation allowance for the gross deferred tax asset (150) (554) 441 - --------------------------------------------------------------------------------------------------------------------------- Total income tax expense $ 664 $ (118) $ 12 ===========================================================================================================================
The actual income tax expense (benefit) differs from the "expected" income tax expense (benefit), (computed by applying the statutory U.S. Federal corporate tax rate of 34%) in 1997, 1996 and 1995 to income (loss) before income taxes, as follows: 18
Years ended December 31 ( in thousands) 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- Expected income tax expense (benefit) at statutory rate $ 912 $ 449 $ (385) Increase (decrease) in income tax resulting from: Connecticut state tax 120 131 (51) Purchase premium not deductible for tax purposes 10 10 10 Dividend received deduction (237) (132) - Change in valuation allowance for deferred tax assets (150) (554) 441 Other, net 9 (22) (3) - --------------------------------------------------------------------------------------------------------------------------- Total income tax expense (benefit) $ 664 $ (118) $ 12 ===========================================================================================================================
The Company made income tax payments of $494,000, $460,000 and $37,000 during the years ended December 31, 1997, 1996, and 1995, respectively. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:
Years ended December 31 ( in thousands) 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Deferred tax asset: Allowance for loan losses $ 706 $ 754 State NOL carry forward - 10 Foreclosed assets 143 128 Depreciation expense 19 - Unrealized loss on securities 85 54 Other, net 112 101 - --------------------------------------------------------------------------------------------------------------------------- Total gross deferred tax asset 1,065 1,047 Less: valuation allowance (85) (305) Gross asset, net of valuation allowance 980 742 Less: deferred tax liability Unrealized gain on securities (572) - Depreciation expense - (3) Core deposit amortization (78) (77) Other (257) (166) - --------------------------------------------------------------------------------------------------------------------------- Total gross deferred tax liability (907) (246) - --------------------------------------------------------------------------------------------------------------------------- Net deferred tax asset $ 73 $ 496 ===========================================================================================================================
The valuation allowance decreased by $220,000 in 1997, which was comprised of a decrease of $70,000 relating to the decrease in net unrealized losses on securities held to maturity, and a $150,000 decrease due to Management's assessment of the realizability of deferred tax assets. In assessing the realizability of deferred tax assets, Management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. In making the assessment, Management considers the estimated reversal of deferred tax liabilities, projected future taxable, income taxes paid in prior years that are recoverable, and tax planning strategies. Based on the level of historical taxable income, and projections for future taxable income over the periods in which the deferred tax assets are deductible, Management believes it is more likely than not that the Company will realize the benefits of the deductible temporary difference, net of the existing valuation allowance at December 31, 1997. 16. Commitments and Contingencies Future minimum rental payments required under operating leases that have remaining noncancellable lease terms in excess of one year as of December 31, 1997 total $283,000, due by years ending December 31 as follows: 1998 - $68,000; 1999 - $69,000; 2000 - $27,000; 2001 - $25,000; 2002 - $25,000; and $92,000 thereafter. Total rental expense under these leases and prior leases was $70,000, $77,000, and $64,000 for the years ended December 31, 1997, 1996 and 1995 respectively. In 1995, the Company entered into an employment agreement with its former President. During 1996 and 1995, the Company charged $272,000 and $14,000, respectively, to operations in connection with this agreement, nothing was charged to operations in 1997. Included in other liabilities at December 31, 1997, was approximately $116,000 representing total future amounts due under this agreement. 19 There are various legal proceedings against the Company arising out of its business. Although the outcome of these cases is uncertain, in the opinion of Management, based on discussions with legal counsel, these matters are not expected to result in a material adverse effect on the financial position or future operating results of the Company. 17. Condensed Financial Statements of Alliance Bancorp of New England, Inc. (Parent Company) On October 3, 1997, Alliance Bancorp of New England, Inc. acquired all of the outstanding common stock of Tolland Bank on a one-for-one basis, concluding the formation of a bank holding company. The Income Statement and Statement of Cash Flows are for the quarter ended December 31, 1997.
Balance Sheet December 31 (in thousands except share data) 1997 - --------------------------------------------------------------------------------------------------------------------------- Assets Cash and cash equivalents $ 65 Investment in subsidiary 18,601 Other assets 150 - --------------------------------------------------------------------------------------------------------------------------- Total assets $ 18,816 =========================================================================================================================== Liabilities and Shareholders' Equity Liabilities: Accrued expenses 13 - --------------------------------------------------------------------------------------------------------------------------- Total liabilities 13 Total shareholders' equity 18,803 - --------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 18,816 =========================================================================================================================== Income Statement Quarter ended December 31 (in thousands except share data) 1997 - --------------------------------------------------------------------------------------------------------------------------- Dividends from bank subsidiary $ 256 - --------------------------------------------------------------------------------------------------------------------------- Total operating income 256 - --------------------------------------------------------------------------------------------------------------------------- Non-interest expenses 44 Income before income tax benefit and equity in net income of subsidiary 212 - --------------------------------------------------------------------------------------------------------------------------- Income tax benefit 22 - --------------------------------------------------------------------------------------------------------------------------- Income before equity in net income of subsidiary 234 Equity in undistributed income of subsidiary 329 - --------------------------------------------------------------------------------------------------------------------------- Net Income $ 563 ===========================================================================================================================
20
Statement of Cash Flows Quarter ended December 31 (in thousands) 1997 - --------------------------------------------------------------------------------------------------------------------------- Operating Activities: Net income $ 563 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiary (329) (Increase) in other assets (148) Increase in other liabilities 13 - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 99 Investing Activities: Net cash used by investing activities - Financing Activities: Stock options exercised 55 Dividends paid to stockholders (89) - --------------------------------------------------------------------------------------------------------------------------- Net cash used by financing activities (34) - --------------------------------------------------------------------------------------------------------------------------- Net Change in Cash and Cash Equivalents 65 - --------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents beginning of quarter - =========================================================================================================================== Cash and cash equivalents end of quarter $ 65 ===========================================================================================================================
21 Consolidated Supplementary Financial Data (unaudited) Selected Quarterly Financial Data
1997 1996 (in thousands except share data) 4 3 2 1 4 3 2 1 ---------------------------------------------------------------------------------------------------------------------------- Net interest income $ 2,011 $ 1,980 $ 2,008 $ 1,961 $ 1,982 $ 1,943 $ 1,872 $ 1,866 Provision for loan losses 312 379 64 74 165 493 134 186 Non-interest income 758 693 250 260 140 603 225 307 Non-interest expense 1,663 1,584 1,587 1,577 1,988 1,570 1,531 1,551 Income tax expense (benefit) 231 187 126 120 (451) 109 90 134 ---------------------------------------------------------------------------------------------------------------------------- Net income $ 563 $ 523 $ 481 $ 450 $ 420 $ 374 $ 342 $ 302 ============================================================================================================================ Per Share Data: Diluted earnings per share $ 0.33 $ 0.31 $ 0.30 $ 0.28 $ 0.26 $ 0.24 $ 0.22 $ 0.20 Basic earnings per share .35 .33 .31 .29 .27 .24 .22 .20 Cash dividends declared .05 .05 .04 .04 .02 - - - Common stock price: High 18.00 18.25 15.00 12.09 10.03 9.28 7.78 7.88 Low 16.38 13.03 10.31 8.63 8.25 7.22 7.13 6.94 Close 16.50 16.75 14.81 10.69 9.00 8.81 7.50 7.50
The increase in the loan loss provision in the second half of 1997 was related to one impaired commercial loan and to higher estimates of losses on consumer loans based on a revised assessment of collateral values. Non-interest income increased in the second half of 1997 due to securities gains resulting from the initiation of an investment restructuring process at mid-year to lengthen the duration and increase the diversification of the investment portfolio. Income tax expense increased in the second half of 1997 due to the reduction in adjustments to the valuation allowance on the deferred tax asset. Volume and Rate Analysis - FTE Basis
1997 versus 1996 Change due to 1996 versus 1995 Change due to - ------------------------------------------------------------------------------------------------------------------------------ (in thousands) Volume Rate Total Volume Rate Total - ------------------------------------------------------------------------------------------------------------------------------ Interest income Loans $ (166) $ (43) $ (209) $ 166 $ 11 $ 177 Securities available for sale 1,145 36 1,181 1,064 405 1,469 Securities held to maturity (91) 26 (65) (521) (67) (588) Other earning assets 42 13 55 162 5 167 - ------------------------------------------------------------------------------------------------------------------------------ Total Change 930 32 962 871 354 1,225 - ------------------------------------------------------------------------------------------------------------------------------ Interest expense Deposits 481 112 593 520 441 961 Borrowings (171) 20 (151) (290) (37) (327) - ------------------------------------------------------------------------------------------------------------------------------ Total Change 310 132 442 230 404 634 - ------------------------------------------------------------------------------------------------------------------------------ Net Change $ 620 $ (100) $ 520 $ 641 $ (50) $ 591 ==============================================================================================================================
Note: Changes attributable jointly to volume and rate have been allocated proportionately. 22 Construction and Commercial Loans
1 Year 1-5 Over 5 December 31, 1997 (in millions) or Less Years Years Total -------------------------------------------------------------------------------------------------------------------------- Contractual maturity: Construction loans: Commercial $ 1.1 $ 2.4 $ 1.1 $ 4.6 Commercial loans 4.8 5.7 3.3 13.8 -------------------------------------------------------------------------------------------------------------------------- Total $ 5.9 $ 8.1 $ 4.4 $ 18.4 ========================================================================================================================== Interest rate sensitivity: Predetermined rates $ .9 $ 4.1 $ 2.4 $ 7.4 Variable rates 5.0 4.0 2.0 11.0 -------------------------------------------------------------------------------------------------------------------------- Total $ 5.9 $ 8.1 $ 4.4 $ 18.4 ==========================================================================================================================
Securities Cost and Fair Value
1997 1996 1995 -------------------------------------------------------------------------------------------------------------------------- Amortized Fair Amortized Fair Amortized Fair December 31, (in thousands) Cost Value Cost Value Cost Value -------------------------------------------------------------------------------------------------------------------------- Available for sale U.S. Government and agency $ 18,081 $ 17,891 $ 25,314 $ 24,982 $ 15,561 $ 15,088 U.S. Agency mortgage-backed 5,366 5,391 3,375 3,390 4,166 4,187 Other debt securities 1,312 1,321 1,745 1,734 2,255 2,304 Marketable equity 16,710 18,296 13,989 14,560 - - FHLBB stock 830 830 720 720 943 943 -------------------------------------------------------------------------------------------------------------------------- Total available for sale $ 42,299 $ 43,729 $ 45,143 $ 45,386 $ 22,925 $ 22,522 ========================================================================================================================== Held to maturity U.S. Government and agency $ 2,901 $ 2,941 $ 2,876 $ 2,895 $ 2,851 $ 2,940 U.S. Agency mortgage-backed 15,214 15,224 15,757 15,710 17,026 17,153 Other debt securities 1,834 1,856 2,057 2,044 3,500 3,480 -------------------------------------------------------------------------------------------------------------------------- Total held to maturity $ 19,949 $ 20,021 $ 20,690 $ 20,649 $ 23,377 $ 23,573 ==========================================================================================================================
23 Table of Market Risk Sensitive Instruments
Expected Maturity Date at December 31, There- Fair Value 1997 (dollars in millions) 1998 1999 2000 2001 2002 after Total 12/31/97 - ---------------------------------------- --------- ---------- --------- ---------- --------- ---------- -------- ----------- Interest Sensitive Assets: Loans: Fixed interest rate Residential mortgages $ 3 $ 2 $ 2 $ 2 $ 2 $ 9 $ 20 $ 21 Average interest rate 7.82% 7.76% 7.76% 7.78% 7.78% 7.84% 7.81% Variable interest rate Residential mortgages 3 2 2 2 2 8 19 19 Average interest rate 8.55% 8.56% 8.57% 8.57% 8.62% 8.56% 8.57% Fixed interest rate Consumer loans 2 2 1 2 2 1 10 10 Average interest rate 9.42% 9.59% 9.56% 8.62% 8.50% 9.85% 9.19% Variable interest rate Consumer loans 4 2 2 2 2 7 19 18 Average interest rate 8.50% 8.56% 8.58% 8.64% 8.63% 8.34% 8.48% Fixed interest rate Commercial loans 9 5 3 3 3 5 28 27 Average interest rate 7.92% 8.55% 8.54% 8.52% 8.52% 8.31% 8.30% Variable interest rate Commercial loans 18 8 9 8 7 11 61 61 Average interest rate 9.17% 8.99% 8.91% 8.35% 8.60% 8.81% 8.87% Fixed interest rate Securities 14 7 6 4 1 2 34 34 Average interest rate 6.67% 6.36% 6.24% 6.25% 6.29% 6.23% 6.44% Variable interest rate Securities 6 2 9 1 - 12 30 30 Average interest rate 5.49% 6.13% 5.96% 6.90% - 6.21% 5.98% - ---------------------------------------------------------------------------------------------------------------------------- Total interest sensitive assets $ 59 $ 30 $ 34 $ 24 $ 19 $ 55 $ 221 $ 220 ============================================================================================================================ Interest Sensitive Liabilities: Deposits: Checking $ 1 $ 1 $ 1 $ 1 $ 1 $ 39 $ 44 $ 44 Average interest rate 0.91% 0.91% 0.91% 0.91% 0.91% 0.91% 0.91% Savings 3 2 1 1 1 27 35 35 Average interest rate 2.30% 2.30% 2.30% 2.30% 2.30% 2.30% 2.30% Money market 1 1 1 1 1 10 15 15 Average interest rate 4.03% 4.03% 4.03% 4.03% 4.03% 4.03% 4.03% Time deposits 79 31 10 3 4 - 127 128 Average interest rate 5.26% 5.95% 6.06% 6.07% 6.23% - 5.54% Borrowings: FHLBB - - 4 - - - 4 4 Average interest rate - - 6.11% - - - 6.11% Other 2 - - - - - 2 2 Average interest rate 6.05% - - - - - 6.05% - ---------------------------------------------------------------------------------------------------------------------------- Total interest sensitive liabilities $ 86 $ 35 $ 17 $ 6 $ 7 $ 76 $ 227 $ 228 ============================================================================================================================
Note: The amounts above reflect principal cash amounts only. The table includes non-trading instruments only; the Company had no trading instruments at December 31, 1997. For more information, see Quantitative Disclosures about Market Risk in Management's Discussion and Analysis of Financial Condition and Results of Operations. The base interest rate for variable rate instruments is equal to the rate in effect at year-end 1997. The table excludes off balance sheet financial instruments (e.g., commitments to extend credit, standby letters of credit and commitments to purchase Government guaranteed loans) with a fair value totaling $189 thousand which are sensitive to changes in interest rates and have an expected maturity date within 1998. 24 EX-27 10 FINANCIAL DATA SCHEDULE
9 0001046002 ALLIANCE BANCORP OF NEW ENGLAND, INC. 1,000 US YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 1 6,652 5 14,760 0 43,729 19,949 20,021 157,450 3,000 247,129 221,733 2,000 854 3,739 0 0 16 18,787 247,129 12,138 4,280 293 16,711 8,487 8,751 7,960 829 961 6,411 2,681 2,681 0 0 2,017 0 1.23 3.80 2,133 86 502 1,500 2,850 768 89 3,000 3,000 0 650
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