-----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, U+xog6UYlv7Q+lG/iDTk1J/iV0TMPc1agR/w1r9YatFaY6C6TwHDEnf7x97+8wrv bDbJSORGokIqAwIbLL0gXA== 0000950116-99-000542.txt : 19990330 0000950116-99-000542.hdr.sgml : 19990330 ACCESSION NUMBER: 0000950116-99-000542 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990329 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: 061495617 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13405 FILM NUMBER: 99575251 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 FORM 10-K FORM 10-K United States Securities and Exchange Commission Washington, DC 20549 Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1998 Commission File Number 001-13405 ALLIANCE BANCORP OF NEW ENGLAND, INC. Incorporated in the State of Delaware IRS Employer Identification Number 06-1495617 Address and Telephone: 348 Hartford Turnpike, Vernon, Connecticut 06066, (860) 875-2500 Securities registered pursuant to Section 12(b) of the Act: Common Stock -- $.01 par value, which is registered on the American Stock Exchange. Alliance Bancorp of New England (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is contained in definitive proxy statements incorporated by reference in Part III of this Form 10-K. The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the closing sale price of November 2, 1998, as reported by American Stock Exchange, was approximately $24,065,506. The number of shares outstanding of common stock was 2,291,953 as of February 1, 1999. Documents Incorporated by Reference The Alliance Bancorp of New England, Inc. Proxy Statement for the Annual Meeting of Stockholders to be held on April 7, 1999 is incorporated by reference into Part III of this Form 10-K.
FORM 10-K CROSS REFERENCE INDEX PAGE PART I Item 1 - Business 2 Item 2 - Properties 6 Item 3 - Legal Proceedings 6 Item 4 - Submission of Matters to a Vote of Security Holders 6 PART II Item 5 - Market for Registrants Common Equity and Related Shareholder Matters 7 Item 6 - Selected Consolidated Financial Data 8 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 7A- Quantitative and Qualitative Disclosures about Market Risk 26 Item 8 - Consolidated Financial Statements and Supplementary Data 29 Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 29 PART III The information called for by Part III (Items 10 through 13) is incorporated herein by reference from Alliance's Proxy Statement for the 1999 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission. PART IV Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K 29
PART I Special Note Regarding Forward-Looking Statements This report contains certain "forward-looking statements." These forward-looking statements, which are included in Management's Discussion and Analysis, describe future plans or strategies and include the Company's expectations of future financial results. The words "believe," "expect," "anticipate," "estimate," "project" and similar expressions identify forward-looking statements. The Company's ability to predict results or the effect of future plans or strategies or qualitative or quantitative changes based on market risk exposure is inherently uncertain. Factors which could affect actual results include but are not limited to change in general market interest rates, general economic conditions, legislative/regulatory changes, fluctuations of interest rates, changes in the quality or composition of the Company's loan and investment portfolios, deposit flows, competition, demand for financial services in the Company's markets, and changes in the accounting principles, policies, and guidelines. These factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements. ITEM 1. BUSINESS General. Alliance Bancorp of New England, Inc. ("Alliance" or the "Company") is a Delaware corporation that was organized in 1997. Alliance's primary activity is to act as the holding Company for Tolland Bank (the "Bank"), which is its sole subsidiary and principal asset. The Bank is a Connecticut chartered savings bank which was founded in 1841 and is headquartered in Vernon, as is Alliance. In 1986, Tolland Bank converted from mutual to stock form. The Bank's deposits are insured up to applicable limits by the Federal Deposit Insurance Corporation ("FDIC"). The Bank operates eight offices in Tolland County and provides retail and commercial banking products and services in Tolland County and surrounding towns. Retail activities consist of branch deposit services, home mortgage and consumer lending, and mortgage banking. Commercial activities include merchant deposit services, business cash management, and construction mortgages, permanent mortgages, and working capital and equipment loans. Through third party relationships, the Bank also provides investment products, insurance products, and electronic payment services to retail and commercial customers. At December 31, 1998, Tolland Bank had total deposits of $240.0 million, total loans of $184.7 million, and total assets of $283.6 million. There are no material concentrations of loans or deposits with one customer, a group of related customers, or in a single industry. Market Area. The Bank's market area is centered in Tolland County, Connecticut, a suburban and rural area east of Hartford. The bank operates eight offices and its wider market area extends throughout much of northeastern Connecticut and into Massachusetts. Much of the market is part of the Greater Hartford metropolitan area. Lending Activities. The Bank actively solicits retail and commercial loans in and around its market area. Retail lending consists primarily of the origination of residential first mortgages and home equity lines of credit, which are generally secured by second mortgages. Commercial lending focuses primarily on owner occupied first mortgage loans, along with general commercial and industrial loans and subdivision development and construction loans. Additionally, the Bank has a portfolio of 100% Government guaranteed loans purchased in the secondary market to supplement local loan originations. The Bank's business strategy is to cross-sell other loan and deposit products to build multiple sales to its customer base. Most of the Bank's residential mortgage originations are underwritten to secondary market standards and are sold on a non-recourse, servicing released basis. The Bank offers an extensive list of mortgage types, including FHA and VA loans, land loans, and subprime loans (which are also sold to investors). Consumer loans primarily consist of home equity lines and loans and are normally secured by second mortgages. These loans are subject to the same general underwriting standards as residential mortgage loans, and the bank retains ownership and servicing of all home equity lines and loans that it originates. Consumer loans also include secured installment loans, which are primarily well seasoned mobile home loans and indirect loans which were originated in the 1980's. Commercial mortgages are primarily first mortgage loans on a variety of owner occupied commercial properties. The Bank also provides commercial mortgages on investor owned properties, including retail, office, and light manufacturing. Commercial mortgages normally amortize over 15 - 20 years and typically mature in 5-10 years. Commercial mortgages are normally guaranteed by the principals and by owner occupant businesses. Other commercial loans include commercial and industrial loans, and real estate secured loans, as well as subdivision development and construction loans. Government guaranteed loans are purchased in the secondary market and are 100% guaranteed by either the Small Business Administration (SBA) or the U.S. Department of Agriculture (USDA). These are business term loans and mortgages, and are primarily loan certificates registered with and serviced by a national service corporation. All loan originations are governed by a Board approved credit policy, which requires that all policy exceptions be reported to the Board. Loan approval limits are based on loan and relationship size, and most commercial loans are approved either by the Chief Lending Officer, the Company's Credit Committee, and/or the Board. The loan policy sets certain limits on concentrations of credit related to one borrower. The Bank's policy is to assign a risk rating to all commercial loans. The Bank conducts an ongoing program of commercial loan reviews and quality control sample inspections of residential and consumer loan originations. The loan loss allowance is determined based on a methodology described in the Company's policies. This methodology evaluates commercial loans based on their risk ratings, and residential mortgages and consumer loans are evaluated in aggregate pools. Allowance percentages are applied to loan pools to calculate allocations of the allowance. These factors are evaluated at least annually based on trends in the Company's credit experience, and on peer group and other industry information. The unallocated portion of the loan loss allowance is based on management's assessment of the overall level of the allowance, of trends in the growth of the portfolio, of long term objectives for loan portfolio coverage, and of subjective considerations of economic and credit conditions and outlooks. The Company does not prepare formal projections of loan losses. The allowance is evaluated quarterly by management and the Board and changes are compared to prior period and historic data. The assessment of the allowance also includes an analysis of the coverage ratios of loan outstandings, non-performing loans, and annualized charge-offs. The detailed methodology and a summary narrative analysis are approved by the Credit Committee and the Board. The narrative analysis includes consideration of trends in the performance and mix of the components of the loan portfolio. At least annually an analysis is made of the charge-off and allowance trends with peer group comparison. Adverse developments in credit performance in the Company's markets can develop quickly, and the determination of the allowance is based on management's assessment of both short and long term risk factors. Total real estate secured loans were $142.5 million (77.1% of total loans) at year-end 1998. Local real estate prices have declined throughout much of the current decade. Aided by favorable interest rates and a modest recovery in the Connecticut economy, real estate prices have firmed in some sectors over the last three years, while some sectors continue to show further modest softening. The Bank conducts an overall review of real estate market trends at least once each year, and real estate lending activities are governed by real estate lending and appraisal policies. New construction has remained active in certain residential markets, along with commercial retail, medical office, and lodging properties. Investment Activities. Securities investments are a source of interest and dividend income, provide for diversification, are a tool for asset/liability management, and are a source of liquidity. In 1998, investment activities were limited to purchases and sales of available for sale securities. The Company's investment portfolio consists of high grade investment securities, and is primarily composed of mortgage backed securities, U.S. agency securities, U.S. corporate capital trust preferred securities, and U.S. exchange traded equity securities. Investment activities are governed by a Board approved investment policy, and the Board reviews all investment activities on a monthly basis. Deposits and Other Sources of Funds. The Banks' major sources of funds are deposits, borrowings, principal payments on loans and securities, and maturities of investments. Borrowings are generally used to fund long-term assets and short-term liquidity requirements or to manage interest rate risk. The Bank is a member of the Federal Home Loan Bank of Boston ("FHLBB") and may borrow from the FHLBB subject to certain limitations. The Bank also has available lines of credit for federal funds purchases and reverse repurchase agreements. Competition. The Company's market area is highly competitive with a wide range of financial institutions including commercial banks, both mutual and stock owned savings banks, savings and loan associations, and credit unions. The Bank also competes with insurance and finance companies, investment companies, and brokers. Factors affecting competition include ongoing mergers and acquisitions (including expansion of regional and national banks), the introduction of new product types and rate structures, and the development of new delivery channels (including supermarket banking and home banking). The Bank competes through pricing, product development, focused marketing, and providing more convenience through technology and business hours. The Bank strives to provide the personal service advantage of a community bank and to take advantage of potential market changes following consolidations by the large regional banks. Employees. As of year-end 1998, the Company had 92 full-time equivalent employees. None of the employees are represented by a collective bargaining group, and management considers relations with its employees to be good. Regulation and Supervision. The Company and the Bank are heavily regulated. As a bank holding Company, Alliance is supervised by the Board of Governors of the Federal Reserve System ("FRB") and it is also subject to the jurisdiction of the Connecticut Department of Banking. As a Connecticut-chartered savings bank, the Bank is subject to regulation and supervision by the FDIC and the Connecticut Department of Banking. The FDIC insures the Bank's deposit accounts to the $100,000 maximum per separately insured account. The Bank is subject to regulation, examination, and supervision by the FDIC and to reporting requirements of the FDIC. The FDIC has adopted requirements setting minimum standards for capital adequacy and imposing minimum leverage capital ratios. The Company and Bank exceeded all applicable requirements at December 31, 1998. Furthermore, under the capital standards, the Company and the Bank are currently well-capitalized. Connecticut statutes and regulations govern, among other things, investment powers, lending powers, deposit activities, maintenance of surplus and reserve accounts, the distribution of earnings, the payments of dividends, issuance of capital stock, branching, acquisitions and mergers and consolidations. Connecticut banks that do not operate in accordance with the regulations, policies and directives of the Banking Commissioner may be subject to sanctions for noncompliance. The Commissioner may, under certain circumstances, suspend or remove officers or directors who have violated the law, conducted the Bank's business in a manner which is unsafe, unsound or contrary to the depositor's interest, or been negligent in the performance of their duties. Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("Riegle-Neal"), different types of interstate transactions and activities will be permitted, each with different effective dates. Interstate transactions and activities provided for under the law include: (i) bank holding Company acquisitions of separately held banks in a state other than a bank holding Company's home state; (ii) mergers between banks with different home states, including consolidations of affiliated banks; (iii) establishment of interstate branches either de novo or by branch acquisition; and (iv) affiliate banks acting as agents for one another for certain banking functions without being considered a "branch." In general, subject to certain limitations, nationwide interstate acquisitions are now permissible, irrespective of state law limitations other than limitations related to deposit concentrations and bank age requirements. Interstate mergers were permissible on June 1, 1997, unless a state passed legislation either to prevent or to permit the earlier occurrence of interstate mergers. States may at any time enact legislation permitting interstate branching either de novo or through acquisition. Affiliated banks may act as agents for one another beginning one year after enactment. Each of the transactions and activities must be approved by the appropriate federal bank regulator, with separate and specific criteria established for each category. Year 2000 Considerations. The Company uses computer systems extensively in its operations. The Company has established a Year 2000 project plan to address systems and facilities changes necessary to properly recognize dates after 1999. The Company's Year 2000 Considerations are discussed in Management's Discussion and Analysis of Financial Condition and Results of Operation. Supplementary Information The following supplementary information, some of which is required under Guide 3 (Statistical Disclosure by Bank Holding Companies), is found in this report on the pages indicated below, and should be read in conjunction with the related financial statements and notes thereto. Selected Consolidated Financial Data 8 Average Balance Sheet, Net Interest Income and Interest Rates 10 Loan Portfolio 16 Nonaccruing Loans 17 Provision and Allowance for Loan Losses 17 Interest Rate Sensitivity 22 Maturity of Securities Exhibit 99 Foreclosed Properties Exhibit 99 Time Deposits of $100 Thousand or More Exhibit 99 Deposits Exhibit 99 Short-term Borrowings Exhibit 99 Volume and Rate Analysis-FTE Basis Exhibit 99 Selected Quarterly Financial Data Exhibit 99 Construction and Commercial Loans Exhibit 99 Securities Cost and Fair Value Exhibit 99 Market Risk Sensitive Instruments Exhibit 99 ITEM 2. PROPERTIES The premises of Alliance are located in Connecticut as follows (see the notes "Premises and Equipment, Net" and "Commitments and Contingencies" in Item 8 for additional information about the Company's premises): Owned/ Year Lease Location - Town (Street) Leased Expires - --------------------------------------------------------------------------- o Tolland - (Olde Tolland Common) Owned o Vernon - (348 Hartford Turnpike) Owned o Coventry - (Routes 31 and 44) Owned o Ellington - (287 Somers Road) Owned o Stafford Springs - (34 West Stafford Road)Leased 1999 o Willington - (Routes 74 and 32) Leased 2005 o Tolland - (215 Merrow Road) Leased 2023 o Hebron - (31 Main Street) Leased 2003 o Approximately 9 acres of land adjacent to the Company's office on Olde Tolland Common in Tolland. o A commercial property leased to a child care operation adjacent to the Company's office on Olde Tolland Common in Tolland. o Approximately 10 acres of land adjacent to the Company's office in Coventry, Connecticut. At December 31, 1998, the Company had entered into a conditional contract to sell its premises at Olde Tolland Common in 1999 for an amount which will not materially impact income. Additionally, at that date, the Company had entered into a conditional contract to purchase premises for a planned new location at 1665 Ellington Rd. in South Windsor. ITEM 3. LEGAL PROCEEDINGS The Company is not involved in any material legal proceedings other than ordinary routine litigation incidental to its business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY & RELATED SHARE HOLDER MATTERS The Company's common stock is listed on the American Stock Exchange (AMEX) under the symbol "ANE." A total of 956,800 shares of the Company's stock, or 42% of year-end outstanding shares, were traded on AMEX in 1998. As of February 1, 1999, the Company had 531 holders of record of its common stock. This does not reflect the number of persons or entities who hold their stock in nominee or "street" name. The closing sale price of the stock on February 1, 1999 was $11.25. Dividends declared and paid in 1998 and 1997 totaled $0.17 and $0.12 per share, respectively. Dividends are subject to the restrictions of applicable regulations. See the "Shareholders' Equity" note in Item 8 for additional information. See also the information contained in Item 6. The following table presents quarterly information on the range of high and low prices for the past two years, together with dividends declared per share. Dividends Declared Quarter Ended High Low Per Share - -------------------------------------------------------------------------- March 31, 1997 8.06 5.75 .03 June 30, 1997 10.00 6.87 .03 September 30, 1997 12.17 8.69 .03 December 31, 1997 12.00 10.92 .03 March 31, 1998 14.25 10.92 .03 June 30, 1998 16.67 14.00 .03 September 30, 1998 15.75 9.75 .05 December 31, 1998 13.00 9.00 .05 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
December 31 1998 1997 1996 1995 1994 - ------------------------------------------------- -------------- -------------- -------------- -------------- -------------- For the Year (in thousands) Net interest income $ 9,028 $ 7,960 $ 7,663 $ 7,364 $ 6,954 Provision for loan losses 179 829 978 1,975 639 Service charges and fees 1,226 1,148 1,115 1,005 789 Net gain (loss) on securities 1,204 961 (40) 22 (16) Net gain (loss) on assets (11) (148) 200 (967) (28) Non-interest expense 7,347 6,411 6,640 6,582 6,545 Income (loss) before income taxes 3,921 2,681 1,320 (1,133) 515 Income tax expense (benefit) 1,363 664 (118) 12 61 Net income (loss) $ 2,558 $ 2,017 $ 1,438 $(1,145) $ 454 - ------------------------------------------------- -------------- -------------- -------------- -------------- -------------- Per Share Basic earnings (loss) $ 1.07 $ 0.85 $ .62 $ (.49) $ .19 Diluted earnings (loss) 1.03 0.82 .61 (.49) .19 Dividends declared 0.17 .12 .01 - - Book value 7.94 7.66 6.65 5.73 5.71 Common stock price: High 16.67 12.17 6.69 5.19 4.81 Low 9.00 5.75 4.63 3.50 3.63 Close 11.75 11.00 6.00 4.75 3.81 - ------------------------------------------------- -------------- -------------- -------------- -------------- -------------- At Year End (in millions) Total assets $ 283.6 $ 247.1 $ 232.3 $ 214.1 $ 201.1 Total loans 184.7 157.5 147.8 152.9 131.4 Other earning assets 87.4 78.4 71.2 47.8 52.1 Deposits 240.0 221.7 205.6 193.4 180.4 Borrowings 23.6 5.7 10.4 6.9 6.9 Shareholders' equity 18.2 18.8 15.6 13.3 13.2 - ------------------------------------------------- -------------- -------------- -------------- -------------- -------------- Operating Ratios (in percent) Return (loss) on average assets 1.02% .86% .65% (.54)% .24% Return (loss) on average equity 14.24 12.29 9.84 (8.37) 3.19 Equity % total assets (period end) 6.42 7.61 6.71 6.20 6.57 Net interest spread (fully taxable equivalent) 3.48 3.30 3.34 3.35 3.72 Net interest margin (fully taxable equivalent) 4.02 3.80 3.78 3.71 3.95 Dividend payout ratio 15.46 13.78 2.43 - - - ------------------------------------------------- -------------- -------------- -------------- -------------- --------------
ITEM 7 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS 1998 Summary Alliance Bancorp of New England, Inc. ("Alliance" or the "Company") recorded record net profit of $2.56 million for the year 1998 ($1.03 per diluted share), up 26.8% from 1997 earnings of $2.02 million ($.82 per diluted share). As of year-end, Alliance had recorded eleven consecutive quarters of increasing earnings, together with three consecutive years of record earnings. For the year 1998, the Company achieved a return on average assets of 1.02% and a return on average equity of 14.2%. Return on average equity increased to 15.6% in the last quarter of the year. 1998 results reflect growth in the marketplace. The Company's loans grew by 17.3% and deposits grew by 8.2% over the year. The Company also announced steps to expand its market into two new towns, Hebron and South Windsor, as well as to reposition its Tolland offices to better serve this community. Earnings growth in 1998 was primarily due to growth in the bank's business volume and to improved loan quality. This strong growth in business volume produced a $1.07 million (13.4%) increase in net interest income for the year. Higher net interest income resulted from $36.3 million (15.3%) of growth in earning assets to $272.2 million. Interest income also benefited from an improvement in the tax equivalent net interest margin to 4.02% in 1998 compared to 3.80% in the previous year. The resolution of problem assets resulted in a $2.0 million reduction in nonperforming assets to $0.7 million at year-end 1998 from $2.7 million at year-end 1997. In conjunction with this improvement, the provision for loan losses declined by $650 thousand compared to 1997. Problem asset reductions also resulted in $175 thousand in additional interest income recognition. At year-end 1998, nonperforming assets measured 0.2% of total assets, compared to 1.1% a year ago. Total non-interest income increased by $458 thousand and non-interest expense increased by $936 thousand in the year 1998 compared to 1997. Non-interest income benefited from growth of $78 thousand (6.9%) in service charges and fees due to higher account volumes. Additionally, net gains on securities contributed $243 thousand in increased earnings for 1998, realizing the benefits of improving market valuations and active portfolio management. Compensation expense in 1998 included staff additions related to growth in commercial lending and to branch expansion. Growth in other expense in 1998 included expenses related to increased business volume, computer system upgrades, and branch expansion. Non-interest expense was flat across most other categories from year to year. The effective tax rate increased due to a $106 thousand second quarter charge related to an increase in the deferred tax asset valuation allowance. The Company has initiated steps toward the formation of a passive investment subsidiary in accordance with changes in Connecticut tax statutes, which is expected to reduce the effective tax rate beginning in 1999. Additionally, 1997 results included the benefit of a reduction in the valuation allowance on the deferred tax asset totaling $150 thousand. Total assets at year-end 1998 were $283.6 million, an increase of $36.4 million (14.8%) over the prior year-end. During the last quarter, the Company took advantage of favorable market conditions to increase its debt security portfolio by about $20 million, funded by intermediate term borrowings. Year-end shareholders' equity totaled $18.2 million, representing a book value of $7.94 per share, and measuring 6.42% of assets. The Company's capital remains in excess of all regulatory requirements. Diluted earnings per share of $1.03 in 1998 benefited from a treasury stock repurchase of 200,599 shares in the amount of $3.1 million, which was announced on July 2, 1998. Additionally, the quarterly cash dividend to shareholders increased by 50% as a result of a three-for-two common stock split effected as a stock dividend which was paid on May 26, 1998. Prior period earnings, dividends, and book value per share have been restated for this change. The Company had completed a four-for-three common stock split in 1997 which, together with the 1998 split, accomplished a cumulative two-for-one split over the last two years. The quarterly cash dividend to shareholders was $.05 per share as of the most recent quarter. Alliance is the holding company for Tolland Bank (the "Bank"). Results Of Operations - 1998 Versus 1997 Net Interest Income - Fully Taxable Equivalent (FTE) Basis
(dollars in thousands) Average Balance Rate (FTE Basis) - --------------------------------------------------------------------------------------------------------------------- Years ended December 31 1998 1997 1996 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------- Loans $ 166,908 $ 148,601 $ 150,636 8.33% 8.17% 8.20% Securities available for sale 43,131 48,159 32,663 7.74 7.39 7.29 Securities held to maturity 18,336 20,634 22,204 5.87 5.85 5.73 Other earning assets 11,944 5,618 4,876 5.79 5.70 5.43 - ---------------------------------------------------------------------------------------------------------------------- Total earning assets 240,319 223,012 210,379 7.91 7.72 7.73 Other assets 10,751 10,965 11,744 - ---------------------------------------------------------------------------------------------------------------------- Total assets $ 251,070 $ 233,977 $ 222,123 - ---------------------------------------------------------------------------------------------------------------------- Interest bearing deposits $ 204,869 $ 193,371 $ 182,379 4.39 4.39 4.33 Borrowings 6,190 4,244 7,012 5.80 6.22 5.92 - ---------------------------------------------------------------------------------------------------------------------- Interest bearing liabilities 211,059 197,615 189,391 4.43 4.43 4.39 Other liabilities 23,068 19,947 18,116 Shareholder's equity 16,943 16,415 14,616 - ---------------------------------------------------------------------------------------------------------------------- Total liabilities and equity $ 251,070 $ 233,977 $ 222,123 - ---------------------------------------------------------------------------------------------------------------------- Net Interest Spread 3.48% 3.30% 3.34% Net Interest Margin 4.02% 3.80% 3.78%
Note: The average balance of loans included nonaccruing loans and deferred costs. Also, the balance and yield on all securities is based on amortized cost and not on fair value.
Net Interest Income FTE (in thousands) 1998 1997 1996 - -------------------------------------------------------------------------------------------- Loan interest $ 13,896 $ 12,138 $ 12,347 Securities available for sale (FTE) 3,340 3,561 2,380 Securities held to maturity 1,076 1,207 1,272 Other earning assets interest (FTE) 691 320 265 - -------------------------------------------------------------------------------------------- Total interest income (FTE) 19,003 17,226 16,264 Total interest expense 9,343 8,751 8,309 - -------------------------------------------------------------------------------------------- Net interest income (FTE) 9,660 8,475 7,955 Less tax equivalent adjustment (632) (515) (292) - -------------------------------------------------------------------------------------------- Net interest income (Financial Statement) $ 9,028 $ 7,960 $ 7,663 - --------------------------------------------------------------------------------------------
Net interest income on an FTE basis increased in 1998 by $1.068 million (13.4%) due to a $17.3 million (7.8%) increase in average earnings assets and to a 6.8% increase in the net interest margin to 4.02% in 1998 from 3.80% in 1997. The growth in average earning assets was due to growth in average loans and growth in average short term investments. Loan growth included growth in all major loan categories. Average investment securities decreased although total securities increased at year-end 1998 compared to a year earlier. Average securities declined due to sales and calls recorded in the first half of the year, while the majority of securities purchases were in the last quarter of the year. As a result, liquidity was held in short term investments during the middle of the year, resulting in a higher average balance even though the year-end balance was little changed from the prior year-end. The increase in the net interest margin was primarily due to a 5.4% increase in the net interest spread. The yield on all major categories of earning assets increased in 1998 compared to 1997. The yield on loans benefited from lower nonaccruing loans as well as collection of previously nonaccrued interest related to the liquidation of problem loans. The yield on investment securities increased due to purchases of corporate debt securities in the fourth quarter, along with maturities and calls on lower yielding government agency securities during the year. The cost of deposits remained flat. The net interest margin also benefited from a $3.1 million (15.6%) increase in average non-interest bearing liabilities due to growth in demand deposit accounts. These deposits helped provide funds for growth in earning assets as discussed above. Interest rates declined during the second half of the year to historically low levels. The Company entered 1998 with a positive one year interest rate sensitivity (asset sensitive gap) and ended the year with a negative one year sensitivity (liability sensitive gap). The one year interest rate sensitivity gap was ($22) million at year-end 1998, compared to $20 million twelve months earlier; these changes are described under Interest Rate Sensitivity. This change in interest rate sensitivity benefited net interest income in the prevailing interest rate environment. The cost of interest bearing liabilities decreased to 4.34% in the fourth quarter of 1998 compared to 4.48% in the same quarter of 1997, due to reductions in the cost of time accounts and borrowings. While the average cost of interest bearing liabilities remained unchanged at 4.43% in both years, these improvements in the cost of time deposits and borrowings offset the increased use of money market deposits to fund growth in earning assets. The decline in interest rates contributed to a decrease in the yield on residential mortgages and consumer loans. This was offset by higher yields on commercial loans and investment securities as discussed above. As a result of the securities purchases in the fourth quarter, average earning assets increased by $18.4 million (7.8%) in the fourth quarter of 1998, compared to the first nine months of 1998. The annualized earnings impact of this growth was therefore not fully reflected in 1998 results, and will contribute to earnings in future periods. Provision for Loan Losses The provision for loan losses is made to establish the allowance for loan losses at a level estimated to be adequate by management and the Board. The provision for loan losses in 1998 totaled $179 thousand, compared to $829 thousand in 1997. The loan loss allowance increased to $3.06 million at year-end 1998, compared to $3.00 million at year-end 1997. Please see the later discussion on the Allowance for Loan Losses and the Summary of Significant Policies in the Notes to the Consolidated Financial Statements.
Non-Interest Income Years ended December 31 (in thousands) 1998 1997 Change % - --------------------------------------------------------------------------------------------------- Loan related income $ 500 $ 453 $ 47 10.5% Deposit related income 541 528 13 2.3 Miscellaneous charges and other income 185 167 18 11.2 - --------------------------------------------------------------------------------------------------- Total service charges and fees 1,226 1,148 78 6.9 Gross gains on securities 1,264 961 303 31.5 Gross losses on securities (60) - (60) - - --------------------------------------------------------------------------------------------------- Net gains (losses) on securities 1,204 961 243 25.3 Gross gains on assets 34 31 3 9.7 Gross losses on assets (45) (179) 134 (74.7) - --------------------------------------------------------------------------------------------------- Net gains (losses) on assets (11) (148) 137 (92.8) - --------------------------------------------------------------------------------------------------- Total non-interest income $ 2,419 $ 1,961 $ 458 23.4% - ---------------------------------------------------------------------------------------------------
Total service charges and fees increased by $78 thousand (6.9%) due to growth in all major categories. The increase in loan related income was primarily due to penalty fees received in relation to problem asset liquidations. Growth in deposit and miscellaneous fee income was related to increased fee income in several business lines, including debit cards, investment fees, and mutual fund sweep fees. The Company recorded $1.204 million in net gains on investment securities in 1998, reflecting an ongoing process of active investment portfolio management, including realizing the benefits of improving market valuations. Gains and losses on assets related to liquidations of problem assets in 1998. Non-Interest Expense
Years ended December 31 (in thousands) 1998 1997 Change % - ------------------------------------------------------------------------------------------ Staff $ 3,632 $ 3,199 $ 433 13.5% Occupancy 618 586 32 5.5 Equipment 265 283 (18) (6.2) Data processing services 564 620 (56) (9.0) FDIC, office and insurance 524 553 (29) (5.3) Problem asset related expense 100 88 12 13.9 Other 1,644 1,082 562 52.1 - ------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------ Total non-interest expense $ 7,347 $ 6,411 $ 936 14.6% - ------------------------------------------------------------------------------------------
Non-interest expense increased due to higher compensation expense and higher other expense. The remaining categories of expense were little changed in 1998 compared to 1997. The $433 thousand increase in compensation expense in 1998 included approximately $150 thousand in higher commissions and bonuses, approximately $100 thousand in merit related increases, $54 thousand in higher benefits expenses, and approximately $130 thousand in higher salaries due to staff expansion in the lending and branch divisions. Compensation expense is stated net of deferred salaries totaling $448 thousand in 1998, which increased by $94 thousand from 1997 due to higher loan originations activities. The $562 thousand increase in other expense included $131 thousand in higher consulting fees due to lending related growth and higher investment management fees; $73 thousand in higher appraisal and credit report fees related to increased loan originations; $94 thousand in increased shareholder and director related expenses; $77 thousand in higher marketing and association related expenses; and costs related to branch relocations and to the formation of a passive investment corporation. Income Tax Expense Total income tax expense increased by $699 thousand in 1998. The effective tax rate increased due primarily to a $106 thousand second quarter charge related to an increase in the deferred tax asset valuation allowance. The Company has initiated steps toward the formation of a passive investment subsidiary in accordance with changes in Connecticut tax statutes, which is expected to result in a reduction in the effective tax rate beginning in 1999. Additionally, 1997 results included a reduction in the valuation allowance on the deferred tax asset totaling $150 thousand. Net of changes in the valuation allowance, the effective tax rate measured 32.1% in 1998, compared to 30.4% in 1997. This increase resulted from the lower proportional benefit of the dividends received deduction as a result of growth in other pretax income. Comprehensive Income In addition to net income recorded in the Income Statement, comprehensive income includes unrealized gains on securities available for sale, net of income tax expense. Comprehensive income totaled $2.666 million in 1998, compared to $2.893 million in 1997. Comprehensive income decreased due to a lower unrealized holding gain on investments, net of income tax expense. This gain totaled $830 thousand in 1998, compared to $1.453 million in 1997. Financial Condition - Fiscal Year-End 1998 Versus 1997 Cash and Cash Equivalents Short term investments at year-end consisted of federal funds sold to the Federal Home Loan Bank of Boston. During the year, short term investments on a daily basis are primarily invested in short term money market mutual funds. Short term investments include amounts expected to be reinvested in future loan and investment growth. Securities Average investment securities decreased although total securities increased at year-end 1998 compared to a year earlier. Average securities declined due to sales and calls recorded in the first half of the year, while the majority of securities purchases were in the last quarter of the year. As a result of these purchases, securities available for sale (AFS) increased by $14.8 million (33.9%) at year-end 1998 compared to the previous year-end. Securities held to maturity (HTM) decreased by $4.5 million (22.6%) as a result of amortization and calls. AFS securities totaling $58.6 million at year-end 1998 consisted primarily of $37.0 million in investment grade corporate debt and equity securities, composed primarily of financial services and electric utilities companies. These securities are publicly traded and were purchased primarily to provide yield income, including tax benefits on the dividends received deduction on equity securities. These securities included $17.7 million in marketable equity securities and $19.3 million in debt securities, consisting primarily of capital trust preferred securities. Year-end AFS securities also included $16.7 million in U.S. Government and agency securities, consisting primarily of deleveraged notes. HTM securities totaling $15.4 million at year-end 1998 consisted primarily of U.S. agency mortgage-backed securities, which are primarily planned amortization class collateralized mortgage obligations. Securities transactions in 1998 included sales of $12.1 million and securities purchases of $49.7 million. The sales produced realized gains of $1.204 million, and the calls produced gains of $40 thousand. Securities sold were marketable equity securities. Securities called included government agency securities and preferred equity securities. Securities purchased were primarily corporate debt and equity securities. Securities transactions resulted from a program of active portfolio management, including realizing the benefits of improving market valuations. This program also included activity to lengthen the duration, increase the yield, and increase the diversification of the portfolio. As a result, the fully taxable equivalent yield on the securities portfolio increased to 7.74% in 1998, compared to 7.39% in 1997. Additionally, securities with a repricing horizon over five years increased to $33 million at year-end 1998, compared to $12 million at the previous year-end. At year-end 1998, most callable securities were analyzed based on expected repricing to anticipated call dates. Callable securities at year-end 1998 totaled $26 million, compared to $23 million at year-end 1997. At year-end 1998, AFS securities included $1.380 million in net unrealized gains (2.4% of fair value), compared to $1.430 million in net unrealized gains (3.3% of fair value) at the previous year-end. At year-end 1998, the AFS portfolio included $1.639 million in gross unrealized gains and $259 thousand in gross unrealized losses, compared to $1.649 million in gains and $219 thousand in losses at the prior year-end.
Lending Activities December 31 (dollars in millions) 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------ Residential mortgages $ 57.6 31.2% $ 39.3 25.0% $ 41.7 28.2% $ 44.0 28.8% $ 44.6 33.9% Commercial mortgages 46.7 25.3 45.5 28.9 40.5 27.4 40.7 26.6 37.2 28.3 Other commercial loans 25.1 13.6 18.3 11.6 15.3 10.4 18.8 12.3 20.0 15.2 Consumer loans 32.5 17.6 29.5 18.7 26.1 17.7 22.4 14.7 23.6 18.0 - ------------------------------------------------------------------------------------------------------------------------------ Total regular loans 161.9 87.7 132.6 84.2 123.6 83.7 125.9 82.4 125.4 95.4 Government guaranteed loans 22.8 12.3 24.9 15.8 24.2 16.3 27.0 17.6 6.0 4.6 - ------------------------------------------------------------------------------------------------------------------------------ Total loans $ 184.7 100.0 $ 157.5 100.0 $ 147.8 100.0 $ 152.9 100.0 $ 131.4 100.0 - ------------------------------------------------------------------------------------------------------------------------------
Total loans increased by $27.2 million (17.3%) at year-end 1998, compared to the previous year-end. Growth was spread across all major categories, and was concentrated in residential mortgages and other commercial loans. Residential mortgages increased by $18.3 million, and other commercial loans increased by $8.0 million. Total loans originated in 1998 were approximately $102.3 million, compared to about $53.2 million in 1997. Most loans were real estate secured. Total real estate secured loans increased by $22.2 million (19.9%) in 1998 to $133.9 million at year-end. As a result of the decrease in interest rates during the year, the volume of prepayments and refinances increased in 1998, and the interest rates on existing loans decreased in certain segments of the portfolio. Total residential mortgages originated during the year were $50.9 million. This total included $36.6 million of traditional residential first mortgages, and $14.3 million of the new Free-Refi mortgage product introduced by the Company in the second quarter of 1998. Traditional first mortgages are originated with a full documentation process and are primarily intended for sale on a servicing released basis to secondary market investors. Loan originations in 1998 included $27.1 million of first mortgages originated for sale, and $9.5 million in mortgages retained in the Bank's portfolio, including loans held for sale totaling $5.3 million. The new Free-Refi first mortgage product is originated with streamlined documentation requirements consistent with the methodology used in originating home equity lines of credit. During 1998, Free-Refi mortgages included five year adjustable rate mortgages and fifteen year fixed rate mortgages, all of which were retained in the Company's portfolio. During 1998, the Company originated $38.2 million in commercial mortgages and commercial loans. The $8.0 million increase in commercial loan balances at year-end 1998 included a $2.1 million increase in SBA loans originated by the Company, a $2.5 million increase in commercial term loans not secured by real estate, a $1.4 million increase in commercial construction loans, and a $1.2 million increase in commercial mortgages. Consumer loans increased by $3.0 million in 1998, reflecting growth in home equity loans and automobile loans. Total consumer loan originations were approximately $13.2 million in 1998. Government guaranteed loans are purchased in the secondary market and are 100% guaranteed either by the Small Business Administration (SBA) or the U. S. Department of Agriculture (USDA). These are business term loans and mortgages originated by U.S. banks, and are primarily loan certificates registered with and serviced by a national servicing corporation. These loans declined by $2.0 million (8.1%) in 1998 due to higher prepayments. At year-end 1998, outstanding commitments to originate new loans totaled $21.2 million, compared to $8.2 million at the previous year-end. Additionally, total unadvanced lines and letters of credit were $33.4 million at year-end 1998, compared to $24.3 million a year earlier.
Nonperforming Assets December 31 (dollars in millions) 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------ Nonaccruing loans $ 0.6 $ 2.1 $ 3.4 $ 4.4 $ 0.7 Foreclosed assets 0.1 0.6 1.0 2.0 5.4 - ------------------------------------------------------------------------------------------------------------------------------ Total nonperforming assets $ 0.7 $ 2.7 $ 4.4 $ 6.4 $ 6.1 - ------------------------------------------------------------------------------------------------------------------------------ Nonperforming assets as a 0.2% 1.1% 1.9% 3.0% 3.0% percentage of total assets
Total nonperforming assets decreased during the year by $2.0 million to $0.7 million at year-end 1998. Nonaccruing loans were $0.6 million, and foreclosed assets were $0.1 million. Total nonperforming assets measured 0.2% of assets at year-end 1998, compared to 1.1% at year-end 1997. Accruing loans delinquent more than 30 days increased by $1.3 million to $2.7 million at year-end 1998 compared to the previous year-end, primarily due to higher residential mortgage delinquencies in the fourth quarter. At year-end 1998, accruing loans included $1.2 million of classified loans with a potential to become nonperforming based on identified credit weaknesses. This total decreased from $1.5 million at year-end 1997. Allowance for Loan Losses
December 31 (in thousands) 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------- Beginning balance $ 3,000 $ 2,850 $ 2,340 $ 2,090 $ 2,070 Charge-offs: Residential mortgages (150) (108) (74) (102) (177) Consumer (200) (366) (273) (252) (251) Commercial (51) (294) (220) (1,438) (288) - ------------------------------------------------------------------------------------------------------- Total Charge-offs (401) (768) (567) (1,792) (716) - ------------------------------------------------------------------------------------------------------- Recoveries: Residential mortgages 1 11 12 8 1 Consumer 101 45 61 53 89 Commercial 180 33 26 6 7 - ------------------------------------------------------------------------------------------------------- Total Recoveries 282 89 99 67 97 - ------------------------------------------------------------------------------------------------------- Net Charge-offs (119) (679) (468) (1,725) (619) Provision for losses 179 829 978 1,975 639 - ------------------------------------------------------------------------------------------------------- Ending balance $ 3,060 $ 3,000 $ 2,850 $ 2,340 $ 2,090 - -------------------------------------------------------------------------------------------------------
The total allowance for loan losses increased to $3.06 million at year-end 1998, compared to $3.00 million a year earlier. Net chargeoffs were $119 thousand in 1998, compared to $679 thousand in 1997. Gross chargeoffs decreased to $401 thousand in 1998 compared to $768 thousand in 1997. Gross recoveries increased to $282 thousand in 1998 compared to $89 thousand in the prior year. Net chargeoffs were at the lowest level in the last five years. Both the lower chargeoffs and the higher recoveries were due to the liquidation of problem assets during the year 1998. Additionally, recoveries benefited from $58 thousand in proceeds from the sale of charged-off loans in 1998. In allocating the allowance for loan losses, amounts allocated to the individual categories of loans include (1) allowances for specific impaired loans, (2) an allocation of remaining allowance amounts based on the experience of management and the Company, (3) the overall risk characteristics of the individual loan category and (4) the current economic conditions that could affect the individual loan categories.
December 31 (dollars in thousands) 1998 1997 1996 1995 1994 - ---------------------------------------- ------------- ----------------- ---------------- ----------------- ---------------- Allowance for loan losses by type of loan: Residential mortgage $ 334 10.9% $ 202 6.7% $ 304 10.7% $ 173 7.4% $ 118 5.6% Consumer 426 13.9 399 13.3 416 14.6 276 11.8 300 14.4 Commercial 1,340 43.9 1,749 58.3 1,860 65.3 1,743 74.5 1,481 70.9 Unallocated 960 31.3 650 21.7 270 9.4 148 6.3 191 9.1 - ------------------------------------- ------- -------- -------- -------- -------- ------- -------- -------- -------- ------- Total $ 3,060 100.0 $ 3,000 100.0 $ 2,850 100.0 $ 2,340 100.0 $ 2,090 100.0 - ------------------------------------- ------- -------- -------- -------- -------- ------- -------- -------- -------- -------
The major changes in the components of the allowance in 1998 were a $409 thousand reduction in the allowance for commercial loans, and a $310 thousand increase in the unallocated portion of the allowance. The commercial allowance decreased primarily due to the resolution of problem assets and criticized loans during the year. The increase in the unallocated component includes management's assessment of economic and credit conditions and the volume of increased commitments and credit lines. Additionally, the residential mortgage allowance was increased due to portfolio growth, higher chargeoffs and delinquencies. The consumer allowance was increased due to portfolio growth. No reserves are assigned to Government guaranteed loans, which are 100% backed by U.S. agency guarantees. Net loan charge-offs were a comparatively low .07% in 1998. The allowance provided adequate coverage of chargeoffs based on historic experience. All components also provided adequate coverage of nonperforming loans at year-end 1998. The ratio of the allowance to total nonperforming loans measured 533% at year-end 1998, compared to 141% at year-end 1997. The ratio of the allowance to total regular loans decreased to 1.89% at year-end 1998, compared to 2.26% at year-end 1997.
Net charge-offs as a percentage of average loans by type: 1998 1997 1996 1995 1994 ------------------------------------------------- -------------- -------------- -------------- -------------- ------------- Residential mortgage 0.32% 0.24% 0.15% 0.21% 0.42% Consumer 0.32 1.21 0.84 0.88 0.77 Commercial (0.20) 0.46 0.34 1.77 0.50 Total 0.07 0.46 0.31 1.16 0.52 Allowance as a percentage of outstanding loans by type: Residential mortgage 0.58% 0.51% 0.75% 0.39% 0.26% Consumer 1.31 1.35 1.59 1.23 1.29 Commercial 1.86 2.74 3.33 2.93 2.35 Unallocated - - - - - Subtotal Regular Loans 1.89 2.26 2.33 1.86 1.67 Government guaranteed loans - - - - - Total 1.66 1.91 1.95 1.53 1.59
Deposits and Borrowings
December 31 (dollars in millions) 1998 1997 % change - ------------------------------------------------------------------------------------------------------------ Demand deposits $ 25.3 $ 21.9 15.4% NOW deposits 25.2 22.3 13.0 Money market deposits 29.6 15.4 91.5 Savings deposits 37.2 34.7 7.4 Time deposits < $100 thousand 106.5 112.2 (5.1) Time deposits > $100 thousand 16.2 15.2 6.4 - ------------------------------------------------------------------------------------------------------------ Total deposits $ 240.0 $ 221.7 8.2 - ------------------------------------------------------------------------------------------------------------ Personal $ 202.1 $ 190.4 6.1 Commercial 32.5 25.9 25.4 Municipal 5.4 5.4 (.4) - ------------------------------------------------------------------------------------------------------------ Total deposits $ 240.0 $ 221.7 8.2% - ------------------------------------------------------------------------------------------------------------
Total deposits increased by $18.3 million (8.2%) at year-end 1998 compared to a year earlier. All major categories of deposits increased except for time deposits under $100 thousand. The strongest growth was in money market accounts, which increased by $14.2 million (91.5%). The Company introduced its new WiseMoney savings account with higher yielding tiered interest rates in the second half of 1997, which has propelled growth in this category for the last eighteen months. Total transactions accounts increased by $6.3 million (14.3%) at year-end 1998 compared to year-end 1997. Average transactions account balances increased by 9.9% in the fourth quarter of 1998 compared to 1997. This growth reflected higher business volumes in 1998. The year-end growth also reflected temporary year-end balance increases, particularly for accounts which also use the Company's money market mutual fund sweep product. Growth was also registered in savings accounts and jumbo time deposits as a result of overall business volume growth. Time deposits under $100 thousand decreased by $5.7 million (5.1%). Due to the decrease in interest rates in 1998, the Company experienced some outflow of maturing higher rate two and three year deposits which had been booked in earlier years. Time deposits greater than or equal to $100 thousand were comprised of $5.2 million maturing within three months, $8.3 million maturing after three months and within twelve months, and $2.7 million maturing after twelve months. Total borrowings increased by $17.9 million to $23.6 million at year-end 1998 compared to year-end 1997. During the fourth quarter, the Company borrowed $20 million under intermediate term notes from the Federal Home Loan Bank of Boston to fund the purchase of corporate debt securities. These notes are callable notes with final maturities of ten to fifteen years, and call periods of three, five, and ten years. Interest Rate Sensitivity The following table presents a breakdown of the Company's interest rate sensitive assets and liabilities on December 31, 1998 by specific time frames and cumulatively. Balances of fixed rate assets are reported by their expected prepayment schedules or by their expected remaining lives taking into account call provisions. These estimates are provided by a correspondent bank and are based on market estimates. Balances of deposit liabilities without a contractual maturity date are reported by their repricing characteristics. These repricing characteristics are determined by Management in accordance with an analysis of the market sensitivity of specific deposit product types. Repricing characteristics of borrowings include expected remaining lives, taking into account call provisions.
Total Interest Rate Sensitivity - Repricing Horizon Within 1-5 Over 5 (dollars in millions) One Year Years Years - --------------------------------------------------------------------------------------------------------- December 31, 1998 Earning Assets: Loans $ 91 $ 26 $ 68 Securities available for sale 12 14 33 Securities held to maturity 8 7 - Other assets 13 - - - --------------------------------------------------------------------------------------------------------- Total earning assets $ 124 $ 47 $ 101 - --------------------------------------------------------------------------------------------------------- Funds Supporting Earning Assets: NOW deposits $ 18 $ 7 $ - Savings & Money Market 40 27 - Time deposits < $100,000 74 33 - Time deposits > $100,000 13 3 - - Borrowings 1 18 5 Non-interest bearing funds - - 33 - --------------------------------------------------------------------------------------------------------- Total funds supporting earning assets $ 146 $ 88 $ 38 - --------------------------------------------------------------------------------------------------------- December 31, 1998 - --------------------------------------------------------------------------------------------------------- Gap for period $ (22) $ (41) $ 63 Cumulative gap (22) (63) - Cumulative gap as percent of total earning assets (8)% (23)% - December 31, 1997 - --------------------------------------------------------------------------------------------------------- Cumulative gap $ 20 $ (22) - Cumulative gap as percent of total earning assets 9% (11)% -
The Company's Asset Liability Committee (ALCO) meets weekly to manage net interest income and its sensitivity to interest rates. ALCO strategies are reviewed by the Board monthly. ALCO monitors risk and establishes long term strategies. ALCO also manages the interest rates and other pricing features of the Company's products. At December 31, 1998, the Company had a negative twelve month gap of $22 million, compared to a positive twelve month gap of $20 million at the prior year-end. As a result of the decrease in interest rates in 1998, the demand for loans shifted toward fixed rate products, the supply of variable rate purchased assets decreased, and consumer demand for time deposits shifted to maturities of one year and less. Under these circumstances, the maturities of the Company's assets lengthened and the maturities of deposits shortened. Loans with repricing horizons over one year increased by $36 million (62.1%). Deposits with maturities over one year decreased by $15 million (17.6%). The above combined shift of $51 million in loans and deposits created the shift in the twelve month gap described above. Additionally, total securities with repricing horizons over one year increased by $17 million based on the investment portfolio management program. This increase was funded by a $19 million increase in borrowings with repricing horizons over one year. The one year gap as a percentage of total earning assets was less than 10% at both year-end 1998 and year-end 1997. The Company generally targets a one year gap that is near zero or slightly positive. This provides protection to net interest income in case interest rates increase. The change in the one year gap from a positive to a negative position was beneficial to earnings during 1998. Under the Company's methodology, short term liabilities include $28 million in NOW and savings deposits. While these deposits have some short term interest sensitivity, it has been minimal in this decade. The cumulative five year gap measured ($63) million at year-end 1998, compared to ($22) million, as intermediate term liabilities were used to fund a $49 million increase in assets repricing over five years. Liquidity and Cash Flows The Company's primary source of funds is dividends from the Bank, and its primary use of funds is dividends to shareholders. Dividends from the Bank are primarily paid from current period cash earnings of the Bank, and secondarily from other liquid assets of the Bank. Dividends from the Bank to the Company are subject to restrictions as is further described in the Shareholder's Equity note to the consolidated financial statements. In 1998, the purchase of treasury stock in an amount of $3.1 million by the Company was also funded by a dividend from the Bank. Liquidity is also needed by the Bank to fund loan originations and the use of credit commitments, along with deposit withdrawals and maturing borrowings. The Bank manages its day-to-day liquidity by maintaining short term investments and/or utilizing short term borrowings. In addition to its FHLBB relationship, the Bank maintains $12 million in credit facilities for short term borrowings and repurchase agreements. Over the year, loan originations and asset purchases are funded by amortization of loans and investments, as well as by deposit growth and FHLBB borrowings. In 1998, the primary use of funds were the origination of loans and the purchase of investment securities, and the primary sources of funds were growth in money market deposits and new FHLBB borrowings. In the event of additional funds needs, the Bank could choose to liquidate short term investments or to obtain funds from the investment portfolio either by selling securities available for sale or obtaining loans backed by investment securities. Additionally, the portfolio of Government guaranteed loan certificates represents a readily marketable pool of assets. Capital Resources Capital ratios for the Company and the Bank were in excess of all applicable regulatory requirements for all periods presented. Total shareholders' equity decreased by $0.6 million, with net income of $2.6 million offset by the purchase of treasury stock. The Company increased the quarterly cash dividend to five cents per share in the third quarter of 1998, from three cents per share in previous quarters, due to the effect of the three for two stock split declared and paid in the second quarter. Impact of New Accounting Standards Certain new accounting standards apply to future period reporting, as is more fully discussed in the Recent Accounting Developments section of the Summary of Significant Accounting Policies in the notes to the Consolidated Financial Statements. Year 2000 Considerations All disclosure concerning Year 2000 Considerations should be considered "Year 2000 Readiness Disclosure" pursuant to the Year 2000 Information and Readiness Disclosure Act. The Year 2000 modification information provided herein should be read in connection with the Year 2000 Information and Readiness Disclosure Act which, among other things, mandates that certain Year 2000 readiness disclosures may not be used in litigation. The Company has established a Year 2000 project plan to address systems and facilities changes necessary to properly recognize dates after 1999, has assigned implementation responsibilities and has established management and Board reporting processes. All of the Company's significant information technology systems are provided under contract with major national banking systems providers who are progressing under their own Year 2000 plans. Most significant systems changes were reported to be completed at December 31, 1998. The Company's plan follows the five step approach required by its regulators: Awareness, Assessment, Modification, Verification, and Implementation. As of December 31, 1998, the Company believes that its progress under its plan was satisfactory in accordance with plan objectives, and the Company expects to complete its plan in accordance with regulatory guidelines. The Company's project also addresses its other suppliers, customers, and other constituents, as well as remediation and business resumption contingency plans. The Company has arranged for temporary consulting help and has purchased diagnostic software to assist with this project. The costs of the project, which are not expected to be significant, and the dates in the Company's plans are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those plans. The primary uncertainty facing the Company is the ability of third party systems providers to identify and modify software as planned. Specific factors that might cause material differences from plans include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. Additional information about the Company's Year 2000 status at December 31, 1998 was as follows: Readiness: The Company's plans include both information technology ("IT") and non-IT systems. Most of the Company's primary Year 2000 exposures relate to IT systems, primarily to the vendor of its account processing systems. This is a large national banking systems vendor. Additionally, as of the date of this report, this vendor has reported that it has substantially completed remediation, testing, and implementation actions for substantially all of the major processing systems which it is providing to the Company. The Company has substantially completed its own testing of these systems, and its plan calls for further testing and evaluation of these systems through the first half of 1999. The Company currently anticipates that its major IT vendors will comply with federal regulatory guidelines for Year 2000 readiness. Costs: The Company has not incurred material costs related to its Year 2000 program. The Company is being charged approximately $25 thousand by its account processing vendor for testing arrangements, which is being billed over twelve months. The Company has accelerated certain capital expenditure plans, totaling approximately $150 thousand, related to computer upgrades, which it implemented in 1998. Additionally, the Company has budgeted further computer and equipment upgrades totaling up to $200 thousand in 1999, which include expenditures related to the execution of the Company's Year 2000 program. Additionally, the Company will evaluate capital expenditures totaling up to approximately $50 thousand related to general contingency capabilities. Risks: The most significant risk anticipated by the Company is the possibility of interruptions to its account processing systems. Due to the progress described above, the Company does not presently foresee any material interruptions to these systems. The next most significant risk relates to interruptions in the payment processing systems, which are integrated with the Company's account processing systems. The Company is working with its payment processing vendors, the most significant of which are reported to be making satisfactory progress in complying with federal regulatory guidelines for Year 2000 readiness. These guidelines include the substantial completion of remediation of mission critical systems and the initiation of testing in 1998. The Company is also exposed to various non-IT systematic risks which it cannot fully monitor and test, including the supply of electric power, telecommunications services, and postal services. Contingency Plans: The Company has taken actions to comply with federal regulatory requirements for Year 2000 contingency planning. The Company has established a contingency planning committee representing all of its major functional areas. The Company has established a contingency plan timetable and developed risk analyses for its high priority business functions; in the first half of 1999, the Company will be developing contingency timetables and action plans in accordance with federal regulatory guidelines. The Company has taken steps to increase its available staffing as necessary to respond to Year 2000 contingencies. Comparison of 1997 VERSUS 1996 Alliance earned $2.02 million ($.82 per diluted share) for the year ended December 31, 1997. Net income increased by 40.3% from $1.44 million in 1996. As of year-end, Alliance had recorded seven consecutive quarters of increasing earnings. 1997 results benefited from improvements over 1996 in all major areas of operations. Net interest income increased by 3.9%, total service charges and fees increased by 2.9%, and non-interest expense declined by 3.4%. Collectively, these improvements contributed $559 thousand to 1997 earnings, providing an increase of 42.3% over 1996 pre-tax earnings. During 1997, the Company realized securities gains totaling $961 thousand as a result of an ongoing restructuring of the investment portfolio. The gains offset losses of $148 thousand on foreclosed assets and a $782 thousand increase in tax expense. Certain foreclosed assets were written down to accelerate liquidation. Tax expense in 1996 included the benefit of a larger reduction in the valuation allowance on the deferred tax asset. The Company reduced its nonperforming assets to 1.11% of total assets at year-end 1997, compared to 1.88% a year earlier. The loan loss allowance increased by 5.3% to $3.0 million, providing 140.7% coverage of nonaccruing loans, compared to 84.3% a year earlier. Net loan charge-offs totaled $679 thousand in 1997, compared to $468 thousand in 1996, as a result of a reassessment of probable consumer loan losses. Total nonaccruing loans were reduced to $2.1 million at year-end 1997, compared to $3.4 million a year earlier. Total assets at year-end 1997 were $247.1 million, 6.4% higher than a year earlier. Total loans grew by a similar 6.5%, while total deposits grew by 7.8%. Deposit growth resulted from time account promotions during the first half of 1997, and from the introduction of a new money market account during the second half of 1997. Loan growth was mostly during the second half of 1997, and consisted primarily of commercial loan growth, along with originations of home equity loans. Shareholders' equity increased 20.6% from a year earlier to $18.8 million at December 31, 1997, representing a book value per share of $7.66. At year-end, the equity to asset ratio stood at 7.61%, up from 6.71% a year earlier. The Company's capital remained in excess of all regulatory requirements. In addition to retained earnings, sources of equity growth included option exercises and unrealized securities gains, which together provided a $1.5 million increase in net worth. On July 17, 1997, a 33.33% stock dividend was paid to shareholders, providing one additional share for each three shares held, as a result of a four-for-three stock split. Prior period earnings and book value per share have been restated for this change. Due to the effect of the stock split and a dividend increase in 1997, cash dividends paid to shareholders were 122% higher in the fourth quarter of 1997 than in the same period of the prior year. On October 3, 1997, the Company completed formation of Alliance Bancorp of New England as the holding Company for Tolland Bank. Shareholders of the Bank became shareholders of the Company on a share for share basis. All existing Tolland Bank shares are treated the same as Alliance shares, with no need for shareholders to exchange them. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK A table of market risk sensitive instruments is included in the Supplementary Financial Data section. For loans, securities and liabilities with contractual maturities, this table presents projected principal cash flows and related weighted-average interest rates by contractual maturities. Additionally reflected is the Company's historical experience of the impact of interest rate fluctuations on the prepayment of residential mortgages, consumer loans, commercial loans and mortgage-backed securities. Projected principal cash flows and prepayment assumptions utilized as a percentage of outstanding balances at year-end 1998 were 10% for residential mortgages, 27% for consumer loans and 32% for commercial loans, compared to 15%, 21% and 17%, respectively, at year-end 1997. Principal cash flows for mortgage backed securities were determined based on market prepayment speeds ("PSAs") at year-end 1998. Equity securities are reported as variable rate instruments with maturities of greater than five years, except for callable equities which are reported by the next call date. Time deposits and borrowings are presented based on contractual maturities and weighted-average interest rates. For core deposits (e.g., checking, savings and money market deposits) that have no contractual maturity, the table presents principal cash flows and related weighted-average interest rates based on the Company's historical experience and management's judgement concerning expected customer withdrawal behavior. The Company utilized decay rate assumptions of 8% for savings accounts, 2% for checking accounts and 3% for money market deposit accounts in the one year or less category, compared to 9%, 2% and 7%, respectively, at year-end 1997. Expectations regarding originations, prepayments and customer behavior are reviewed during the Company's budget preparation process and approved by the Asset/Liability Committee and the Board. The table shows that the total fair values of market sensitive assets at December 31, 1998 exceeded carrying value by 3.7% due to the decrease in interest rates; these values were approximately equal in 1997. Fair values of market sensitive liabilities at both year-ends approximately equaled carrying value. Market risk sensitive assets are spread among several categories of loans and investments; fixed interest rate commercial loans were the largest category, totaling $49 million (19% of total market risk sensitive assets). In 1997, the largest category was variable interest rate commercial loans (28.0% of total market risk sensitive assets). Market risk sensitive liabilities were primarily concentrated in time deposits, which totaled $122.7 million (46.6% of total market risk sensitive liabilities); this decreased from 55.9% at year-end 1997. Qualitative Disclosures About Market Risk On a quarterly basis, management analyzes the sensitivity of net income and net worth to changes in interest rates and the Board reviews reports of the status of this sensitivity in comparison to approved internal guidelines. Quarterly reviews of market risk sensitivity are conducted in conjunction with reviews of the interest rate repricing horizon as previously described. Management and the Board manage market risk exposures based on an evaluation of changes in the composition of assets and liabilities, and management's plans for originating and promoting market risk sensitive instruments. Through weekly meetings of its Asset/Liability Committee, management is constantly adjusting its products, prices, and promotions to achieve all Asset/Liability objectives, including the management of interest rate sensitivity. Strategies utilized include changing the mix of new loan and deposit originations, establishing repricing targets for assets and liabilities which are repricing or maturing, and adjusting the level and mix of short term investments, securities available for sale, borrowings, and the potential utilization of hedging instruments. Because most market sensitive instruments are contracted with local customers in the context of multiple service relationships, and recognizing the generally level volume of annual sensitivity of existing instruments, management believes that it has the flexibility and capability to consider and successfully implement a variety of strategies in the normal course of business. There were no significant changes in the qualitative aspects of market risk management in 1998 compared to 1997. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Exhibit 99. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated by reference from Alliance's Proxy Statement for the 1998 Annual Meeting of the Shareholders to be filed with the Scurities and Exchange Commission. ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference from Alliance's Proxy Statement for the 1998 Annual Meeting of the Shareholders to be filed with the Scurities and Exchange Commission. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference from Alliance's Proxy Statement for the 1998 Annual Meeting of the Shareholders to be filed with the Scurities and Exchange Commission. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference from Alliance's Proxy Statement for the 1998 Annual Meeting of the Shareholders to be filed with the Scurities and Exchange Commission. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) All schedules have been omitted as the required information is either included herein or in the Proxy Statement, or is inapplicable. (b) Reports on Form 8-K for Fourth Quarter (i) On November 27, 1998, the Company filed a Form 8-K reporting, under Item 6, the resignation of one of the Company's directors. (ii) On December 2, 1998, the Company filed a Form 8-K reporting, under Item 5, an appointment to the Board of Directors. (iii) On December 23, 1998, the Company filed a Form 8-K reporting, under Item 5, the appointment of two individuals to the Board of Directors to serve the remainder of the terms of two directors who announced their retirement. (c) Exhibit Index The exhibits listed below are included in this report or are incorporated herein by reference to the identified document previously filed with the Securities and Exchange Commission as set forth parenthetically. 3(i) Certificate of Incorporation of Registrant (Exhibit 99.1 to the Registration Statement on Form 8-A filed September 23, 1997). 3(ii) Bylaws of Registrant (Exhibit 99.2 to the Registration Statement on Form 8-A filed September 23, 1997). 10(i) Change in Control Agreement between Tolland Bank and Joseph H. Rossi, dated January 5, 1996 (Exhibit 10(i) to the Report on Form 10-K filed March 27, 1998). 10(ii) 1997 Stock Incentive Plan for Directors, Officers and Key employees (Exhibit 4.3 to the Registration Statement on Form S-8 filed November 6, 1997). 10(iii) Supplemental Executive Retirement Plan and Agreement between Tolland Bank and Joseph H. Rossi, dated December 16, 1996 (Exhibit 10(iii) to the Report on Form 10-K filed March 27, 1998). 10(iv) Directors' Deferred Compensation Plan (Exhibit 10(iv) to the Report on Form 10-K filed on March 27, 1998). 10(v) Tolland Bank 1997 Employee Stock Purchase Plan (Exhibit 10(v) to the Report on Form 10-K filed on March 27, 1998). 10(vi) Cash Bonus Plan (Exhibit 10(vi) to the Report on Form 10-K filed on March 27, 1998). 21. Subsidiaries of Registrant. 23. Independent Auditors' Consent 27. Financial Data Schedule. 99. Consolidated Financial Statements of the Registrant. SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on February 23, 1999. ALLIANCE BANCORP OF NEW ENGLAND, INC. by /s/ Joseph H. Rossi Joseph H. Rossi President/CEO Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following directors and officers on behalf of the Company on February 23, 1999: /s/ Dr. Howard G. Abbott /s/ Patricia A. Noblet - ------------------------------ ------------------------------ Dr. Howard G. Abbott Patricia A. Noblet Director Director /s/ Robert C. Boardman /s/ Kenneth R. Peterson - ------------------------------ ------------------------------ Robert C. Boardman Kenneth R. Peterson Director Director /s/ William E. Dowty, Jr. /s/ Francis J. Prichard, Jr. - ------------------------------ ------------------------------ William E. Dowty, Jr. Francis J. Prichard, Jr. Director Chairman /s/ D. Anthony Guglielmo /s/ Mark L. Summers - ------------------------------ ------------------------------ D. Anthony Guglielmo Mark L. Summers Vice Chairman Director /s/ Reginald U. Martin /s/ Joseph H. Rossi - ------------------------------ ------------------------------ Reginald U. Martin Joseph H. Rossi Director Director/President/CEO /s/ Douglas J. Moser /s/ David H. Gonci - ------------------------------ ------------------------------ Douglas J. Moser David H. Gonci Director Senior Vice President/ Chief Financial Officer/Treasurer EX-21 2 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 3 EXHIBIT 23 Exhibit 23 Independent Accountants' 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 28, 1999, relating to the consolidated balance sheets of Alliance Bancorp of New England, Inc. and subsidiaries as of December 31, 1998 and 1997, 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, 1998 , which report is included herein. /s/ KPMG LLP Hartford, Connecticut March 23, 1999 EX-99 4 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, 1998 and 1997, and the related consolidated income statements, statements of changes in shareholders' equity, and statements of cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 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, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. /S/ KPMG LLP -------------------------- KPMG LLP Hartford, Connecticut January 28, 1999 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 LLP, the Company's independent auditors. KPMG 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.
Consolidated Balance Sheets December 31, December 31, (in thousands except share data) 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 6,760 $ 6,652 Short-term investments 13,456 14,765 - ---------------------------------------------------------------------------------------------------------------------------- Total cash and cash equivalents 20,216 21,417 Securities available for sale (at fair value) 58,556 43,729 Securities held to maturity (fair value of $15,519 in 1998 and $20,021 in 1997) 15,431 19,949 Residential mortgage loans 57,555 39,319 Commercial mortgage loans 46,724 45,511 Other commercial loans 25,105 18,270 Consumer loans 32,515 29,504 Government guaranteed loans 22,827 24,846 - ---------------------------------------------------------------------------------------------------------------------------- Total loans 184,726 157,450 Less: Allowance for loan losses (3,060) (3,000) - ---------------------------------------------------------------------------------------------------------------------------- Net loans 181,666 154,450 Premises and equipment, net 4,276 4,151 Foreclosed assets, net 80 617 Other assets 3,356 2,816 - ---------------------------------------------------------------------------------------------------------------------------- Total assets $ 283,581 $ 247,129 - ---------------------------------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity Demand deposits $ 25,328 $ 21,918 NOW deposits 25,155 22,260 Money market deposits 29,585 15,447 Savings deposits 37,238 34,677 Time deposits 122,679 127,431 - ---------------------------------------------------------------------------------------------------------------------------- Total deposits 239,985 221,733 Borrowings 23,610 5,739 Other liabilities 1,790 854 - ---------------------------------------------------------------------------------------------------------------------------- Total liabilities 265,385 228,326 Commitments and contingencies (Note 17) Preferred stock, ( $.01 par value; 100,000 shares authorized, none issued) - - Common stock, ($.01 par value; authorized 4,000,000 shares; issued 2,492,552 in 1998 and 1,636,269 in 1997; outstanding 2,291,953 in 1998 and 1,636,269 in 1997) 25 16 Additional paid-in capital 11,306 11,073 Retained earnings 9,223 7,071 Accumulated other comprehensive income, net 751 643 Treasury stock (200,599 shares in 1998) (3,109) - - ---------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 18,196 18,803 - ---------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 283,581 $ 247,129 - ----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements Consolidated Income Statements
Years ended December 31 (dollars in thousands except share data) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------- Interest Income Loans $ 13,896 $ 12,138 $ 12,347 Debt Securities 2,620 3,233 2,780 Dividends on equity securities 1,224 1,047 601 Other earning assets 631 293 244 - ------------------------------------------------------------------------------------------------------------------- Total interest and dividend income 18,371 16,711 15,972 - ------------------------------------------------------------------------------------------------------------------- Interest Expense Deposits 8,984 8,487 7,894 Borrowings 359 264 415 - ------------------------------------------------------------------------------------------------------------------- Total interest expense 9,343 8,751 8,309 - ------------------------------------------------------------------------------------------------------------------- Net interest income 9,028 7,960 7,663 Provision For Loan Losses 179 829 978 - ------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 8,849 7,131 6,685 Non-Interest Income Service charges and fees 1,226 1,148 1,115 Net gain (loss) on securities 1,204 961 (40) Net (loss ) gain on assets (11) (148) 200 - ------------------------------------------------------------------------------------------------------------------- Total non-interest income 2,419 1,961 1,275 Non-Interest Expense Compensation and benefits 3,632 3,199 3,253 Occupancy 618 586 597 Equipment 265 283 285 Data processing services 564 620 476 FDIC, office and other insurance 524 553 509 Problem asset related expense 100 88 549 Other 1,644 1,082 971 - ------------------------------------------------------------------------------------------------------------------- Total non-interest expense 7,347 6,411 6,640 - ------------------------------------------------------------------------------------------------------------------- Income before income taxes 3,921 2,681 1,320 Income tax expense (benefit) 1,363 664 (118) - ------------------------------------------------------------------------------------------------------------------- Net Income $ 2,558 $ 2,017 $ 1,438 - ------------------------------------------------------------------------------------------------------------------- Per Share Data Basic earnings per share $ 1.07 $ .85 $ .62 - ------------------------------------------------------------------------------------------------------------------- Diluted earnings per share $ 1.03 $ .82 $ .61 - ------------------------------------------------------------------------------------------------------------------- Average basic shares outstanding 2,389,828 2,382,654 2,316,218 Average additional dilutive shares 98,208 77,087 31,796 - ------------------------------------------------------------------------------------------------------------------- Average diluted shares outstanding 2,488,036 2,459,741 2,348,014 - -------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Changes in Shareholders' Equity
Accumulated Additional other Years ended December 31 Common paid-In Retained com-prehensive Treasury (in thousands except share data) stock capital earnings income stock Total - ------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1995 $ 1,158 $ 8,795 $ 4,328 $ (1,000) $ 13,281 Comprehensive income Net income 1,438 Unrealized gains on securities, net of reclassification adjustment 767 Comprehensive income 2,205 Dividends declared ($0.01 per share) (35) (35) Shares issued 15 123 138 - ------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 $ 1,173 $ 8,918 $ 5,731 $ (233) $ 15,589 - ------------------------------------------------------------------------------------------------------------------------- Comprehensive income Net income 2,017 Unrealized gains on securities, net of reclassification adjustment 876 Comprehensive income 2,893 Dividends declared ($0.12 per share) (278) (278) Shares issued 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 - ------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 $ 16 $ 11,073 $ 7,071 $ 643 $ 18,803 - ------------------------------------------------------------------------------------------------------------------------- Comprehensive income Net income 2,558 Unrealized gains on securities, net of reclassification adjustment 108 Comprehensive income 2,666 Dividends declared ($0.17 per share) (397) (397) Three for two stock split effected as a stock dividend 9 (9) Shares issued 233 233 Purchase of treasury stock $ (3,109) (3,109) - ----------------------------------------------------------------------------------------------------------- ------------- Balance, December 31, 1998 $ 25 $ 11,306 $ 9,223 $ 751 $ (3,109) $ 18,196 - -------------------------------------------------------------------------------------------------------------------------
Disclosure of reclassification amount Years ended December 31 (in thousands) 1998 1997 1997 - ----------------------------------------------------------------------------------------------------------------- Unrealized holding gain arising during the year net of income tax expense of $522, $1,002 and $512, respectively $ 830 $ 1,453 $ 743 Less reclassification adjustment for (gains) losses included in net income net of income tax expense (benefit) of $482, 384, and $16, respectively (722) (577) 24 - ----------------------------------------------------------------------------------------------------------------- Net unrealized gains on securities $ 108 $ 876 $ 767 - -----------------------------------------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
Years ended December 31 (in thousands) 1998 1997 1996 - --------------------------------------------------------------------------- --------------------------------------- Operating Activities: Net income $ 2,558 $ 2,017 $ 1,438 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 179 829 978 Depreciation and amortization 621 500 513 Net investment security (gains) losses (1,204) (961) 40 Net asset losses (gains) 11 148 (200) Loans originated for sale (27,105) (14,741) (17,719) Proceeds from loans sold 21,853 15,962 18,230 Increase in other liabilities 936 175 207 Decrease (increase) in other assets 386 348 (803) - --------------------------------------------------------------------------- --------------------------------------- Net cash provided by operating activities (1,765) 4,277 2,684 Investing Activities: Securities available for sale: Proceeds from amortization and maturities 2,802 3,219 2,447 Proceeds from sales of securities 32,081 23,453 3,759 Purchases of securities (49,660) (23,585) (28,422) Securities held to maturity: Proceeds from amortization and maturities 4,518 741 2,060 Proceeds from sales of securities - - 806 Net (increase) decrease in loans (22,651) (12,963) 5,517 Proceeds from sales of foreclosed assets 1,097 2,021 1,530 Purchases of premises and equipment (473) (88) (157) Proceeds from sales of premises and equipment - - 102 - --------------------------------------------------------------------------- --------------------------------------- Net cash used by investing activities (32,286) (7,202) (12,358) Financing Activities: Net increase in interest-bearing deposits 14,842 13,880 10,177 Net increase in demand deposits 3,410 2,245 1,993 Proceeds from issuance of FHLB advances 21,929 6,052 12,203 Principal repayments of FHLB advances (2,058) (9,719) (11,572) Net increase (decrease) in other borrowings (2,000) (1,000) 2,890 Stock options exercised 233 599 138 Cash dividends paid (397) (278) (35) Purchase of treasury stock (3,109) - - - --------------------------------------------------------------------------- --------------------------------------- - --------------------------------------------------------------------------- --------------------------------------- Net cash provided by financing activities 32,850 11,779 15,794 - --------------------------------------------------------------------------- --------------------------------------- Net Change in cash and cash equivalents (1,201) 8,854 6,120 Cash and cash equivalents at beginning of the year 21,417 12,563 6,443 - --------------------------------------------------------------------------- --------------------------------------- Cash and cash equivalents at end of the year $ 20,216 $ 21,417 $ 12,563 - --------------------------------------------------------------------------- --------------------------------------- Supplemental Information On Cash Payments Interest expense $ 9,289 $8,737 $ 8,309 Income taxes 797 494 460 Supplemental Information On Non-cash Transactions Net loans transferred to foreclosed assets 216 2,128 369
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 eight offices located in Tolland County, Connecticut. Tolland Bank maintains a wholly owned foreclosed 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. Calls of securities are accounted for as sales. 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, and 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. 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. The Company's Credit Committee is responsible for assessing the adequacy of the loan loss allowance and for recommending any loan loss provision necessary to establish the allowance at an adequate level. The Committee maintains the allowance in accordance with generally accepted accounting principles and with regulatory accounting principles. The Committee also considers regulatory guidelines in effect regarding the establishment of the loan loss allowance. The Committee provides its quarterly assessment to the Board of Directors for approval of the amount of the loan loss allowance. The Company maintains a detailed methodology for assessing the loan loss allowance. This methodology is based on dividing the loan portfolio into homogeneous loan pools, and dividing the commercial loan portfolio into pools based on risk rating. A reserve is established for each pool of loans. Additional reserves are maintained on classified loans, and management may establish specific additional allocations for certain loans based on management's assessment. Impairment reserves are maintained in accordance with SFAS 114. Additionally, a management allocation is assigned to the overall allowance based on management's assessment of the overall risks and trends of the portfolio, and other applicable factors. A loan is considered impaired when it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the 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 charged-off against 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 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. 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. Recent Accounting Developments. The Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") 130, Reporting Comprehensive Income, in 1998. SFAS 130 establishes standards for the reporting and display of comprehensive income and its components (such as changes in unrealized investment gains and losses). Comprehensive income includes net income and any changes in equity from non-owner sources that are not included in the income statement. The purpose of reporting comprehensive income is to report a measure of all changes in equity of an enterprise that result from recognized transactions and other economic events of the period other than transactions with owners in their capacity as owners. Application of SFAS 130 has not impacted the amounts previously reported for net income or affected the comparability of previously issued financial statements. In 1998, the Company adopted the provisions of SFAS 132, Employers' Disclosures about Pensions and Other Post Retirement Benefits. This statement standardizes disclosure requirements for pensions and other post retirement benefits, eliminates unnecessary disclosures, and requires additional information. The accompanying financial statements conform to these disclosure requirements, including restatement of disclosures for earlier periods provided for comparative purposes. In June 1997, the FASB issued SFAS 131, Financial Reporting for Segments of a Business Enterprise, which sets forth disclosure conditions for segment information for periods beginning after December 15, 1997. An operating segment is defined as a component of a business for which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and evaluate performance. The Company operations are limited to financial services provided within the framework of a community bank, and decisions are based generally on specific market areas and or product offerings. Accordingly, based on the financial information now regularly evaluated by the Company's chief operating decision-maker, the Company operates in a single business segment and detailed segment operation is not required. In April, 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-5, Reporting on the Costs of Start-up Activities. This statement requires that costs of start-up activities and organization costs be expensed as incurred. The statement is effective for financial statements for fiscal years beginning after December 15, 1998. Initial application of this statement is to be reported as the cumulative effect of a change in accounting principle. The Company does not believe that the adoption of this statement will have a material impact on its financial position or results of operations. In June 1998, the FASB issued SFAS 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that companies record all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. The manner in which the companies are to record gains and losses resulting from changes in the values of those derivatives depends on the use of the derivative and whether it qualifies for hedge accounting. For qualifying hedges, the recognition of changes in the value of both the hedge and the hedged item are recorded in earnings in the same period. Changes in the fair value of derivatives that do not qualify for hedge accounting are included in earnings in the period of the change. SFAS 133 also allows a one-time reclassification of held to maturity securities. This statement is effective for years beginning after June 15, 1999. The Company does not believe that the adoption of this statement will have a material impact on its financial position or results of operations. 2. Cash And Cash Equivalents
Short-term investments at December 31 (in thousands) 1998 1997 - --------------------------------------------------------------------------------------------- Federal funds sold $ 13,450 $ 14,760 FHLBB Ideal Way account 6 5 - --------------------------------------------------------------------------------------------- Total short-term investments $ 13,456 $ 14,765 - ---------------------------------------------------------------------------------------------
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 $757,000 and $714,000 at December 31, 1998 and December 31, 1997, respectively. 3. Securities
Amortized Unrealized Unrealized Fair December 31, 1998 (in thousands) Cost Gains Losses Value - ------------------------------------------------------ ----------------- ---------------- ----------------- ---------------- Securities available for sale U.S. Government and agency $ 16,694 $ 34 $ (82) $ 16,646 U.S. Agency mortgage-backed 2,312 22 (1) 2,333 Other debt securities 19,265 476 (26) 19,715 Marketable equity 17,724 1,107 (150) 18,681 FHLBB stock 1,181 - - 1,181 - ------------------------------------------------------ ----------------- ---------------- ----------------- ---------------- Total available for sale $ 57,176 $ 1,639 $ (259) $ 58,556 - ------------------------------------------------------ ----------------- ---------------- ----------------- ---------------- Securities held to maturity U.S. Government and agency $ 1,952 $ 65 $ - $ 2,017 U.S. Agency mortgage-backed 12,095 22 (28) 12,089 Other debt securities 1,384 29 - 1,413 - ------------------------------------------------------ ----------------- ---------------- ----------------- ---------------- Total held to maturity $ 15,431 $ 116 $ (28) $ 15,519 - ------------------------------------------------------ ----------------- ---------------- ----------------- ---------------- 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 - ------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
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.
Amortized Fair Average December 31, 1998 (in thousands) Cost Value Yield - ------------------------------------------------------ ----------------------- ----------------------- ---------------------- Securities available for sale Due in 1 year or less $ 7,266 $ 7,266 4.89% Due after 1 to 5 years 6,161 6,108 5.06 Due after 5 to 10 years 4,686 4,712 6.59 Due after 10 years 20,158 20,608 7.63 - ------------------------------------------------------ ----------------------- ----------------------- ---------------------- Total available for sale $ 38,271 $ 38,694 6.57% - ------------------------------------------------------ ----------------------- ----------------------- ---------------------- Securities held to maturity Due in 1 year or less $ 3,597 $ 3,637 5.80% Due after 1 to 5 years 10,843 10,895 6.01 Due after 5 to 10 years 547 543 5.00 Due after 10 years 444 444 6.00 - ------------------------------------------------------ ----------------------- ----------------------- ---------------------- Total held to maturity $ 15,431 $ 15,519 5.92% - ------------------------------------------------------ ----------------------- ----------------------- ----------------------
As of December 31, 1998, securities having an amortized cost of $1,415,000 were pledged to secure treasury, tax and loan and other deposits. 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 1998 and 1997, and all other securities sold in 1996 were securities available for sale. The book value of securities called in 1998 was $20,910,000, with gross gains of $40,000. 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) 1998 1997 1996 - ------------------------------------------------------ ----------------------- ----------------------- ---------------------- Debt securities sold Book value at sale $ 18,908 $ 8,716 $ 4,267 Gross gains 4 7 11 Gross losses - - (52) Equity securities sold Book value at sale $ 11,969 $ 13,776 $ 338 Gross gains 1,260 954 1 Gross losses (60) - -
4. Total Loans
December 31 (in thousands) 1998 1997 - ------------------------------------------------------------------------ ------------------------- ------------------------- Residential mortgage loans $ 57,555 $ 39,319 Commercial mortgage loans 46,724 45,511 Other commercial loans: Construction 6,062 4,642 Other commercial real estate secured 5,658 5,645 Other commercial, not real estate secured 13,385 7,983 - ------------------------------------------------------------------------ ------------------------- ------------------------- Total other commercial loans 25,105 18,270 Consumer loans: Installment 12,602 11,133 Home equity line loans 17,906 16,569 Other consumer loans 2,007 1,802 - ------------------------------------------------------------------------ ------------------------- ------------------------- Total consumer loans 32,515 29,504 - ------------------------------------------------------------------------ ------------------------- ------------------------- Total regular loans 161,899 132,604 Purchased government guaranteed loans 22,827 24,846 - ------------------------------------------------------------------------ ------------------------- ------------------------- Total loans $ 184,726 $ 157,450 - ------------------------------------------------------------------------ ------------------------- ------------------------- Net deferred costs included in total loans $ 489 $ 401
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, 1998 and 1997 residential mortgage loans held for sale totaled $5,354,000 and $102,000, respectively.
December 31 (in thousands) 1998 1997 - ------------------------------------------------------------------------ ------------------------- ------------------------- Total nonaccruing loans $ 574 $ 2,133 Accruing loans past due 90 days or more - 86 Impaired loans: Impaired loans - valuation allowance required 420 1,607 Impaired loans - no valuation allowance required 252 1,576 - ------------------------------------------------------------------------ ------------------------- ------------------------- Total Impaired Loans $ 672 $ 3,183 Total valuation allowance on impaired loans 110 340 Commitments to lend additional funds for impaired loans - - Restructured loans, all of which are performing: Loans restructured prior to January 1, 1995 - 502 Commitments to lend additional funds for restructured loans - - Years ended December 31 (in thousands) 1998 1997 1996 - ------------------------------------------------------------------------ ---------------- ----------------- ---------------- Additional interest income that would have been earned on year-end loans if they had been accruing based on originals terms: Nonaccruing loans $ 38 $ 310 $ 198 Loans restructured prior to January 1, 1995 - 17 23 Total income recognized on impaired loans 84 111 311 Average recorded investment in impaired loans 1,928 3,949 5,779
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, 1998, and 1997, loans to related parties totaled $199,000 and $616,000 respectively. During 1998 originations of related party loans totaled $12,000 and payments on related party loans totaled $429,000. Loans serviced for others totaled $7,280,000 and $7,248,000 at December 31, 1998 and 1997, respectively. 5. Allowance For Loan Losses
Years ended December 31 (in thousands) 1998 1997 1996 - ------------------------------------------------------ ----------------------- ----------------------- ---------------------- Balance at beginning of year $ 3,000 $ 2,850 $ 2,340 Charge-offs (401) (768) (567) Recoveries 282 89 99 Provision for loan losses 179 829 978 - ------------------------------------------------------ ----------------------- ----------------------- ---------------------- Balance at end of year $ 3,060 $ 3,000 $ 2,850 - ------------------------------------------------------ ----------------------- ----------------------- ----------------------
6. Premises and Equipment, Net
December 31 (in thousands) 1998 1997 - ------------------------------------------------------------------------ ------------------------- ------------------------- Land $ 1,222 $ 1,195 Buildings 4,375 4,292 Furniture, fixtures, and equipment 3,452 3,089 - ------------------------------------------------------------------------ ------------------------- ------------------------- Total property and equipment 9,049 8,576 Less: accumulated depreciation and amortization (4,773) (4,425) - ------------------------------------------------------------------------ ------------------------- ------------------------- Property and equipment, net $ 4,276 $ 4,151 - ------------------------------------------------------------------------ ------------------------- -------------------------
7. Foreclosed Assets, Net
December 31 (in thousands) 1998 1997 - ------------------------------------------------------------------------ ------------------------- ------------------------- Foreclosed and repossessed assets $ 80 $ 977 Foreclosed asset valuation allowance - (360) - ------------------------------------------------------------------------ ------------------------- ------------------------- Net foreclosed assets $ 80 $ 617 - ------------------------------------------------------------------------ ------------------------- -------------------------
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) 1998 1997 1996 - ------------------------------------------------------ ----------------------- ----------------------- ---------------------- Transactions in the valuation allowance: Balance at beginning of year $ 360 $ 222 $ 341 Write-downs, net (360) - (188) Provision for losses, net - 138 69 - ------------------------------------------------------ ----------------------- ----------------------- ---------------------- Balance at end of year $ - $ 360 $ 222 - ------------------------------------------------------ ----------------------- ----------------------- ---------------------- Gains and losses included in net gain (loss) on assets in the statements of income: Gross gains $ 34 $ 31 $ 270 Gross losses (45) (179) (141) - ------------------------------------------------------ ----------------------- ----------------------- ---------------------- Net gain (loss) $ (11) $ (148) $ 129 - ------------------------------------------------------ ----------------------- ----------------------- ----------------------
8. Other Assets
December 31 (in thousands) 1998 1997 - ------------------------------------------------------------------------ ------------------------- ------------------------- Accrued loan interest receivable $ 1,336 $ 1,190 Other accrued interest and dividends receivable 841 434 Purchased deposit premium, net 105 220 Goodwill, net 139 169 Mortgage servicing rights 44 56 Deferred tax asset, net - 73 Income tax receivable 305 305 All other assets 586 369 - ------------------------------------------------------------------------ ------------------------- ------------------------- Total other assets $ 3,356 $ 2,816 - ------------------------------------------------------------------------ ------------------------- -------------------------
9. Deposits
December 31 (dollars in thousands) 1998 1997 - ------------------------------------------------------ ----------------- ---------------- ----------------- ---------------- Amount Avg. Rate Amount Avg. Rate - ------------------------------------------------------ ----------------- ---------------- ----------------- ---------------- Demand deposits $ 25,328 0.00% $ 21,918 0.00% NOW deposits 25,155 1.82 22,260 1.80 Money market deposits 29,585 4.05 15,447 4.03 Savings deposits 37,238 2.30 34,677 2.30 - ------------------------------------------------------ ----------------- ---------------- ----------------- ---------------- Total non-time deposits 117,306 2.14 94,302 1.93 Time deposits, by remaining period to maturity: Within 1 year 87,488 5.12 78,770 5.26 After 1, but within 2 years 23,556 5.45 31,943 5.88 After 2, but within 3 years 3,875 5.76 10,369 6.02 After 3 years 7,760 5.84 6,349 6.17 - ------------------------------------------------------ ----------------- ---------------- ----------------- ---------------- Total time deposits 122,679 5.25 127,431 5.52 - ------------------------------------------------------ ----------------- ---------------- ----------------- ---------------- Total deposits $ 239,985 3.73 $ 221,733 3.99 - ------------------------------------------------------ ----------------- ---------------- ----------------- ---------------- Time deposits of $100,000 or more $ 16,168 5.15% $ 15,210 5.55%
Interest expense and interest paid on deposits is summarized as follows:
Years ended December 31 (in thousands) 1998 1997 1996 - ------------------------------------------------------ ----------------------- ----------------------- ---------------------- Interest Expense NOW deposits $ 379 $ 361 $ 342 Money market deposits 914 285 143 Savings deposits 809 850 880 Time deposits 6,882 6,991 6,529 - ------------------------------------------------------ ----------------------- ----------------------- ---------------------- Total deposit interest expense $ 8,984 $ 8,487 $7,894 - ------------------------------------------------------ ----------------------- ----------------------- ---------------------- Interest Paid Time deposits of $100,000 or more $ 727 $ 773 $ 915 Total deposit interest paid 9,003 8,470 7,883
10. Borrowings
December 31 (dollars in thousands) 1998 1997 - ------------------------------------------------------ ----------------------------------- ---------------------------------- Due Date Amount Rate Amount Rate - ------------------------------------------------------ ----------------- ---------------- ----------------- ---------------- FHLB advances by remaining period to maturity: Within 1 year $ 110 6.98% $ - -% After 1, but within 2 years 3,500 6.11 239 6.95 After 2, but within 3 years - - 3,500 6.11 After 3 years 20,000 4.90 - - - ------------------------------------------------------ ----------------- ---------------- ----------------- ---------------- Total FHLB advances 23,610 5.09 3,739 6.16 - ------------------------------------------------------ ----------------- ---------------- ----------------- ---------------- Federal funds purchased - - 2,000 6.05 - ------------------------------------------------------ ----------------- ---------------- ----------------- ---------------- Total Borrowings $ 23,610 5.09% $ 5,739 6.12% - ------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
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. FHLB advances maturing after three years at December 31, 1998 were callable at the option of the lender. At December 31, 1998, the Company had a $5,000,000 facility for repurchase agreements, and two lines of credit for unsecured federal funds borrowings for $4,000,000 and $3,000,000. The Company maintains compensating balances of $30,000 related to the $4,000,000 line of credit. The Company paid $286,000, $267,000, and $426,000, in interest on borrowings during the years ended December 31, 1998, 1997, and 1996, respectively. 11. Shareholders' Equity Treasury Stock On July 1, 1998, the Company purchased 200,599 common shares from an institutional shareholder in a privately negotiated transaction totaling $3.1 million. The shares are being held as treasury stock. Net Unrealized Gain (Loss) on Securities
December 31 (dollars in thousands) 1998 1997 - ------------------------------------------------------------------------ ------------------------- ------------------------- Net gain (loss) on securities available for sale $ 1,379 $ 1,430 Net unamortized loss on securities held to maturity (77) (215) Income tax effect (551) (572) - ------------------------------------------------------------------------ ------------------------- ------------------------- Total Net Unrealized Gain (Loss) $ 751 $ 643 - ------------------------------------------------------------------------ ------------------------- -------------------------
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, financial conditions, and the Bank's operating results. The shareholders of the Company will be entitled to dividends only when, and if, declared by the Company's Board of Directors out of funds legally available therefore. The declaration of future dividends will be subject to favorable operating results, financial conditions, tax considerations and other factors. 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. During 1998, the Company declared a three-for-two common stock split effected as a 50.0% stock dividend which was paid on May 26, 1998. All per share information has been retroactively adjusted to reflect this stock dividend. 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, 1998 and 1997. Management believes, as of December 31, 1998, that the Company and Bank meet all capital adequacy requirements to which it is subject. As of December 31, 1998, 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, 1998: Risk-based Total Capital $ 20,127 10.5% $ 15,286 8.0% $ 19,108 10.0% Risk-based Tier I Capital 17,302 9.0 7,643 4.0 11,465 6.0 Tier I Leverage Capital 17,302 6.5 10,646 4.0 13,308 5.0 Tolland Bank, December 31, 1998: Risk-based Total Capital $ 19,812 10.4% $ 15,182 8.0% $ 18,977 10.0% Risk-based Tier I Capital 17,000 9.0 7,591 4.0 11,386 6.0 Tier I Leverage Capital 17,000 6.4 15,978 6.0 15,978 6.0 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 14,790 6.0
Stock Options At December 31, 1998, 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. 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:
Year ended December 31 (in thousands except share data) 1998 1997 - -------------------------------------------------------------------------------------------- Net income As Reported $ 2,558 $ 2,017 Pro forma 2,451 1,822 Basic earnings per share As Reported 1.07 0.85 Pro forma 1.03 0.77 Diluted earnings per share As Reported 1.03 0.82 Pro forma .99 0.74 Assumptions used as of December 31 1998 1997 - -------------------------------------------------------------------------------------------- Expected dividend yield 1.75% 1.15% Expected volatility 28.00% 27.00% Risk free interest rate 4.66% 5.75% 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, 299,993 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, 1998. Total shares reserved for future grants were 177,156 at December 31, 1998. Under the Company's 1988 Stock Option Plan for Non-Employee Directors, 199,995 shares were reserved for issuance. This plan expired on February 15, 1998. At expiration, 99,990 options for which shares had been reserved had been granted. Under the Company's 1986 Stock Option Plan for the benefit of officers and other employees, 199,995 shares were reserved for issuance. As of December 31, 1996, this plan had expired. All 199,995 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 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Weighted-Avg. Weighted-Avg. Weighted-Avg. Exercise Exercise Exercise Shares Price Shares Price Shares Price - --------------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 223,212 $ 6.24 244,969 $ 5.06 244,138 $ 5.07 Granted 45,600 10.59 87,986 8.59 40,823 4.98 Exercised (38,288) 6.09 (109,743) 5.49 (29,993) 4.60 Forfeited (1,299) 9.02 - - (9,999) 6.25 - ------------------------------------------ ------------ -------------- ------------ ------------- ------------ ------------ Outstanding at end of year 229,225 $ 7.12 223,212 $ 6.24 244,969 $ 5.06 - ------------------------------------------ ------------ -------------- ------------ ------------- ------------ ------------ Options exercisable at year-end 219,159 $ 7.07 213,213 $ 6.19 244,969 $ 5.06 - ---------------------------------------------------- -- -------------- ------------ ------------- ------------ ------------ Weighted-average fair value of options granted $ 2.34 $ 2.23 $ 2.52 - ------------------------------------------ ------------ -------------- ------------ ------------- ------------ ------------ Shares reserved for future grants 177,156 - 322,011 - 110,004 -
The following table summarizes information about stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable - ---------------------------- ---------------- --------------------- ------------------- ---------------- ------------------- Range of Number Weighted-Avg. Weighted-Avg. Number Weighted-Avg. Exercise Outstanding Remaining Exercise Outstanding Exercise Prices at 12/31/98 Contractual Life Price at 12/31/98 Price - ---------------------------- ---------------- --------------------- ------------------- ---------------- ------------------- $ 1 to 6 96,389 4.7 years $ 4.17 96,389 $ 4.17 6 to 9 57,986 8.3 7.13 51,320 7.13 9 to 12 74,850 9.5 10.91 71,450 10.95 - ---------------------------- ---------------- --------------------- ------------------- ---------------- ------------------- Total 229,225 7.2 years $ 7.12 219,159 $ 7.07 - ---------------------------- ---------------- --------------------- ------------------- ---------------- -------------------
12. Financial Instruments With Off-Balance Sheet Risk
December 31 ( in thousands) 1998 1997 - ------------------------------------------------------------------------------------------------------ Commitments to extend credit: Commitments to originate new loans $ 21,218 $ 8,204 Unadvanced construction lines of credit 4,873 1,667 Unadvanced home equity credit lines 19,417 15,847 Unadvanced commercial lines of credit 7,987 5,942 Unadvanced reserve credit lines 421 405 Standby letters of credit 733 461 Commitments to purchase Government guaranteed loans - 1,043
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. Derivative Financial Instruments with Off-Balance Sheet Risk The Bank has entered into a $10,000,000 interest rate swap agreement with the Federal Home Loan Bank of Boston (FHLBB) as a hedge against an asset-sensitive gap position. This contract amount, also known as notional amount, expresses the volume of the swap; the amount potentially subject to credit risk is much smaller. Under the swap, the Bank pays the FHLBB a variable rate of interest which averaged 5.59% in 1998, and receives back a fixed rate of interest of 5.59%. The swap agreement will mature January 13, 1999, and had no fair value at December 31, 1998. The swap interest income and expense are recorded as borrowing interest expense. The net interest paid was $8,000 in 1998. 14. Fair Values of Financial Instruments
Years ended December 31 (in thousands) 1998 1997 - ------------------------------------------------------ ----------------- ---------------- ----------------- ---------------- Carrying Fair Carrying Fair Value Value Value Value - ------------------------------------------------------ ----------------- ---------------- ----------------- ---------------- Financial assets: Cash and cash equivalents $ 20,216 $ 20,216 $ 21,417 $ 21,417 Securities available for sale 58,556 58,556 43,729 43,729 Securities held to maturity 15,431 15,519 19,949 20,021 Net loans 181,666 190,640 154,450 155,997 Accrued interest receivable 2,177 2,177 1,624 1,624 Financial liabilities: Deposits with no stated maturity 117,306 117,306 94,302 94,302 Time deposits 122,679 124,502 127,431 128,176 Borrowings 23,610 23,323 5,739 5,750 Accrued interest payable 260 260 96 96 Off balance sheet financial instruments - 289 - 189
15. 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:
Years ended December 31 ( in thousands) 1998 1997 - ------------------------------------------------------------------------ ------------------------- ------------------------- Change in benefit obligation: Projected benefit obligation at beginning of year $ 2,326 $ 1,788 Service cost 117 98 Interest cost 164 151 Liability loss 173 331 Benefits paid (34) (42) - ------------------------------------------------------------------------ ------------------------- ------------------------- Projected benefit obligation at end of year $ 2,746 $ 2,326 - ------------------------------------------------------------------------ ------------------------- ------------------------- Change in plan assets: Assets at beginning of year $ 2,564 $ 2,085 Employer contributions 61 123 Actual return 262 398 Expenses paid (30) - Benefits paid (34) (42) - ------------------------------------------------------------------------ ------------------------- ------------------------- Assets at end of year $ 2,823 $ 2,564 - ------------------------------------------------------------------------ ------------------------- ------------------------- December 31 ( in thousands) 1998 1997 - ------------------------------------------------------------------------ ------------------------- ------------------------- Funded status 77 238 Unrecognized net transition asset being recognized over 15 years (72) (90) Unrecognized net loss 233 59 Unrecognized past service liability (71) (88) - ------------------------------------------------------------------------ ------------------------- ------------------------- Prepaid pension cost 167 119 - ------------------------------------------------------------------------ ------------------------- ------------------------- Weighted average assumptions as of October 1: Discount rate 6.25% 7.25% Expected return on plan assets 9.25% 9.25% Rate of compensation increase 5.00% 5.00%
Components of net periodic pension cost (excluding administrative cost):
Years ended December 31 (in thousands) 1998 1997 1996 - ------------------------------------------------------ ----------------------- ----------------------- ---------------------- Service costs earned during the year $ 117 $ 98 $ 98 Interest cost on projected benefit obligation 164 151 124 Return on plan assets, net (232) (398) (238) Net amortization and deferral (35) 176 39 - ------------------------------------------------------ ----------------------- ----------------------- ---------------------- Net periodic pension expense $ 14 $ 27 $ 23 - ------------------------------------------------------ ----------------------- ----------------------- ----------------------
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 1998, 1997, and 1996. 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. 16. 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) 1998 1997 1996 - ------------------------------------------------------ ----------------------- ----------------------- ---------------------- Current: Federal $ 958 $ 575 $ 246 State 212 131 9 - ------------------------------------------------------ ----------------------- ----------------------- ---------------------- Total current 1,170 706 255 Deferred: Federal 14 57 (9) State 73 51 190 - ------------------------------------------------------ ----------------------- ----------------------- ---------------------- Total deferred 87 108 181 Change in valuation allowance for the gross deferred tax asset 106 (150) (554) - ------------------------------------------------------ ----------------------- ----------------------- ---------------------- Total income tax expense $ 1,363 $ 664 $ (118) - ------------------------------------------------------ ----------------------- ----------------------- ----------------------
The actual income tax expense (benefit) differs from the "expected" income tax expense, (computed by applying the statutory U.S. Federal corporate tax rate of 34%) in 1998, 1997 and 1996 to income before income taxes, as follows:
Years ended December 31 ( in thousands) 1998 1997 1996 - ------------------------------------------------------------ --------------------- --------------------- --------------------- Expected income tax expense (benefit) at statutory rate $ 1,333 $ 912 $ 449 Increase (decrease) in income tax resulting from: Connecticut state tax 188 120 131 Dividend received deduction (278) (237) (132) Change in valuation allowance for deferred tax assets 106 (150) (554) Other, net 14 19 (12) - ------------------------------------------------------------ --------------------- --------------------- --------------------- Total income tax expense (benefit) $ 1,363 $ 664 $ (118) - ------------------------------------------------------------ --------------------- --------------------- ---------------------
The Company made income tax payments of $797,000, $494,000 and $460,000 during the years ended December 31, 1998, 1997, and 1996, 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) 1998 1997 - ------------------------------------------------------------------------ ------------------------- ------------------------- Deferred tax asset: Allowance for loan losses $ 815 $ 706 State NOL carry forward - - Foreclosed assets - 143 Depreciation expense 47 19 Unrealized loss on securities 31 85 Other, net 155 112 - ------------------------------------------------------------------------ ------------------------- ------------------------- Total gross deferred tax asset 1,048 1,065 Less: valuation allowance (136) (85) Gross asset, net of valuation allowance 912 980 Less: deferred tax liability Unrealized gain on securities (551) (572) Loan origination fees (191) - Depreciation expense - - Core deposit amortization (42) (78) Other (227) (257) - ------------------------------------------------------------------------ ------------------------- ------------------------- Total gross deferred tax liability (1,011) (907) - ------------------------------------------------------------------------ ------------------------- ------------------------- Net deferred tax asset (liability) $ (99) $ 73 - ------------------------------------------------------------------------ ------------------------- -------------------------
The valuation allowance increased by $106,000 in 1998, due primarily to Management's assessment of the realizability of deferred state income taxes due to the expected formation of a Passive Investment Corporation. 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, 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, 1998. 17. 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, 1998, total $988,000, due by years ending December 31 as follows: 1999 - $108,000; 2000 - $82,000; 2001 - $82,000; 2002 - $82,000; 2003 - $77,000; and $557,000 thereafter. Total rental expense under these leases and prior leases was $86,000, $70,000, and $77,000, for the years ended December 31, 1998, 1997 and 1996 respectively. In 1995, the Company entered into an employment agreement with its former President. During 1996, the Company charged $272,000, to operations in connection with this agreement; nothing was charged to operations in 1998 and 1997. Included in other liabilities at December 31, 1998, was approximately $32,000 representing total future amounts due under this agreement. 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. Consolidated Supplementary Financial Data (unaudited) Selected Quarterly Financial Data
1998 1997 (in thousands except share data) 4 3 2 1 4 3 2 1 ----------------------------------------------------------------------------------------------------------------------------- Net interest income $ 2,489 $ 2,280 $ 2,172 $ 2,087 $ 2,011 $ 1,980 $ 2,008 $ 1,961 Provision for loan losses 11 10 14 144 312 379 64 74 Non-interest income 502 467 768 682 758 693 250 260 Non-interest expense 1,998 1,769 1,836 1,745 1,663 1,584 1,587 1,577 Income tax expense (benefit) 306 315 464 278 231 187 126 120 ----------------------------------------------------------------------------------------------------------------------------- Net income $ 676 $ 653 $ 626 $ 602 $ 563 $ 523 $ 481 $ 450 ----------------------------------------------------------------------------------------------------------------------------- Per Share Data: Basic earnings per share $ 0.29 $ 0.28 $ 0.25 $ 0.24 $ 0.23 $ 0.22 $ 0.21 $ 0.19 Diluted earnings per share .28 .27 .24 .23 .22 .21 .20 .19 Cash dividends declared .05 .05 .03 .03 .03 .03 .03 .03 Common stock price: High 13.00 15.75 16.67 14.25 12.00 12.17 10.00 8.06 Low 9.00 9.75 14.00 10.92 10.92 8.69 6.87 5.75 Close 11.75 10.13 15.75 14.00 11.00 11.17 9.87 7.13
The increase in interest income in the second half of 1998 included the benefit of lower nonaccruing loans and collections of nonaccrued interest in conjunction with the liquidation of problem loans. Non-interest income decreased in the second half of 1998 due to lowering net securities gains in the second half of the year. The provision for loan losses decreased after the first quarter of 1998 due to the liquidation of problem loans. Higher non-interest expense in the fourth quarter of 1998 included charges related to branch expansion. Income tax expense in the second quarter of 1998 included a charge related to an increase in the valuation allowance on the deferred tax asset related to the anticipated impact on state income taxes due to the planned formation of a Passive Investment Corporation. Volume and Rate Analysis - FTE Basis
1998 versus 1997 Change due to 1997 versus 1996 Change due to - ------------------------------------- ------------- -------------- ------------- -------------- ------------- ---------------- (in thousands) Volume Rate Total Volume Rate Total - ------------------------------------- ------------- -------------- ------------- -------------- ------------- ---------------- Interest income Loans $ 1,520 $ 238 $ 1,758 $ (166) $ (43) $ (209) Securities available for sale (384) 163 (221) 1,145 36 1,181 Securities held to maturity (134) 3 (131) (91) 26 (65) Other earning assets 366 5 371 42 13 55 - ------------------------------------- ------------- -------------- ------------- -------------- ------------- ---------------- Total Change 1,368 409 1,777 930 32 962 - ------------------------------------- ------------- -------------- ------------- -------------- ------------- ---------------- Interest expense Deposits 505 (8) 497 481 112 593 Borrowings 114 (19) 95 (171) 20 (151) - ------------------------------------- ------------- -------------- ------------- -------------- ------------- ---------------- Total Change 619 (27) 592 310 132 442 - ------------------------------------- ------------- -------------- ------------- -------------- ------------- ---------------- Net Change $ 749 $ 436 $ 1,185 $ 620 $ (100) $ 520 - ------------------------------------- ------------- -------------- ------------- -------------- ------------- ----------------
Note: Changes attributable jointly to volume and rate have been allocated proportionately. Construction and Commercial Loans
1 Year 1-5 Over 5 December 31, 1998 (in millions) or Less Years Years Total ----------------------------------------------------- ----------------- ---------------- ----------------- ----------------- Contractual maturity: Construction loans: Residential $ - $ - $ 0.4 $ 0.4 Commercial 2.2 2.1 1.7 6.0 Commercial loans 5.5 4.5 9.1 19.1 ----------------------------------------------------- ----------------- ---------------- ----------------- ----------------- Total $ 7.7 $ 6.6 $ 11.2 $ 25.5 ----------------------------------------------------- ----------------- ---------------- ----------------- ----------------- Interest rate sensitivity: Predetermined rates $ 1.4 $ 2.7 $ 5.6 $ 9.7 Variable rates 6.3 3.9 5.6 15.8 ----------------------------------------------------- ----------------- ---------------- ----------------- ----------------- Total $ 7.7 $ 6.6 $ 11.2 $ 25.5 ----------------------------------------------------- ----------------- ---------------- ----------------- -----------------
Securities Cost and Fair Value
1998 1997 1996 --------------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------- Amortized Fair Amortized Fair Amortized Fair December 31, (in thousands) Cost Value Cost Value Cost Value --------------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------- Available for sale U.S. Government and agency $ 16,694 $ 16,646 $ 18,081 $ 17,891 $ 25,314 $ 24,982 U.S. Agency mortgage-backed 2,312 2,333 5,366 5,391 3,375 3,390 Other debt securities 19,265 19,715 1,312 1,321 1,745 1,734 Marketable equity 17,724 18,681 16,710 18,296 13,989 14,560 FHLBB stock 1,181 1,181 830 830 720 720 --------------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------- Total available for sale $ 57,176 $ 58,556 $ 42,299 $ 43,729 $ 45,143 $ 45,386 --------------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------- Held to maturity U.S. Government and agency $ 1,952 $ 2,017 $ 2,901 $ 2,941 $ 2,876 $ 2,895 U.S. Agency mortgage-backed 12,095 12,089 15,214 15,224 15,757 15,710 Other debt securities 1,384 1,413 1,834 1,856 2,057 2,044 --------------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------- Total held to maturity $ 15,431 $ 15,519 $ 19,949 $ 20,021 $ 20,690 $ 20,649 --------------------------------------------- ------------ ------------ ------------ ------------ ------------ -------------
Table of Market Risk Sensitive Instruments
Expected Maturity Date at December 31, There- Fair Value 1998 (dollars in millions) 1999 2000 2001 2002 2003 after Total 12/31/98 - ----------------------------------------- ---------- --------- ---------- --------- ---------- --------- --------- ----------- Interest Sensitive Assets: Loans: Fixed interest rate Residential mortgages $ 9 $ 2 $ 2 $ 2 $ 2 $ 22 $ 39 $ 41 Average interest rate 6.76% 7.45% 7.45% 7.38% 7.38% 7.49% 7.31% Variable interest rate Residential mortgages 3 2 2 2 2 8 19 20 Average interest rate 8.04% 8.06% 8.06% 8.13% 8.08% 8.00% 8.04% Fixed interest rate Consumer loans 2 1 1 2 2 4 12 13 Average interest rate 8.57% 8.66% 8.66% 7.81% 7.81% 9.39% 8.57% Variable interest rate Consumer loans 7 2 1 1 1 8 20 20 Average interest rate 7.61% 7.64% 7.78% 7.99% 8.80% 7.26% 7.56% Fixed interest rate Commercial loans 18 7 4 4 3 13 49 50 Average interest rate 8.25% 8.19% 8.03% 8.50% 8.61% 7.96% 8.19% Variable interest rate Commercial loans 22 7 5 3 2 7 46 47 Average interest rate 8.69% 8.57% 8.03% 8.00% 8.69% 8.74% 8.57% Fixed interest rate Securities 16 6 4 - 2 19 47 47 Average interest rate 5.74% 6.42% 6.25% - 6.38% 7.61% 6.66% Variable interest rate Securities 3 8 - - 1 15 27 27 Average interest rate 5.87% 5.51% - - 5.00% 6.21% 5.91% - ----------------------------------------- ---------- --------- ---------- --------- ---------- --------- ---------- --------- Total interest sensitive assets $ 80 $ 35 $ 19 $ 14 $ 15 $ 96 $ 259 $ 265 - ----------------------------------------- ---------- --------- ---------- --------- ---------- --------- ---------- --------- Interest Sensitive Liabilities: Deposits: Checking $ 1 $ 1 $ 1 $ 1 $ 1 $ 45 $ 50 $ 50 Average interest rate 0.91% 0.91% 0.91% 0.91% 0.91% 0.91% 0.91% Savings 3 2 1 1 1 29 37 37 Average interest rate 2.30% 2.30% 2.30% 2.30% 2.30% 2.30% 2.30% Money market 1 1 1 1 1 25 30 30 Average interest rate 4.05% 4.05% 4.05% 4.05% 4.05% 4.05% 4.05% Time deposits 87 24 4 4 4 - 123 125 Average interest rate 5.13% 5.46% 5.76% 6.15% 5.50% - 5.25% Borrowings: FHLBB - 4 10 - 5 5 24 23 Average interest rate - 6.11% 4.66% - 4.89% 5.39% 5.09% - ------------------------------------------- -------- --------- ---------- --------- ---------- --------- ---------- --------- Total interest sensitive liabilities $ 92 $ 32 $ 17 $ 7 $ 12 $ 104 $ 264 $ 265 - ------------------------------------------- -------- --------- ---------- --------- ---------- --------- ---------- ---------
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, 1998. 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 1998. 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 $289 thousand which are sensitive to changes in interest rates and have an expected maturity date within 1999. 18. 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 year ended December 31, 1998 and the quarter ended December 31, 1997.
Balance Sheet December 31 (in thousands except share data) 1998 1997 - ---------------------------------------------------------------------- ------------------------- ----------------------------- Assets Cash and cash equivalents $ 108 $ 65 Investment in subsidiary 17,999 18,601 Other assets 180 150 - ---------------------------------------------------------------------- ------------------------- ----------------------------- - ---------------------------------------------------------------------- ------------------------- ----------------------------- Total assets $ 18,287 $ 18,816 - ---------------------------------------------------------------------- ------------------------- ----------------------------- Liabilities and Shareholders' Equity Liabilities: Accrued expenses 91 13 - ---------------------------------------------------------------------- ------------------------- ----------------------------- Total liabilities 91 13 Total shareholders' equity 18,196 18,803 - ---------------------------------------------------------------------- ------------------------- ----------------------------- Total liabilities and shareholders' equity $ 18,287 $ 18,816 - ---------------------------------------------------------------------- ------------------------- ----------------------------- Income Statement Year ended (1998) and quarter ended (1997) December 31 (in thousands except share data) 1998 1997 - ---------------------------------------------------------------------- ------------------------- ----------------------------- Dividends from bank subsidiary $ 3,489 $ 258 - ---------------------------------------------------------------------- ------------------------- ----------------------------- Total operating income 3,489 258 - ---------------------------------------------------------------------- ------------------------- ----------------------------- Non-interest expenses 379 44 Income before income tax benefit and equity in net income of subsidiary 3,110 214 - ---------------------------------------------------------------------- ------------------------- ----------------------------- Income tax benefit 157 22 - ---------------------------------------------------------------------- ------------------------- ----------------------------- Income before equity in net income of subsidiary 3,267 236 Equity in undistributed income of subsidiary (709) 329 - ---------------------------------------------------------------------- ------------------------- ----------------------------- Net Income $ 2,558 $ 565 - ---------------------------------------------------------------------- ------------------------- -----------------------------
Statement of Cash Flows Year ended (1998) and quarter ended (1997) December 31 (in thousands) 1998 1997 - ---------------------------------------------------------------------- ------------------------- ----------------------------- Operating Activities: Net income $ 2,558 $ 563 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiary 709 (329) (Increase) in other assets (30) (148) Increase in other liabilities 79 13 - ---------------------------------------------------------------------- ------------------------- ----------------------------- Net cash provided by operating activities 3,316 99 Investing Activities: Net cash used by investing activities - - Financing Activities: Stock options exercised 233 55 Dividends paid to stockholders (397) (89) Purchase of treasury stock (3,109) - ---------------------------------------------------------------------- ------------------------- ----------------------------- Net cash used by financing activities (3,273) (34) - ---------------------------------------------------------------------- ------------------------- ----------------------------- Net Change in Cash and Cash Equivalents 43 65 - ---------------------------------------------------------------------- ------------------------- ----------------------------- Cash and cash equivalents beginning of period 65 - - ---------------------------------------------------------------------- ------------------------- ----------------------------- Cash and cash equivalents end of period $ 108 $ 65 - ---------------------------------------------------------------------- ------------------------- -----------------------------
EX-27 5 FDS --
9 0001046002 Alliance Bancorp of New England, Inc. 1000 U.S. DOLLARS YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 1 6760 6 13450 0 58556 15431 15519 184726 3060 283581 239985 0 1790 23610 25 0 0 18171 283581 13896 3844 631 18371 8984 9343 9028 179 1204 4928 3921 3921 0 0 2558 0 1.03 4.02 574 0 0 1200 3000 401 282 3060 3060 0 960
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