<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1995 or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
------------ ------------
Commission File Number 0-16358
-----------------
ANDOVER BANCORP, INC.
--------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 04-2952665
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
61 Main Street, Andover, Massachusetts 01810
-------------------------------------- -------------------
Address of principal executive office) Zip Code
(508) 749-2000
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of each of the registrant's classes of
Common Stock, as of the latest practicable date is:
Class: Common Stock, par value $0.10 per share
Outstanding as of August 7, 1995: 4,220,971 shares
<PAGE> 2
<TABLE>
ANDOVER BANCORP, INC.
AND SUBSIDIARIES
----------------
Index
PART I - FINANCIAL INFORMATION
<CAPTION>
ITEM 1 Financial Statements Page
<S> <C> <C>
Consolidated Balance Sheets 1
Consolidated Statements of Operations 2
Consolidated Statements of Changes in
Stockholders' Equity 3
Consolidated Statements of Cash Flows 4
Note to Consolidated Financial
Statements 5
Analysis of Net Yield on Earning Assets 6
ITEM 2 Management's Discussion and Analysis of 7-18
Results of Operations and Financial Condition
For the Quarter Ended June 30, 1995
For the Six Months Ended June 30, 1995
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings 19
ITEM 2 Changes in Securities 19
ITEM 3 Defaults upon Senior Securities 19
ITEM 4 Submission of Matters to a Vote of Security Holders 19
ITEM 5 Other Information 19
ITEM 6 Exhibits and Reports on Form 8-K 19
Signatures 20
</TABLE>
<PAGE> 3
<TABLE>
ANDOVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
JUNE 30, 1995 DECEMBER 31, 1994
------------- -----------------
(In thousands)
ASSETS
<S> <C> <C>
Cash and due from banks $ 21,645 $ 18,182
Short-term investments 20,000 5,200
---------- ----------
Cash and cash equivalents 41,645 23,382
---------- ----------
Assets held for sale, at market 1,569 2,507
Investment trading accounts, at market 10,000 ---
Investments available for sale (Amortized
cost of $110,548 in 1995 and $130,011
in 1994) 109,449 123,449
Investment securities (Market value
$43,967 in 1995 and $39,504 in 1994) 43,515 40,608
Mortgage-backed securities (Market value
$177,321 in 1995 and $171,884 in 1994) 177,667 183,428
Loans 664,822 645,037
Allowance for loan losses (11,714) (12,343)
---------- ----------
Net loans 653,108 632,694
---------- ----------
Other real estate owned, net 6,055 8,796
Premises and equipment, net 9,587 9,814
Accrued interest receivable 7,035 6,947
Stock in FHLBB, at cost 12,584 12,368
Deferred income taxes receivable 2,899 6,302
Current income taxes receivable 229 ---
Mortgage servicing rights 5,245 3,752
Other assets 3,663 4,625
---------- ----------
Total assets $1,084,250 $1,058,672
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 747,488 $ 727,858
Securities sold under agreements
to repurchase 15,704 4,000
Federal Home Loan Bank advances 234,272 247,185
Mortgagors' escrow accounts 2,320 2,243
Income taxes payable --- 480
Accrued expenses and other liabilities 4,462 4,384
---------- ----------
Total liabilities 1,004,246 986,150
---------- ----------
Stockholders' equity
Serial preferred stock, $0.10 par value;
3,000,000 shares authorized, none issued --- ---
Common stock, $0.10 par value;
15,000,000 shares authorized;
Shares issued 5,136,768 in 1995
and 5,126,088 in 1994, respectively 514 513
Additional paid-in capital 71,310 71,172
Retained earnings 22,077 18,701
Treasury stock, at cost (917,997 shares) (13,247) (13,247)
Unrealized losses on investments
available for sale, net (650) (4,617)
---------- ----------
Total stockholders' equity 80,004 72,522
---------- ----------
Total liabilities and stockholders' equity $1,084,250 $1,058,672
========== ==========
</TABLE>
The accompanying note is an integral part of the consolidated financial
statements.
- 1 -
<PAGE> 4
<TABLE>
ANDOVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Unaudited)
<CAPTION>
Quarters Ended Year-to-Date
June 30, June 30,
1995 1994 1995 1994
-------------- ---------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Interest and dividend income:
Loans $13,129 $10,315 $25,839 $18,532
Mortgage-backed securities 3,935 3,950 7,997 7,343
Investment securities 1,479 1,368 3,019 2,548
Dividends on equity securities 289 204 523 390
Short-term investments 148 39 250 87
------- ------- ------- -------
Total interest and dividend income 18,980 15,876 37,628 28,900
------- ------- ------- -------
Interest expense:
Deposits 7,289 5,059 14,046 8,906
Federal Home Loan Bank advances 3,457 2,526 7,183 4,921
Securities sold under agreements to repurchase 172 310 310 538
------- ------- ------- -------
Total interest expense 10,918 7,895 21,539 14,365
------- ------- ------- -------
Net interest and dividend income 8,062 7,981 16,089 14,535
Provision for loan losses 175 --- 325 ---
------- ------- ------- -------
Net interest and dividend income
after provision for loan losses 7,887 7,981 15,764 14,535
------- ------- ------- -------
Non-interest income (loss):
Net gains (losses) from sales and
writedowns of assets held for sale 15 63 88 (372)
Net gains (losses) from sales and redemptions of
investments available for sale ------- (11) 73 143
Losses on real estate operations, net (454) (633) (1,036) (1,321)
Other income 1,327 1,068 2,660 1,763
------- ------- ------- -------
Total non-interest income 888 487 1,785 213
------- ------- ------- -------
Non-interest expense:
Salaries and employee benefits 2,435 2,449 4,815 4,381
Office occupancy and equipment 599 618 1,163 1,075
Deposit insurance premiums 426 449 852 808
Data processing 279 247 597 469
Marketing 214 174 392 343
Professional fees 182 152 330 377
Merger expense 1,000 --- 1,000 ---
Other operating expense 878 646 1,531 1,174
------- ------- ------- -------
Total non-interest expense 6,013 4,735 10,681 8,627
------- ------- ------- -------
Income before income tax expense 2,762 3,733 6,868 6,121
Income tax expense 1,055 1,275 2,650 2,111
------- ------- ------- -------
Net income $ 1,707 $ 2,458 $ 4,218 $ 4,010
======= ======= ======= =======
Average number of common shares outstanding 4,215 4,201 4,212 4,181
Net income per share $0.40 $0.59 $1.00 $0.96
</TABLE>
The accompanying note is an integral part of the consolidated financial
statements.
- 2 -
<PAGE> 5
<TABLE>
ANDOVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Year Ended December 31, 1994 and Six Months Ended June 30, 1995
(Unaudited)
<CAPTION>
UNREALIZED
GAINS (LOSSES) TOTAL
ADDITIONAL ON INVESTMENTS STOCK-
COMMON PAID-IN RETAINED TREASURY AVAILABLE HOLDERS'
STOCK CAPITAL EARNINGS STOCK FOR SALE(1) EQUITY
------- --------- -------- ------- ----------- ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $507 $70,370 $11,335 $(13,247) $ 1,920 $70,885
Net income --- --- 9,043 --- --- 9,043
Dividends declared and
paid ($0.40 per share) --- --- (1,677) --- --- (1,677)
Stock options exercised 6 802 --- --- --- 808
Change in unrealized
gains (losses) on
investments available
for sale --- --- --- --- (6,537) (6,537)
---- ------- ------- -------- ------- -------
Balance at December 31, 1994 $513 $71,172 $18,701 $(13,247) $(4,617) $72,522
Net income --- --- 4,218 --- --- 4,218
Dividends declared and
paid ($0.20 per share) --- --- (842) --- --- (842)
Stock options exercised 1 138 --- --- --- 139
Change in unrealized
gains (losses) on
investments available
for sale --- --- --- --- 3,967 3,967
---- ------- ------- -------- ------- -------
Balance at June 30, 1955 $514 $71,310 $22,077 $(13,247) $ (650) $80,004
==== ======= ======= ======== ======= =======
<FN>
_______________________________________________
(1) Net of related tax effect.
</TABLE>
The accompanying note is an integral part of the consolidated financial
statements.
- 3 -
<PAGE> 6
<TABLE>
ANDOVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
<CAPTION>
YEAR-TO-DATE
JUNE 30,
-------------------
1995 1994
---- ----
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,218 $ 4,010
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 325 ---
Net (gains) losses on sales and provisions for
other real estate owned (31) 51
Net gains from sales and redemptions of
investments available for sale (73) (143)
Net (gains) losses from sales and writedowns of
assets held for sale (88) 372
Depreciation and amortization 561 400
Amortization of fees, discounts and premiums, net 327 557
(Increase) decrease in:
Assets held for sale 1,026 28,022
Investment trading acounts (10,000) ---
Accrued interest receivable (88) (1,264)
Income taxes receivable 1,678 (505)
Mortgage servicing rights (1,493) 188
Other assets 962 (129)
Increase (decrease) in:
Mortgagors' escrow accounts 77 655
Accrued income taxes payable (480) 849
Accrued expenses and other liabilities 78 (227)
------- --------
Net cash provided (used) by operating activities (3,001) 32,836
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash of acquired institution --- 5,372
Purchases of investments available for sale --- (9,103)
Purchases of investment securities and FHLB stock (4,166) (8,410)
Purchases of mortgage-backed securities (2,961) (71,176)
Proceeds from sales of investments available for sale 13,478 16,196
Proceeds from maturities and redemptions of investments
available for sale 2,072 2,128
Proceeds from maturities and redemptions
of investment securities 1,020 1,052
Principal repayments of investments available for sale 3,824 9,238
Principal repayments of mortgage-backed securities 8,582 30,630
Net increase in loans (22,451) (53,936)
Capital expenditures on premises and equipment, net (334) (1,027)
Proceeds from disposition of other real estate owned 4,717 4,065
Capital expenditures on other real estate owned (235) (358)
-------- --------
Net cash provided (used) by investing activities 3,546 (75,329)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 19,630 7,409
Net increase in securities sold
under agreements to repurchase 11,704 8,556
Proceeds from issuance of FHLB advances 99,623 159,150
Principal repayments of FHLB advances (112,536) (128,050)
Dividends paid (842) (836)
Stock options exercised 139 720
-------- --------
Net cash provided by financing activities 17,718 46,949
-------- --------
Net increase in cash and cash equivalents 18,263 4,456
Cash and cash equivalents, at beginning of period 23,382 17,136
-------- --------
Cash and cash equivalents, at end of period $ 41,645 $ 21,592
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 21,549 $14,331
Income taxes 1,434 1,765
Supplemental noncash investing and financing activities:
Conversion of real estate loans to mortgage-backed
securities held for sale 6,129 53,112
Transfer of loans to other real estate owned 1,710 2,176
</TABLE>
The accompanying note is an integral part of the consolidated financial
statements.
- 4 -
<PAGE> 7
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------
1) BASIS OF PRESENTATION
The unaudited consolidated financial statements of Andover Bancorp,
Inc. ("Andover" or the "Company") and its subsidiaries, including its
principal subsidiary, Andover Bank (the "Bank"), presented herein,
should be read in conjunction with the consolidated financial
statements of the Company as of and for the year ended December 31, 1994.
In the opinion of management, the unaudited consolidated financial
statements presented herein reflect all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation.
Interim results are not necessarily indicative of results to be expected
for the entire year.
- 5 -
<PAGE> 8
<TABLE>
ANDOVER BANCORP, INC. AND SUBSIDIARIES
ANALYSIS OF NET YIELD ON EARNING ASSETS
(Unaudited)
<CAPTION>
Quarters Ended June 30, Year-to-Date June 30,
------------------------ --------------------------
1995 1994 1995
--------------------------- ---------------------------- --------------------------
Interest Average Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate(3) Balance Paid Rate(3) Balance Paid Rate(3)
------- -------- ------- ------- -------- -------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Short-term investments $ 10,506 $ 148 5.65% $ 4,744 $ 39 3.30% $ 8,798 $ 250 5.73%
Investment securities (1) 110,558 1,768 6.41 102,887 1,572 6.13 112,389 3,542 6.36
Mortgage-backed securities (1) 235,397 3,935 6.70 242,309 3,950 6.54 239,380 7,997 6.74
---------- ------- -------- ------- ---------- -------
Total investments 356,461 5,851 6.58 349,940 5,561 6.37 360,567 11,789 6.59
---------- ------- -------- ------- ---------- -------
Real estate loans (1) (2) 590,085 11,564 7.86 516,118 9,113 7.08 586,975 22,645 7.78
Consumer loans (2) 48,625 1,106 9.12 48,692 954 7.86 50,708 2,277 9.06
Commercial loans (2) 17,469 459 10.54 12,716 248 7.82 16,443 917 11.25
---------- ------- -------- ------- ---------- -------
Total loans 656,179 13,129 8.03 577,526 10,315 7.16 654,126 25,839 7.97
---------- ------- -------- ------- ---------- -------
Total interest-earning assets 1,012,640 18,980 7.52% 927,466 15,876 6.87% 1,014,693 37,628 7.48%
------- ------- -------
Allowance for loan losses (11,803) (15,531) (11,995)
Other real estate owned 7,616 12,689 7,988
Other assets 43,927 41,584 44,169
---------- -------- ----------
Total assets $1,052,380 $966,208 $1,054,855
========== ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts $ 62,238 $ 183 1.18% $ 62,461 $ 182 1.17% $ 61,595 $ 362 1.19%
Regular savings accounts 72,654 397 2.19 83,261 401 1.93 73,492 784 2.15
Money market deposit accounts 134,432 875 2.61 158,875 881 2.22 136,901 1,733 2.55
Certificates of deposit 419,936 5,834 5.57 321,167 3,595 4.49 413,934 11,167 5.44
---------- ------- -------- ------- ---------- -------
Total interest-bearing deposits 689,260 7,289 4.24 625,764 5,059 3.24 685,922 14,046 4.13
---------- ------- -------- ------- ---------- -------
Borrowed funds:
Reverse repurchase agreements 10,915 172 6.32 29,419 310 4.23 9,947 310 6.28
Notes payable 221,953 3,457 6.25 189,801 2,526 5.34 231,954 7,183 6.24
---------- ------- -------- ------- ---------- -------
Total borrowed funds 232,868 3,629 6.25 219,220 2,836 5.19 241,901 7,493 6.25
---------- ------- -------- ------- ---------- -------
Total interest-bearing liabilities 922,128 10,918 4.75% 844,984 7,895 3.75% 927,823 21,539 4.68%
------- ------- -------
Demand deposits 44,410 44,050 41,875
Other liabilities 5,114 5,304 5,394
---------- -------- ----------
Total liabilities 971,652 894,338 975,092
Stockholders' equity 80,728 71,870 79,763
---------- -------- ----------
Total liabilities and stock-
holders' equity $1,052,380 $966,208 $1,054,855
========== ======== ==========
Net interest income $ 8,062 $ 7,981 $16,089
======= ======= =======
Interest rate spread 2.77% 3.12% 2.80%
==== ==== ====
Net yield on earning assets 3.12% 3.45% 3.20%
==== ==== ====
<CAPTION>
Year-to-Date June 30,
--------------------------
1994
--------------------------
Interest Average
Average Earned/ Yield/
Balance Paid Rate(3)
------- ------- -------
<S> <C> <C> <C>
ASSETS
Interest-earning assets:
Short-term investments $ 5,180 $ 87 3.39%
Investment securities (1) 93,583 2,938 6.33
Mortgage-backed securities (1) 229,231 7,343 6.46
-------- -------
Total investments 327,994 10,368 6.37
-------- -------
Real estate loans (1) (2) 472,767 16,281 6.94
Consumer loans (2) 47,513 1,780 7.55
Commercial loans (2) 12,881 471 7.37
-------- -------
Total loans 533,161 18,532 7.01
-------- -------
Total interest-earning assets 861,155 28,900 6.77%
-------
Allowance for loan losses (14,423)
Other real estate owned 12,910
Other assets 40,864
--------
Total assets $900,506
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts $ 60,722 $ 353 1.17%
Regular savings accounts 72,950 708 1.96
Money market deposit accounts 149,268 1,610 2.18
Certificates of deposit 283,331 6,235 4.44
-------- -------
Total interest-bearing deposits 566,271 8,906 3.17
-------- -------
Borrowed funds:
Reverse repurchase agreements 28,553 538 3.80
Notes payable 184,794 4,921 5.37
-------- -------
Total borrowed funds 213,347 5,459 5.16
-------- -------
Total interest-bearing liabilities 779,618 14,365 3.72%
-------
Demand deposits 44,923
Other liabilities 5,266
--------
Total liabilities 829,807
Stockholders' equity 70,699
--------
Total liabilities and stock-
holders' equity $900,506
========
Net interest income $14,535
=======
Interest rate spread 3.05%
====
Net yield on earning assets 3.40%
====
<FN>
(1) Included in the average balance amounts are the corresponding components of the assets held for sale, available for sale and
held to maturity. The yield is calculated using interest income divided by the average balance of the amortized historical
cost.
(2) Interest on nonaccruing loans has been included only to the extent reflected in the statement of operations. However, the
loan balances are included in the average amounts outstanding.
(3) Average yield/rate calculation based on an annualized basis reflecting 91 days in the second quarter and 181 days in the
year-to-date period.
</TABLE>
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<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE QUARTER ENDED JUNE 30, 1995
-----------------------------------
RESULTS OF OPERATIONS
---------------------
GENERAL. Net income amounted to $1.7 million, $0.40 per share, for the quarter
ended June 30, 1995, compared to net income of $2.5 million, $0.59 per share,
in the corresponding quarter of 1994.
The financial performance in the second quarter of 1995 was negatively impacted
by the $1.0 million pre-tax charge related to the terminated merger with Finest
Financial Corp ("Finest"). Additionally, continued interest rate compression
reduced the net interest margin to 3.12% for the second quarter of 1995 as
compared to 3.45% in 1994. Consequently, Andover's annualized return on
average assets decreased to 0.65% for the second quarter of 1995 compared to
1.02% in the second quarter of 1994. The annualized return on average
stockholders' equity decreased to 8.48% in the second quarter of 1995 from
13.72% in the second quarter of 1994.
Progress continues to be made in the area of reducing non-performing assets and
related costs and the provision for other real estate owned losses. While the
regional economy remains uncertain and weak, the rate of decline in commercial
real estate values has shown signs of slowing. Residential real estate values
appear to have stabilized in most markets and, in isolated areas, have
increased slightly in value. While continued progress has been made in
reducing non-performing assets, the overall high levels of non-performing
assets continue to result in high levels of foregone income and other operating
costs associated with holding and disposing of such assets.
NET INTEREST AND DIVIDEND INCOME. Net interest and dividend income was $8.1
million for the second quarter of 1995 as compared to $8.0 million for the same
period in 1994. This increase resulted from a rise in interest-earning assets,
partially offset by a compression in the interest rate spread. Foregone
income, which represents the amount of interest income earned but excluded from
earnings on non-performing loans, amounted to $241,000 in the second quarter of
1995, versus $230,000 in the comparable quarter of 1994. As interest rates
began to rise in 1994, the higher rates paid on deposits fueled internal growth
in total assets of 9% from the second quarter of 1994 to 1995. The increasing
yields earned on new loan originations, when combined with repricing loans and
investments, offset by foregone interest income, resulted in a 65 basis point
increase in the yield on earning assets in the second quarter of 1995 compared
to the corresponding quarter of 1994. During the same period, there was a 100
basis point increase in the average rate paid on interest-bearing liabilities.
This combination resulted in a reduced spread on earning assets of 2.77% for
the second quarter of 1995 versus 3.12% in the comparable quarter of 1994.
PROVISION FOR LOAN LOSSES. The allowance for loan losses is established
through a provision for loan losses charged to the statement of operations.
Assessing the adequacy of the allowance for loan losses involves substantial
uncertainties and is based upon management's estimation of the amount required
to meet reasonably foreseeable loan losses in light of several factors. Among
the factors management considers are the quality of specific loans, risk
characteristics of the loan portfolio generally, the level of nonaccruing loans
in the various categories, current economic conditions, trends in
delinquencies, the actual charge-off experience, and collateral values of the
underlying security. Because the allowance for loan losses is based on various
estimates, and includes a high degree of judgement, subsequent changes in the
general economic prospects of the borrowers may require changes in those
estimates. In addition, regulatory agencies, as an integral part of the
examination process, review the Bank's allowance and may require the Bank to
provide additions to the allowance based on their assessment, which may differ
from management's assessment.
The provision for loan losses for the second quarter of 1995 was $175,000
versus $0 in the comparable period in 1994. There are several contributing
factors that led to management's conclusion that a provision for loan losses
was necessary in the second quarter of 1995. A significant factor was the
level of charge-offs in the second quarter of 1995 which totalled $559,000 as
compared to $617,000 in the corresponding quarter last year. Other factors
relevant to assessing the
- 7 -
<PAGE> 10
allowance for loan losses were the overall risk characteristics of the loan
portfolio and the level of delinquent loans. The resulting reserve coverage
as a percentage of nonaccruing loans totalled 88.9% at June 30, 1995. This was
a slight increase from the respective reserve coverage at the 1994 year-end.
Additionally, $105,000 in interest payments applied as principal reductions on
nonaccrual loans instead of being recorded as interest income and $143,000 in
loan loss recoveries received during the second quarter of 1995 further
contributed to management's assessment of the adequacy of the allowance for
loan losses.
NON-INTEREST INCOME (LOSS). Net gains from sales and redemptions of loans,
investments and mortgage-backed securities held for sale and available for sale
totalled $15,000 in the second quarter of 1995, as compared to net gains of
$52,000 in the second quarter of 1994.
Losses of $454,000 on real estate operations were recognized in the second
quarter of 1995 as compared to $633,000 in the second quarter of 1994. A
significant portion of the losses on real estate operations during the second
quarters of both 1995 and 1994 were provisions for other real estate owned
totalling $210,000 and $450,000, respectively. Operating costs associated with
acquiring, maintaining and disposing of other real estate owned added another
$594,000 to the losses on real estate operations during the second quarter of
1995, as compared to $854,000 in the second quarter of 1994. In the second
quarter of both 1995 and 1994, sales of other real estate owned totalled $3.1
million.
Other income totalled $1.3 million in 1995's second quarter versus $1.1 million
in 1994's comparable quarter, an increase of 24.3%. The majority of the
increase was due to reduced amortization of the deferred loan premium based on
slower prepayments. Net servicing income totalled $584,000 in the second
quarter of 1995 as compared to $384,000 in the corresponding quarter of 1994.
During the second quarter of 1995, mortgage servicing rights to $103.7 million
in residential first mortgage loans were purchased. The balance of purchased
mortgage loans at June 30, 1995 was approximately $237.7 million. Total loans
serviced for investors totalled $662.3 million and $443.7 million,
respectively, at June 30, 1995 and 1994. Additionally, there was an increase
in service charge income due to a higher deposit base.
NON-INTEREST EXPENSE. Non-interest expenses increased by $1.3 million, or
27.0%, to $6.0 million in the second quarter of 1995 from the second quarter of
1994, primarily due to the pre-tax charge for the terminated merger with
Finest. Salaries and employee benefits, the largest component of non-interest
expense, remained flat at $2.4 million for the second quarter of 1994 and 1995.
Office occupancy expenses decreased from $618,000 in the second quarter of 1994
to $599,000 for the corresponding period of 1995. This decrease reflects the
costs associated with the early lease termination of a branch location in the
second quarter of 1994 offset by the effects of increased investments in
technology and systems and the related costs for depreciation. Deposit
insurance expense decreased $23,000 or 5.1% from the second quarter of 1994 as
a result of the cost savings associated with the premium paid on the insured
deposit balances of the former Community Savings Bank as a result of the
acquisition. Data processing expenses have increased 13.0% from $247,000 for
the quarter ended June 30, 1994 to $279,000 for the second quarter of 1995 due
to an increase in the number of loans and deposits. Professional fees
increased 19.7% from $152,000 in the second quarter of 1994 to $182,000 in the
corresponding period of 1995 as a result of increased consulting and corporate
legal fees. Marketing expenses increased modestly over the comparable period
of last year.
INCOME TAX EXPENSE. As a result of continued earnings of the Company, it is
more likely than not that the Company will realize a greater portion of its
deferred tax asset than has previously been recognized. This has resulted in a
decrease in the valuation allowance on these items of $150,000 for the second
quarter of 1995. Offsetting this income tax benefit, the Company recorded an
income tax expense of $1.2 million on its financial statement earnings.
- 8 -
<PAGE> 11
FINANCIAL CONDITION
-------------------
Total assets increased to $1,084.3 million at June 30, 1995, for a rise of
$25.6 million from $1,058.7 million at December 31, 1994. The rise is
attributable primarily to a $20.0 million increase in total loans and a $7.9
million increase in the investment portfolio. Corresponding with the increase
in total assets was an increase of $19.6 million in total deposits.
<TABLE>
LOANS. The following table shows the composition of the Bank's loan portfolio
at the dates indicated. The balances shown in the table are net of unadvanced
funds and deferred loan origination fees and costs.
<CAPTION>
6/30/95 12/31/94
------- --------
(In thousands)
<S> <C> <C>
Real estate loans:
Residential $470,426 $452,708
Commercial 110,624 108,725
Construction and land 16,955 18,021
-------- --------
Total real estate loans 598,005 579,454
-------- --------
Consumer 49,552 52,164
Commercial 17,265 13,419
-------- --------
Total loans $664,822 $645,037
======== ========
</TABLE>
Residential real estate loans increased $17.7 million from December 31, 1994 to
$470.4 million at June 30, 1995. Loans held for sale decreased from $2.5
million at December 31, 1994, to $1.6 million at June 30, 1995. Residential
loans closed during the first six months of 1995 totalled $40.3 million as
compared to $111.3 million during the corresponding period of 1994. The loan
volume in the first half of 1994 was impacted by the favorable interest rate
environment in 1993 which resulted in high levels of mortgage refinances.
During 1994, interest rates began to increase which significantly curtailed
mortgage refinancing volume. Interest rates peaked in January, 1995, affecting
both the mortgage refinance and home purchase markets. Since that time, rates
have come down slightly. Consumer loans decreased during 1995 as a result of
the sale of the $5.5 million student loan portfolio in the first quarter.
Commercial real estate loans increased slightly to $110.6 million at June 30,
1995 from $108.7 million at December 31, 1994, due to a modest increase in
commercial originations. Outstanding commercial loans increased $3.8 million
from December 31, 1994, to $17.3 million at June 30, 1995. Originations of
commercial real estate, construction and land loans, and commercial loans
continue to be impacted by low credit-worthy loan demand and totalled $29.0
million in the first six months of 1995 as compared to $26.2 million in the
first six months of 1994.
RISK ELEMENTS. Management places loans on nonaccrual status when interest is
past due 90 days or more, regardless of collateral values. All previously
accrued but uncollected interest is reversed against current period interest
income when a loan is placed on nonaccrual status. Loans for which payments
are less than 90 days past due are placed on nonaccrual status when concern
exists regarding the ultimate collectibility of the loan.
Significant progress over the past several years has been made in reducing
total non-performing assets. However, Andover continues to experience a high
level of non-performing assets and corresponding high levels of foregone
income, provisions for loan and other real estate owned losses, loan
charge-offs and other costs associated with non-performing assets. Interest
income of approximately $898,000 would have been recorded in the first six
months of 1995 on nonaccruing loans if those loans had been on a current basis
in accordance with their original terms. Interest income actually recognized
thus far in 1995 on nonaccruing loans amounted to approximately $143,000.
Additionally, another $228,000 in interest payments, which the Bank applied as
a reduction of the loan balance instead of recording as interest income, were
received on nonaccruing loans during the first six months of 1995.
- 9 -
<PAGE> 12
<TABLE>
The following table shows the composition of non-performing assets at June 30,
1995 and December 31, 1994:
<CAPTION>
6/30/95 12/31/94
------- --------
(Dollars in thousands)
<S> <C> <C>
Nonaccruing loans $13,179 $14,516
Restructured loans 2,586 2,036
------- -------
Total non-performing loans 15,765 16,552
Other real estate owned 6,055 8,796
------- -------
Total non-performing assets $21,820 $25,348
======= =======
Total non-performing assets as a
percentage of total assets 2.0% 2.4%
</TABLE>
Total non-performing assets decreased $3.5 million in the first six months of
1995, primarily due to the sale of other real estate owned. During the first
six months of 1995, $1.7 million of loans were written down to their net fair
value and reclassified out of loans and into other real estate owned.
<TABLE>
The following table shows detailed activity by quarter of nonaccruing loans and
other real estate owned for the quarters listed below:
<CAPTION>
6/30/95 3/31/95 6/30/94 3/31/94
------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C>
Beginning balance $21,747 $23,312 $24,978 $24,651
Additions 2,276 2,254 3,124 2,749
Additions from acquired
institution --- --- 5,147 ---
Sales, restructurings, payments
and other decreases (4,164) (2,949) (3,303) (1,799)
Charge-offs and valuation
adjustments (625) (870) (2,011) (623)
------- ------- ------- -------
Balance at end of quarter $19,234 $21,747 $27,935 $24,978
======= ======= ======= =======
</TABLE>
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan" ("SFAS 114"), and Statement of Financial Accounting Standards No. 118,
"Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosure" ("SFAS 118"). These Statements require changes in both the
disclosure and impairment measurement of non-performing loans. A loan is
considered impaired when it is probable that the Company will not be able to
collect all amounts due according to the contractual terms of the loan
agreement. 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 in the case of collateralized loans, the
difference between the fair 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. These Statements also require impairment of
troubled debt restructures to be measured using the premodification rate of
interest.
At June 30, 1995, total impaired loans were $12.1 million, of which $3.2
million had related allowances of $.6 million and $8.9 million which did not
require a related allowance. During the six months ended June 30, 1995, the
average recorded value of impaired loans was $12.4 million and the related
amount of interest income recognized was $197,000.
- 10 -
<PAGE> 13
<TABLE>
NONACCRUING LOANS. The following table shows the composition of nonaccruing loans at June 30, 1995 and December 31, 1994:
<CAPTION>
6/30/95 12/31/94
------- --------
(Dollars in thousands)
<S> <C> <C>
Residential real estate $ 3,476 $ 4,232
Commercial real estate 7,717 8,004
Construction and land 361 382
Commercial 1,232 1,381
Consumer 393 517
------- -------
Total loans on nonaccrual $13,179 $14,516
======= =======
Allowance for loan losses $11,714 $12,343
======= =======
Allowance for loan losses as a
percentage of nonaccruing loans 88.9% 85.0%
Allowance for loan losses as a
percentage of non-performing loans 74.3% 74.6%
Allowance for loan losses as a
percentage of total loans 1.8% 1.9%
</TABLE>
During the first six months of 1995, loans on nonaccrual decreased 9.2% to
$13.2 million. Included in the $13.2 million in total nonaccruing loans at
June 30, 1995, $4.2 million or 31.6% are less than 90 days past due but have
exhibited some other credit weakness. Of the $4.2 million in loans less than
90 days past due, approximately $1.5 million or 36.2% have had the terms or
interest rate, or both, modified. Substantially all of the modified loans are
performing in accordance with their modified terms.
A significant portion of the Bank's nonaccruing loans are secured by commercial
real estate or multi-family dwellings located in Lawrence, Massachusetts. This
city has been especially hard hit with continued declines in real estate
values, increasing vacancies and rapid turnover in the multi-family
investor-owned properties, which represents the majority of the Bank's
collateral on troubled loans and other real estate owned properties in
Lawrence. Continued deterioration in this market area will adversely impact
the collectibility of certain real estate loans and will result in a continued
high level of non-performing assets. At June 30, 1995, approximately $6.1
million of nonaccruing loans and $3.0 million of other real estate owned were
secured by properties located in Lawrence, consisting primarily of multi-family
dwellings, as compared to approximately $6.9 million and $3.4 million,
respectively, at December 31, 1994. The amount of accruing loans secured by
properties in Lawrence totalled approximately $52.8 million at June 30, 1995.
Substantially all of these loans were secured by residential properties, the
majority of which are one-to-four family dwellings.
While stabilization has appeared in certain sectors of the economy and real
estate markets, if the regional economy deteriorates further, nonaccruing loans
would likely increase, reversing progress made by the Bank in reducing
non-performing assets over the past three years.
RESTRUCTURED LOANS. A restructured loan is one for which the Bank has modified
the terms to provide a temporary reduction in the rate of interest and, in most
instances, an extension of payments of principal or interest, or both, due to
the deterioration in the financial position of the borrowers. Restructured
loans are not returned to performing status until the obligation has performed
for a reasonable period of time and the ultimate collectibility is no longer in
doubt.
At June 30, 1995 and December 31, 1994, restructured loans totalled $2.6
million and $2.0 million, respectively. The weighted average interest rate on
restructured loans as of June 30, 1995 was approximately 6.06%. Interest
income that would have been recognized in 1995 if restructured loans had been
performing in accordance with their original terms was $111,000. The actual
amount of interest on these loans that was recognized in interest income in
1995 was $80,000.
- 11 -
<PAGE> 14
OTHER REAL ESTATE OWNED. The deterioration in the New England real estate
market and economy caused foreclosures resulting in the Bank's holding other
real estate owned.
<TABLE>
The following table shows the composition of other real estate owned at June
30, 1995 and December 31, 1994:
<CAPTION>
6/30/95 12/31/94
------- --------
(In thousands)
<S> <C> <C>
Residential real estate $ 849 $ 1,245
Commercial real estate 1,063 3,484
Multi-family real estate 3,154 2,405
Construction and land 1,524 2,377
------- -------
6,590 9,511
Valuation allowance (535) (715)
------- -------
Total other real estate owned $ 6,055 $ 8,796
======= =======
</TABLE>
<TABLE>
The following table shows changes in the valuation allowance for other real
estate owned for the quarters and six months ended June 30, 1995 and 1994:
<CAPTION>
Quarter Ended Year-to-Date
June 30, June 30,
---------------- -----------------
1995 1994 1995 1994
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Balance, beginning of period $ 634 $ 985 $ 715 $1,086
Provision 210 450 420 650
Charge-offs (309) (474) (600) (775)
----- ------ ------ ------
Balance, end of period $ 535 $ 961 $ 535 $ 961
===== ====== ====== ======
</TABLE>
Properties substantively repossessed, for which the Bank has not completed
legal transfer of ownership, included in the above, totalled $975,000 at June
30, 1995 and $2.3 million at December 31, 1994, respectively. All other real
estate owned is carried at the lower of the loan or the estimated net fair
value of the property constructively or actually received. Initial write-downs
to net fair value are charged to the allowance for loan losses. Subsequent
declines in fair value due to the deterioration in real estate values are
charged to the valuation allowance. Losses on real estate operations totalled
$1.0 million in the first six months of 1995, as compared to $1.3 million in
the first six months of 1994. The addition to the valuation allowance for
other real estate owned totalled $420,000 for the first six months of 1995 as
compared to $650,000 in the same period in 1994. Operating costs associated
with acquiring, maintaining and disposing of other real estate owned added
another $1.1 million to the losses on real estate operations during the first
six months of 1995, as compared to $1.3 million in the corresponding period in
1994.
During the first six months of 1995, sales of other real estate owned totalled
$4.7 million, as compared to $4.1 million in the first six months of 1994. In
the first six months of 1995, net gains of $451,000 on sales of other real
estate owned were recognized as compared to net gains of $599,000 on sales of
properties in the corresponding period in 1994. Pending sales under firm
offers or purchases and sales agreements on properties with carrying values of
approximately $750,000 are anticipated for the third quarter. There is no
assurance such sales will take place. There were no commitments for capital
expenditures on real estate acquired by foreclosure at June 30, 1995.
- 12 -
<PAGE> 15
<TABLE>
ALLOWANCE FOR LOAN LOSSES. The following table summarizes the activity in the
Bank's allowance for loan losses for the quarters and six months ended June 30,
1995 and 1994:
<CAPTION>
Quarter Ended Year-to-Date
June 30, June 30,
--------------- ----------------
1995 1994 1995 1994
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $11,955 $13,046 $12,343 $13,392
Balance of acquired institution --- 1,715 --- 1,715
Provision 175 --- 325 ---
Charge-offs:
Residential real estate (367) (114) (676) (291)
Commercial real estate (169) (389) (440) (553)
Construction and land --- --- (43) ---
Commercial --- (108) (21) (145)
Consumer (23) (6) (42) (73)
------- ------- ------- -------
Total charge-offs (559) (617) (1,222) (1,062)
------- ------- ------- -------
Recoveries:
Residential real estate 10 2 10 2
Commercial real estate 87 55 118 55
Construction and land -- -- 2 --
Commercial 35 80 122 172
Consumer 11 5 16 12
------- ------- ------- -------
Total recoveries 143 142 268 241
------- ------- ------- -------
Net charge-offs (416) (475) (954) (821)
------- ------- ------- -------
Balance at end of period $11,714 $14,286 $11,714 $14,286
======= ======= ======= =======
Ratio of net charge-offs to
average loans outstanding 0.06% 0.08% 0.15% 0.15%
</TABLE>
Management periodically analyzes the adequacy of the allowance for loan losses.
See "Results of Operations - Provision for Loan Losses." Charge-offs totalled
$559,000 during the second quarter of 1995 and were spread out among 25 loans;
the largest charge-off during the quarter was $79,000. The charge-offs also
reflect the completion of an examination by the FDIC in the first quarter of
1995.
INVESTMENTS. As of June 30, 1995, the Bank's total investment portfolio
amounted to $360.6 million, an increase of $7.9 million from $352.7 million at
year-end 1994. This increase resulted primarily from a $24.8 million increase
in short-term investments and investment trading accounts, offset by the sale
of $13.5 million in investments available for sale which resulted in a net gain
of $73,000. Management evaluates its investment alternatives in order to
properly manage the overall balance sheet mix. The timing of sales and
reinvestment, if any, will be based on various factors including expectation of
movements in market interest rates and loan demand. In spite of these events,
it is the intent of management to grow the earning asset base through loan
originations and acquisitions of investment and mortgage-backed securities
while funding this growth through retail deposits, FHLB advances, and reverse
repurchase agreements.
- 13 -
<PAGE> 16
<TABLE>
The following table presents the carrying values of the investment portfolio at June 30, 1995 and December 31, 1994:
<CAPTION>
6/30/95 12/31/94
------- --------
(In thousands)
<S> <C> <C>
SHORT-TERM INVESTMENTS $ 20,000 $ 5,200
======== ========
INVESTMENT TRADING ACCOUNTS (MARKET VALUE) $ 10,000 $ ---
======== ========
INVESTMENTS AVAILABLE FOR SALE (MARKET VALUE):
U.S. government and federal agency obligations $ 43,384 $ 52,523
Other bonds and obligations 9,560 11,496
-------- --------
Total bonds and obligations 52,944 64,019
-------- --------
FHLMC participation certificates 5,106 7,771
Collateralized mortgage obligations 11,845 12,948
GNMA mortgage-backed securities 39,554 38,711
-------- --------
Total mortgage-backed securities 56,505 59,430
-------- --------
Total investments available for sale $109,449 $123,449
======== ========
INVESTMENTS HELD TO MATURITY (AMORTIZED COST):
U.S. government and federal agency obligations $ 18,197 $ 16,259
Other bonds and obligations 25,318 24,349
-------- --------
Total bonds and obligations 43,515 40,608
-------- --------
FHLMC participation certificates 85,847 88,080
Collateralized mortgage obligations 1,500 1,752
GNMA mortgage-backed securities 4,725 4,939
FNMA pass-through certificates 84,008 86,920
Other asset-backed securities 1,587 1,737
-------- --------
Total mortgage-backed securities 177,667 183,428
-------- --------
Total investments held to maturity $221,182 $224,036
======== ========
Total investments $360,631 $352,685
======== ========
</TABLE>
<TABLE>
The following table presents the gross unrealized gains and losses by major categories of securities as of June 30, 1995.
<CAPTION>
Unrealized Unrealized
Gains Losses
---------- ----------
(In thousands)
<S> <C> <C>
INVESTMENTS AVAILABLE FOR SALE:
U.S. government and federal agency obligations $ -- $ (854)
Other bonds and obligations 84 (37)
Mortgage-backed securities 336 (628)
------ -------
Total investments available for sale 420 (1,519)
------ -------
INVESTMENTS HELD TO MATURITY:
U.S. government and federal agency obligations $ 312 $ (6)
Other bonds and obligations 225 (79)
Mortgage-backed securities 1,093 (1,439)
------ -------
Total investments held to maturity 1,630 (1,524)
------ -------
Total unrealized gains and losses $2,050 $(3,043)
====== =======
</TABLE>
At June 30, 1995, the Bank's net unrealized loss on investments available for
sale, net of applicable income taxes, amounted to $650,000, a decrease of $4.0
million from $4.6 million at December 31, 1994. At June 30, 1995, the Bank's
net unrealized gain on investments held to maturity totalled $106,000, a change
of $12.7 million from an unrealized loss of $12.6 million at December 31, 1994.
The change in the net unrealized loss on the total investment portfolio from
the end of 1994 was primarily due to increasing values in mortgage-backed
securities and U.S. government obligations due to a decline in market interest
rates.
- 14 -
<PAGE> 17
DEPOSITS AND BORROWED FUNDS. Total deposits increased $19.6 million from
$727.9 million at December 31, 1994 to $747.5 million at June 30, 1995. This
increase primarily resulted from the shift from core deposit accounts into term
certificates of deposit due to various deposit promotions as well as more
favorable rates earned on those term certificates.
<TABLE>
The following table shows the composition of the Bank's deposits at June 30, 1995 and December 31, 1994:
<CAPTION>
6/30/95 12/31/94
------- --------
(In thousands)
<S> <C> <C>
Demand deposit accounts $ 52,004 $ 45,968
Regular savings accounts 72,798 76,571
NOW accounts 67,926 65,882
Money market deposit accounts 132,978 143,203
Certificates of deposit 421,782 396,234
-------- --------
Total deposits $747,488 $727,858
======== ========
</TABLE>
Securities sold under agreements to repurchase increased $11.7 million from
$4.0 million at December 31, 1994, to $15.7 at June 30, 1995. Federal Home
Loan Bank advances decreased $12.9 million from December 31, 1994, to $234.3
million at June 30, 1995. The slight decrease in total borrowings reflects the
Bank's ability to continue to attract retail deposits in a highly competitive
environment.
LIQUIDITY. Liquidity refers to the ability of the Company to efficiently meet
the cash needs of borrowers and depositors, while also providing funds for
attractive investment opportunities.
The Company's primary source of funds is dividends from the Bank. The Bank has
a diverse base of funding sources including customer deposits, borrowed funds,
repayments and amortization of loans, mortgage-backed securities and investment
securities. A portion of the Bank's deposits represent core deposits, which
management believes are relatively insensitive to fluctuations in interest
rates. Sources of borrowed funds include funds purchased from other banks, the
sale of securities under repurchase agreements and borrowings from the FHLB, of
which the Bank is a voluntary member. The Bank also may obtain funds from the
Federal Reserve Bank of Boston by pledging certain assets.
In the second quarter of 1995, the Company paid dividends in the amount of
$421,000 or $.10 per share. In July, 1995, the Company declared a dividend in
the amount of $.12 per share or approximately $510,000, payable in the third
quarter of 1995.
Cash flows provided by operations changed $35.8 million from the first six
months of 1994 to $3.0 million used by operations in the first six months of
1995 due to a decrease in assets held for sale. Cash flows provided by
investing activities increased to $3.5 million for the six months ended June
30, 1995, up from cash flows used by investing activities of $75.3 million
during the equivalent period last year. This was mainly attributable to
decreased principal amortization on mortgage-backed securities and fewer
purchases of investments as well as a reduction in new loan volume. The
Company's cash flows provided by financing activities decreased for the period
ended June 30, 1995 to $17.7 million, as compared to $46.9 million in the
equivalent period in 1994 due to a decrease in new FHLB advances.
At June 30, 1995, the Bank had home equity, reserve credit and commercial
unused lines of credit totalling $72.2 million. Outstanding commitments to
originate real estate loans totalled $28.4 million. Unadvanced portions of
real estate loans amounted to $9.3 million. Standby letters of credit were
$201,000. Loans sold with recourse totalled $7.2 million. Management believes
that its sources of liquidity are sufficient to meet these commitments if and
as called upon.
- 15 -
<PAGE> 18
CAPITAL RESOURCES. Andover Bank continues to maintain a level of capital in
excess of all applicable minimum regulatory requirements.
<TABLE>
The following table presents regulatory capital ratios for Andover Bank:
<CAPTION>
Minimum Actuals
Regulatory ----------------
Requirements 6/30/95 12/31/94
------------ ------- --------
<S> <C> <C> <C>
Current Regulatory Requirements:
Leverage or core capital ratio 4.0% 7.2% 6.8%
Risk-Based Capital:
Tier 1 capital ratio 4.0 12.9 12.2
Total capital ratio 8.0 14.2 13.5
</TABLE>
At June 30, 1995, the Company's leverage or core capital ratio was 7.6%
compared to 7.4% at December 31, 1994. At June 30, 1995, the Company's ratio
of Tier 1 and total capital to risk-weighted assets was 13.8% and 15.0%
respectively, as compared to 13.3% and 14.6% respectively, at the end of 1994.
- 16 -
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1995
--------------------------------------
RESULTS OF OPERATIONS
---------------------
GENERAL. Net income amounted to $4.2 million, $1.00 per share, for the six
months ended June 30, 1995, compared to net income of $4.0 million, $0.96 per
share, in the corresponding period of 1994.
The financial performance in the first six months of 1995 was negatively
impacted by the $1.0 million pre-tax charge related to the termination of the
previously announced merger with Finest Financial Corp. while the acquisition
of Community Savings Bank on April 1, 1994 has been beneficial to the Company
in terms of increased net interest income and non-interest income. However,
mitigating those affects have been high levels of non-performing assets which
result in high levels of foregone income, provision for loan and other real
estate owned losses and other operating costs associated with holding and
disposing of other real estate owned. Included in the year-to-date 1995
results were net gains of $161,000 on sales and redemptions of loans,
investments and mortgage-backed securities held for sale, available for sale
and held for investment, compared to net losses of $229,000 during the
corresponding period of 1994. Andover's annualized return on average assets
decreased to 0.81% for the first six months of 1995 compared to 0.90% in the
comparable period of 1994. The annualized return on average stockholders'
equity decreased to 10.66% in the first six months of 1995 from 11.44% in the
comparable period of 1994.
NET INTEREST AND DIVIDEND INCOME. Net interest and dividend income was $16.1
million for the first six months of 1995, as compared to $14.5 million for the
same period in 1994, an increase of 10.7%. The amount of interest income
excluded from earnings on non-accruing loans amounted to $527,000 in the first
six months of 1995 compared to $470,000 in the comparable period of 1994.
Increased market interest rates resulted in a 71 basis point rise in the yield
on earning assets from the first six months of 1994, to the comparable period
of 1995. During this same period, the rate paid on interest-bearing
liabilities increased by 96 basis points. This continued compression resulted
in a reduced interest rate spread of 2.80% for the first six months of 1995 as
compared to 3.05% in 1994.
PROVISION FOR LOAN LOSSES. The provision for loan losses for the first six
months of 1995 was $325,000. There was no provision for loan losses taken in
1994. Among the factors used to determine that a provision was necessary in
1995 were the level of nonaccrual loans, prior charge-offs and the collateral
value of the underlying security. Net charge-offs amounted to $954,000 in the
first six months of 1995 versus $821,000 in the corresponding period last year.
NON-INTEREST INCOME (LOSS). Andover recorded gains from non-interest sources
of $1.8 million for the first six months of 1995, as compared to $213,000 in
the corresponding period of 1994 primarily as a result of increased loan
servicing income and service charges on deposits. Additionally, gains from
sales and redemptions of loans, investments and mortgage-backed securities held
for sale, available for sale and held for investment, totalled $161,000 in
1995, as compared to losses of $229,000 in the same period of 1994.
Losses on real estate operations totalled $1.0 million during the first six
months of 1995 as compared to $1.3 million in the corresponding period of 1994.
The majority of the loss on real estate operations during the first six months
of both 1995 and 1994 was comprised of write-downs of other real estate owned
totalling $420,000 and $650,000, respectively.
Other income totalled $2.7 million in the first six months of 1995 versus $1.8
million in the first six months of 1994 due to increased excess servicing
income and increased fee income on a larger deposit base.
- 17 -
<PAGE> 20
NON-INTEREST EXPENSE. Non-interest expenses increased 23.8% to $10.7 million
in the first six months of 1995 primarily due to running a larger institution.
Salaries and benefits increased 9.9% to $4.8 million in 1995 due to increased
personnel resulting from the Community acquisition. Office occupancy and
equipment increased 8.2% to $1.2 million due to increased investments in
computers and related costs for depreciation. Deposit insurance premiums
increased slightly to $852,000. Data processing expenses increased 27.3% to
$597,000 as a result of a higher loan and deposit base resulting from the
acquisition as well as from the purchase of mortgage loan servicing.
Professional fees decreased 12.5% to $330,000 as a result of increased cost
control. Marketing expenses increased 14.3% to $392,000 primarily due to an
increased number of discretionary promotions. Merger expenses totalled $1.0
million from the terminated merger with Finest. Other operating expenses
increased $357,000 to $1.5 million primarily due to amortization of the
purchased mortgage servicing rights. Additionally, general overhead expenses
have increased due to operating a larger institution.
INCOME TAX EXPENSE. As a result of continued earnings of the Company, it is
more likely than not that the Company will realize a greater portion of its
deferred tax asset than has previously been recognized. This has resulted in a
decrease in the valuation allowance on these items of $300,000 in the first six
months of 1995. Offsetting this income tax benefit, the Company recorded
income tax expense of $3.0 million due to temporary differences for financial
statement purposes as compared to income tax purposes.
- 18 -
<PAGE> 21
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings
Not Applicable
ITEM 2 Changes in Securities
Not Applicable
ITEM 3 Defaults Upon Senior Securities
Not Applicable
ITEM 4 Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of the registrant was held on
June 15, 1995. All nominees of the Board of Directors of the
registrant were re-elected for a three-year term. Other matters
voted on at the meeting included approval of the Andover Bancorp,
Inc. 1995 Stock Incentive Plan and ratification of KPMG Peat
Marwick LLP as Andover's independent auditors. Votes were cast as
follows:
I. Election of two Class II Directors
<TABLE>
<CAPTION>
Nominee For Withheld
------- --- --------
<S> <C> <C>
Naomi A. Gardner 3,522,271 93,369
Robert J. Scribner 3,523,507 92,133
</TABLE>
II. Approval of the Andover Bancorp, Inc. 1995 Stock Incentive Plan
<TABLE>
<CAPTION>
Broker
For Against Abstain Non Vote
--- ------- ------- --------
<S> <C> <C> <C>
2,315,530 664,473 78,027 557,609
</TABLE>
III. Ratification of KPMG Peat Marwick LLP as Independent Auditors
<TABLE>
<CAPTION>
Broker
For Against Abstain Non Vote
--- ------- ------- --------
<S> <C> <C> <C>
3,577,764 14,467 22,480 929
</TABLE>
ITEM 5 Other Information
None
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
- 19 -
<PAGE> 22
SIGNATURES
----------
Under the requirements of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
ANDOVER BANCORP, INC.
August 11, 1995 /s/ Gerald T. Mulligan
----------------------
Gerald T. Mulligan
President and
Chief Executive Officer
August 11, 1995 /s/ Joseph F. Casey
---------------------
Joseph F. Casey
Chief Financial Officer
and Treasurer
- 20 -
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS OF ANDOVER BANCORP FOR THE SIX
MONTHS ENDED JUNE 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANICAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<EXCHANGE-RATE> 1
<CASH> 21,645
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 20,000
<TRADING-ASSETS> 10,000
<INVESTMENTS-HELD-FOR-SALE> 111,018
<INVESTMENTS-CARRYING> 221,182
<INVESTMENTS-MARKET> 221,288
<LOANS> 664,822
<ALLOWANCE> 11,714
<TOTAL-ASSETS> 1,084,250
<DEPOSITS> 747,488
<SHORT-TERM> 15,704
<LIABILITIES-OTHER> 6,782
<LONG-TERM> 234,272
<COMMON> 514
0
0
<OTHER-SE> 79,490
<TOTAL-LIABILITIES-AND-EQUITY> 1,084,250
<INTEREST-LOAN> 25,839
<INTEREST-INVEST> 11,789
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 37,628
<INTEREST-DEPOSIT> 14,046
<INTEREST-EXPENSE> 21,539
<INTEREST-INCOME-NET> 16,089
<LOAN-LOSSES> 325
<SECURITIES-GAINS> 161
<EXPENSE-OTHER> 10,681
<INCOME-PRETAX> 6,868
<INCOME-PRE-EXTRAORDINARY> 6,868
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,218
<EPS-PRIMARY> 1.00
<EPS-DILUTED> 0
<YIELD-ACTUAL> 3.20
<LOANS-NON> 13,179
<LOANS-PAST> 0
<LOANS-TROUBLED> 2,586
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 12,343
<CHARGE-OFFS> 1,222
<RECOVERIES> 268
<ALLOWANCE-CLOSE> 11,714
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
