<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 September 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 November 6, 1995: 4,228,271 shares
<PAGE> 2
ANDOVER BANCORP, INC.
AND SUBSIDIARIES
Index
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1 Financial Statements Page
<S> <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 September 30, 1995
For the Nine Months Ended September 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
ANDOVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995 DECEMBER 31, 1994
------------------ -----------------
(In thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 21,489 $ 18,182
Short-term investments 19,000 5,200
---------- ----------
Cash and cash equivalents 40,489 23,382
---------- ----------
Assets held for sale (market value $3,489
in 1995 and $2,507 in 1994) 3,485 2,507
Investments available for sale (Amortized
cost of $93,916 in 1995 and $130,011
in 1994) 93,123 123,449
Investment securities (Market value
$54,891 in 1995 and $39,504 in 1994) 54,442 40,608
Mortgage-backed securities (Market value
$171,135 in 1995 and $171,884 in 1994) 171,273 183,428
Loans 700,564 645,037
Allowance for loan losses (11,563) (12,343)
---------- ----------
Net loans 689,001 632,694
---------- ----------
Other real estate owned, net 5,488 8,796
Premises and equipment, net 9,510 9,814
Accrued interest receivable 7,688 6,947
Stock in FHLBB, at cost 12,649 12,368
Deferred income taxes receivable 1,662 6,302
Current income taxes receivable 159 ---
Mortgage servicing rights 5,249 3,752
Other assets 2,774 4,625
---------- ----------
Total assets $1,096,992 $1,058,672
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 743,636 $ 727,858
Securities sold under agreements
to repurchase 32,382 4,000
Federal Home Loan Bank advances 230,890 247,185
Mortgagors' escrow accounts 3,165 2,243
Income taxes payable --- 480
Accrued expenses and other liabilities 4,538 4,384
---------- ----------
Total liabilities 1,014,611 986,150
---------- ----------
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 5,145,568 in 1995
and 5,126,088 in 1994, respectively 514 513
Additional paid-in capital 71,393 71,172
Retained earnings 24,174 18,701
Treasury stock, at cost (917,997 shares) (13,247) (13,247)
Unrealized losses on investments
available for sale, net (453) (4,617)
---------- ----------
Total stockholders' equity 82,381 72,522
---------- ----------
Total liabilities and stockholders' equity $1,096,992 $1,058,672
========== ==========
</TABLE>
The accompanying note is an integral part of the consolidated financial
statements.
- 1 -
<PAGE> 4
ANDOVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Quarters Ended Year-to-Date
September 30, September 30,
1995 1994 1995 1994
-------------------- ---------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Interest and dividend income:
Loans $13,586 $10,970 $39,425 $29,502
Mortgage-backed securities 3,816 4,173 11,813 11,516
Investment securities 1,542 1,419 4,561 3,967
Dividends on equity securities 228 226 751 616
Short-term investments 161 56 411 143
------- ------- ------- -------
Total interest and dividend income 19,333 16,844 56,961 45,744
------- ------- ------- -------
Interest expense:
Deposits 7,542 5,921 21,588 14,827
Federal Home Loan Bank advances 3,505 2,950 10,688 7,871
Securities sold under agreements to repurchase 313 256 623 794
------- ------- ------- -------
Total interest expense 11,360 9,127 32,899 23,492
------- ------- ------- -------
Net interest and dividend income 7,973 7,717 24,062 22,252
Provision for loan losses 480 --- 805 ---
------- ------- ------- -------
Net interest and dividend income
after provision for loan losses 7,493 7,717 23,257 22,252
------- ------- ------- -------
Non-interest income (loss):
Net gains (losses) from sales and writedowns of
assets held for sale and trading accounts (3) (46) 85 (418)
Net gains (losses) from sales and redemptions
of investments available for sale (52) 15 21 158
Net gain from redemptions of investments
held to maturity 4 --- 4 ---
Losses on real estate operations, net (505) (450) (1,541) (1,771)
Other income 1,622 1,114 4,282 2,877
------- ------- ------- -------
Total non-interest income 1,066 633 2,851 846
------- ------- ------- -------
Non-interest expense:
Salaries and employee benefits 2,384 2,366 7,199 6,747
Office occupancy and equipment 556 526 1,719 1,601
Deposit insurance premiums (39) 403 813 1,211
Data processing 299 287 896 756
Marketing 171 151 564 494
Professional fees 175 146 505 523
Merger expense --- --- 1,000 ---
Other operating expense 848 547 2,379 1,721
------- ------- ------- -------
Total non-interest expense 4,394 4,426 15,075 13,053
------- ------- ------- -------
Income before income tax expense 4,165 3,924 11,033 10,045
Income tax expense 1,562 1,360 4,212 3,471
------- ------- ------- -------
Net income $ 2,603 $ 2,564 $ 6,821 $ 6,574
======= ======= ======= =======
Average number of common shares outstanding 4,223 4,208 4,216 4,178
Net income per share $ 0.62 $ 0.61 $ 1.62 $ 1.57
</TABLE>
The accompanying note is an integral part of the consolidated financial
statements.
- 2 -
<PAGE> 5
ANDOVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Year Ended December 31, 1994 and Nine Months Ended September 30, 1995
(Unaudited)
<TABLE>
<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 --- --- 6,821 --- --- 6,821
Dividends declared and
paid ($0.32 per share) --- --- (1,348) --- --- (1,348)
Stock options exercised 1 221 --- --- --- 222
Change in unrealized
gains (losses) on
investments available
for sale --- --- --- --- 4,164 4,164
---- ------- ------- -------- ------- -------
Balance at September 30, 1995 $514 $71,393 $24,174 $(13,247) $ (453) $82,381
==== ======= ======= ======== ======= =======
</TABLE>
- ---------------------------------------
(1) Net of related tax effect.
The accompanying note is an integral part of the consolidated financial
statements.
- 3 -
<PAGE> 6
ANDOVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
YEAR-TO-DATE
SEPTEMBER 30,
------------------
1995 1994
---- ----
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,821 $ 6,574
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 805 ---
Net (gains) losses on sales and provisions for
other real estate owned 70 (207)
Net gains from sales and redemptions of
investments available for sale (21) (158)
Net gains from redemptions of investments held to maturity (4) ---
Net (gains) losses from sales and writedowns of
assets held for sale (85) 418
Depreciation and amortization 842 637
Amortization of fees, discounts and premiums, net 455 846
(Increase) decrease in:
Assets held for sale (893) 28,994
Accrued interest receivable (741) (1,659)
Income taxes receivable 2,876 256
Mortgage servicing rights (1,497) (623)
Other assets 1,851 (688)
Increase (decrease) in:
Mortgagors' escrow accounts 922 1,103
Accrued income taxes payable (480) (95)
Accrued expenses and other liabilities 154 (27)
--------- ----------
Net cash provided by operating activities 11,075 35,371
--------- ---------
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 (17,171) (17,241)
Purchases of mortgage-backed securities (2,961) (84,738)
Proceeds from sales of investments available for sale 27,370 16,713
Proceeds from maturities and redemptions of investments
available for sale 2,572 2,898
Proceeds from maturities and redemptions
of investment securities 3,031 1,052
Principal repayments of investments available for sale 5,934 13,099
Principal repayments of mortgage-backed securities 14,907 37,025
Net increase in loans (59,721) (79,013)
Capital expenditures on premises and equipment, net (538) (1,546)
Proceeds from disposition of other real estate owned 6,120 6,895
Capital expenditures on other real estate owned (250) (360)
--------- ----------
Net cash used by investing activities (20,707) (108,947)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 15,778 48,213
Net increase (decrease) in securities sold
under agreements to repurchase 28,382 (6,938)
Proceeds from issuance of FHLB advances 194,046 234,923
Principal repayments of FHLB advances (210,341) (192,953)
Dividends paid (1,348) (1,257)
Stock options exercised 222 720
--------- ---------
Net cash provided by financing activities 26,739 82,708
--------- ---------
Net increase in cash and cash equivalents 17,107 9,132
Cash and cash equivalents, at beginning of period 23,382 17,136
--------- ---------
Cash and cash equivalents, at end of period $ 40,489 $ 26,268
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 32,933 $ 23,380
Income taxes 1,799 3,393
Supplemental noncash investing and financing activities:
Conversion of real estate loans to mortgage-backed
securities held for sale 10,192 58,731
Transfer of loans to other real estate owned 2,632 3,207
</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 subsidiaries, Andover Bank (the "Bank") and Andover Bank
NH, 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. Andover Bank NH, a guaranty savings
bank, was incorporated under the laws of New Hampshire on September
28, 1995. 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
ANDOVER BANCORP, INC. AND SUBSIDIARIES
ANALYSIS OF NET YIELD ON EARNING ASSETS
(Unaudited)
<TABLE>
<CAPTION>
Quarters Ended September 30,
----------------------------
1995 1994
--------------------------------- ---------------------------------
Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate(3) Balance Paid Rate(3)
------- -------- ------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Short-term investments $ 10,823 $ 161 5.90% $ 5,501 $ 56 4.04%
Investment securities (1) 115,273 1,770 6.09 107,127 1,645 6.09
Mortgage-backed securities (1) 227,471 3,816 6.66 257,143 4,173 6.44
---------- ------- ---------- -------
Total investments 352,758 5,747 6.46 369,771 5,874 6.30
---------- ------- ---------- -------
Real estate loans (1) (2) 614,140 11,918 7.70 543,135 9,685 7.07
Consumer loans (2) 50,177 1,180 9.33 48,751 1,008 8.20
Commercial loans (2) 17,366 488 11.15 13,471 277 8.16
---------- ------- ---------- -------
Total loans 681,683 13,586 7.91 605,357 10,970 7.19
---------- ------- ---------- -------
Total interest-earning assets 1,034,441 19,333 7.41% 975,128 16,844 6.85%
------- -------
Allowance for loan losses (11,550) (13,794)
Other real estate owned 6,014 11,737
Other assets 44,483 45,831
---------- ----------
Total assets $1,074,197 $1,018,902
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts $ 61,667 $ 185 1.15% $ 61,667 $ 184 1.18%
Regular savings accounts 71,586 393 2.18 81,304 403 1.97
Money market deposit accounts 131,070 870 2.63 154,985 931 2.38
Certificates of deposit 424,568 6,094 5.69 363,527 4,403 4.81
---------- ------- ---------- -------
Total interest-bearing deposits 690,977 7,542 4.33 661,483 5,921 3.55
---------- ------- ---------- -------
Borrowed funds:
Reverse repurchase agreements 20,682 313 6.00 21,723 256 4.68
Notes payable 226,892 3,505 6.13 213,688 2,950 5.48
---------- ------- ---------- -------
Total borrowed funds 247,574 3,818 6.12 235,411 3,206 5.40
---------- ------- ---------- -------
Total interest-bearing liabilities 938,551 11,360 4.80% 896,894 9,127 4.04%
------- -------
Demand deposits 48,648 41,097
Other liabilities 5,572 6,342
---------- ----------
Total liabilities 992,771 944,333
Stockholders' equity 81,426 74,569
---------- ----------
Total liabilities and stock-
holders' equity $1,074,197 $1,018,902
========== ==========
Net interest income $ 7,973 $ 7,717
======= =======
Interest rate spread 2.61% 2.81%
===== =====
Net yield on earning assets 3.06% 3.14%
===== =====
<CAPTION>
Year-to-Date Ended September 30,
--------------------------------
1995 1994
--------------------------------- ---------------------------------
Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate(3) Balance Paid Rate(3)
------- -------- ------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Short-term investments $ 9,481 $ 411 5.80% $ 5,288 $ 143 3.62%
Investment securities (1) 113,361 5,312 6.27 98,147 4,583 6.24
Mortgage-backed securities (1) 235,367 11,813 6.71 238,638 11,516 6.45
---------- ------- -------- -------
Total investments 357,936 17,536 6.55 342,073 16,242 6.35
---------- ------- -------- -------
Real estate loans (1) (2) 596,129 34,563 7.75 496,481 25,966 6.99
Consumer loans (2) 50,529 3,457 9.15 47,931 2,788 7.78
Commercial loans (2) 16,754 1,405 11.21 13,079 748 7.65
---------- ------- -------- -------
Total loans 663,412 39,425 7.95 557,491 29,502 7.08
---------- ------- -------- -------
Total interest-earning assets 1,021,348 56,961 7.46% 899,564 45,744 6.80%
------- -------
Allowance for loan losses (11,845) (14,211)
Other real estate owned 7,323 12,515
Other assets 44,274 42,537
---------- --------
Total assets $1,061,373 $940,405
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts $ 62,322 $ 547 1.17% $ 61,040 $ 537 1.18%
Regular savings accounts 72,850 1,177 2.16 75,765 1,111 1.96
Money market deposit accounts 134,936 2,603 2.58 151,195 2,541 2.25
Certificates of deposit 417,517 17,261 5.53 310,357 10,638 4.58
---------- ------- -------- -------
Total interest-bearing deposits 731,783 21,588 4.20 598,357 14,827 3.31
---------- ------- -------- -------
Borrowed funds:
Reverse repurchase agreements 13,565 623 6.14 26,251 794 4.04
Notes payable 230,248 10,688 6.21 194,532 7,871 5.41
---------- ------- -------- -------
Total borrowed funds 243,813 11,311 6.20 220,783 8,665 5.25
---------- ------- -------- -------
Total interest-bearing liabilities 931,438 32,899 4.72% 819,140 23,492 3.83%
------- -------
Demand deposits 44,158 43,633
Other liabilities 5,453 5,629
---------- --------
Total liabilities 981,049 868,402
Stockholders' equity 80,324 72,003
---------- --------
Total liabilities and stock-
holders' equity $1,061,373 $940,405
========== ========
Net interest income $24,062 $22,252
======= =======
Interest rate spread 2.73% 2.97%
===== =====
Net yield on earning assets 3.15% 3.31%
===== =====
</TABLE>
(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 92
days in the third quarter and 273 days in the year-to-date period.
- 6 -
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE QUARTER ENDED SEPTEMBER 30, 1995
RESULTS OF OPERATIONS
GENERAL. Net income amounted to $2.6 million, $0.62 per share, for the quarter
ended September 30, 1995, compared to net income of $2.6 million, $0.61 per
share, in the corresponding quarter of 1994.
Included in the financial performance for the third quarter was an FDIC premium
refund of $471,000 and non-recurring gains of $309,000. The gains resulted
from the sale of a non-marketable security and the sale of a former branch
facility. On September 28, 1995, the Company opened its new community banking
subsidiary, Andover Bank NH, in Salem, New Hampshire. This interstate
expansion into southern New Hampshire was a natural move as the new bank is
located within 10 miles of the Company's headquarters. Interest rate
compression reduced the net interest margin to 3.06% for the third quarter of
1995 as compared to 3.14% in 1994. Andover's annualized return on average
assets decreased to 0.96% for the third quarter of 1995 compared to 1.00% in
the third quarter of 1994. The annualized return on average stockholders'
equity decreased to 12.68% in the third quarter of 1995 from 13.64% in the
third quarter of 1994.
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 reductions of non-performing assets
have been made, the overall high levels of non-performing assets continue to
result in high levels of foregone income, provisions for loan and other real
estate owned losses and other operating costs associated with holding and
disposing of such assets.
NET INTEREST AND DIVIDEND INCOME. Net interest and dividend income was $8.0
million for the third quarter of 1995 as compared to $7.7 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 $179,000 in the third quarter of
1995, versus $268,000 in the comparable quarter of 1994. The yields earned on
new loan originations, when combined with repricing loans and investments,
offset by foregone interest income, resulted in a 56 basis point increase in
the yield on earning assets in the third quarter of 1995 compared to the
corresponding quarter of 1994. However, during the same period, there was a 76
basis point increase in the average rate paid on interest-bearing liabilities.
This combination resulted in a reduced spread on earning assets of 2.61% for
the third quarter of 1995 versus 2.81% 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, 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 third quarter of 1995 was $480,000 versus
none 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 third quarter of 1995. A significant factor was the level and
mix of loans and additions to non-performing loans during the third quarter of
1995. Another factor was the level of charge-offs in the third quarter of 1995
- 7 -
<PAGE> 10
which totalled $768,000 as compared to $1.5 million in the corresponding
quarter last year. Other factors relevant to assessing the 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 96.2% at September 30, 1995. This was an increase
from the respective reserve coverage at the 1994 year-end.
NON-INTEREST INCOME. Net losses from sales and redemptions of loans and the
investment portfolio, totalled $51,000 in the third quarter of 1995, as
compared to net losses of $31,000 in the third quarter of 1994.
Losses of $505,000 on real estate operations were recognized in the third
quarter of 1995 as compared to $450,000 in the third quarter of 1994. A
significant portion of the losses on real estate operations during the third
quarters of both 1995 and 1994 were operating costs associated with acquiring,
maintaining and disposing of other real estate owned totalling $404,000 in 1995
as compared to $729,000 in 1994. Additionally, provisions for other real
estate owned added another $160,000 and $390,000 in 1995 and 1994,
respectively. In the third quarter of 1995 and 1994, sales of other real
estate owned totalled $1.4 million and $2.8 million, respectively.
Other income totalled $1.6 million in 1995's third quarter versus $1.1 million
in 1994's comparable quarter, an increase of $508,000. The majority of the
increase was due to gains recognized on the sale of the non-marketable security
and former branch facility. Additionally, net servicing income increased
$235,000 to $637,000 in the third quarter of 1995 as compared to the
corresponding quarter in 1994. During the third quarter of 1995, the Bank
continued to purchase mortgage service rights on residential first mortgage
loans. The balance of these underlying purchased mortgage loans serviced for
others at September 30, 1995 was approximately $244.7 million. Total loans
serviced for investors totalled $661.5 million and $471.6 million,
respectively, at September 30, 1995 and 1994.
NON-INTEREST EXPENSE. Non-interest expenses decreased by $32,000, or .7%, to
$4.4 million in the third quarter of 1995 from the third quarter of 1994,
primarily due to the FDIC insurance premium refund totalling $471,000.
Salaries and employee benefits, the largest component of non-interest expense,
remained flat at $2.4 million for the third quarter of 1994 and 1995. Office
occupancy expenses increased slightly from the third quarter of 1994 to
$556,000 for the corresponding period of 1995. Data processing expenses
increased 4.2% from $287,000 for the quarter ended September 30, 1994 to
$299,000 for the third quarter of 1995 due to an increase in the number of
loans and deposits. Professional fees increased 19.9% from $146,000 in the
third quarter of 1994 to $175,000 in the corresponding period of 1995 as a
result of increased consulting and corporate legal fees. Marketing expenses
increased over the comparable period of last year due to promotions related to
the opening of the new Bank in September, 1995. Other operating expenses
increased 55.0% from $547,000 in the third quarter of 1994 to $848,000 in the
third quarter of 1995 primarily due to amortization and provision for purchased
mortgage servicing rights in the amount of $194,000 as well as increased costs
associated with running 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 $150,000 for the third
quarter of 1995. Offsetting this income tax benefit, the Company recorded an
income tax expense of $1.7 million on its financial statement earnings.
FINANCIAL CONDITION
Total assets increased to $1,097.0 million at September 30, 1995, for a rise of
$38.3 million from $1,058.7 million at December 31, 1994. The rise is
attributable primarily to a $55.5 million increase in total loans offset by a
decrease of $14.8 million in the investment portfolio. Corresponding with the
increase in total assets was an increase of $15.8 million in total deposits.
- 8 -
<PAGE> 11
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.
<TABLE>
<CAPTION>
9/30/95 12/31/94
------- --------
(In thousands)
<S> <C> <C>
Real estate loans:
Residential $500,822 $452,708
Commercial 114,552 108,725
Construction and land 16,653 18,021
-------- --------
Total real estate loans 632,027 579,454
-------- --------
Consumer 50,534 52,164
Commercial 18,003 13,419
-------- --------
Total loans $700,564 $645,037
======== ========
</TABLE>
Residential real estate loans increased $48.1 million from December 31, 1994 to
$500.8 million at September 30, 1995. Loans held for sale increased from $2.5
million at December 31, 1994, to $3.5 million at September 30, 1995.
Residential loans closed during the first nine months of 1995 totalled $93.7
million as compared to $141.9 million during the corresponding period of 1994.
The loan volume in the first nine months 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 during the latter half of the year.
Interest rates peaked in January 1995, affecting both the mortgage refinance
and home purchase markets. Since that time, rates have come down slightly.
During the third quarter of 1995, the Bank purchased $6.2 million in
variable-rate residential loans. The decrease in consumer loans was primarily
due to the sale of the $5.5 million student loan portfolio in the first quarter
of 1995.
Commercial real estate loans increased to $114.6 million at September 30, 1995
from $108.7 million at December 31, 1994, due to a modest increase in
commercial originations. Outstanding commercial loans increased $4.6 million
from December 31, 1994, to $18.0 million at September 30, 1995. Originations
of commercial real estate, construction and land loans, and commercial loans
are impacted by the level of interest rates and increased competition among
banks and totalled $46.2 million in the first nine months of 1995 as compared
to $42.4 million in the first nine 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 $1.2 million would have been recorded in the first nine
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 $199,000.
Additionally, another $321,000 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 nine months of 1995.
- 9 -
<PAGE> 12
The following table shows the composition of non-performing assets at September
30, 1995 and December 31, 1994:
<TABLE>
<CAPTION>
9/30/95 12/31/94
------- --------
(Dollars in thousands)
<S> <C> <C>
Nonaccruing loans $12,015 $14,516
Restructured loans 5,285 2,036
------- -------
Total non-performing loans 17,300 16,552
Other real estate owned 5,488 8,796
------- -------
Total non-performing assets $22,788 $25,348
======= =======
Total non-performing assets as a
percentage of total assets 2.1% 2.4%
</TABLE>
Total non-performing assets decreased $2.6 million in the first nine months of
1995, primarily due to the sale of other real estate owned. During the first
nine months of 1995, $2.6 million of loans were written down to their net fair
value and transferred out of loans and into other real estate owned.
The following table shows detailed activity by quarter of nonaccruing loans and
other real estate owned for the quarters listed below:
<TABLE>
<CAPTION>
9/30/95 6/30/95 3/31/95
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Beginning balance $19,234 $21,747 $23,312
Additions 3,236 2,276 2,254
Sales, restructurings,
payments and other decreases (4,281) (4,164) (2,949)
Charge-offs and valuation
adjustments (686) (625) (870)
------- ------- -------
Balance at end of quarter $17,503 $19,234 $21,747
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
9/30/94 6/30/94 3/31/94
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Beginning balance $27,935 $24,978 $24,651
Additions 3,496 3,124 2,749
Additions from acquired institution --- 5,147 ---
Sales, restructurings,
payments and other decreases (3,212) (3,303) (1,799)
Charge-offs and valuation
adjustments (1,886) (2,011) (623)
------- ------- -------
Balance at end of quarter $26,333 $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 required 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 September 30, 1995, total impaired loans were $11.5 million, of which $3.8
million had related allowances of $.7 million and $7.7 million which did not
require a related allowance. During the nine months ended September 30, 1995,
the average recorded value of impaired loans was $12.2 million and the related
amount of interest income recognized was $281,000.
- 10 -
<PAGE> 13
Nonaccruing Loans. The following table shows the composition of nonaccruing
loans at September 30, 1995 and December 31, 1994:
<TABLE>
<CAPTION>
9/30/95 12/31/94
------- --------
(Dollars in thousands)
<S> <C> <C>
Residential real estate $ 3,124 $ 4,232
Commercial real estate 7,439 8,004
Construction and land 202 382
Commercial 937 1,381
Consumer 313 517
------- -------
Total loans on nonaccrual $12,015 $14,516
======= =======
Allowance for loan losses $11,563 $12,343
======= =======
Allowance for loan losses as a
percentage of nonaccruing loans 96.2% 85.0%
Allowance for loan losses as a
percentage of non-performing loans 66.8% 74.6%
Allowance for loan losses as a
percentage of total loans 1.7% 1.9%
</TABLE>
During the first nine months of 1995, loans on nonaccrual decreased 17.2% to
$12.0 million. Included in the $12.0 million in total nonaccruing loans at
September 30, 1995, $3.2 million or 26.7% are less than 90 days past due but
have exhibited some other credit weakness.
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 September 30, 1995, approximately $6.0
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 $52.9 million at September 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 several 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 at a market rate of interest and the ultimate
collectibility is no longer in doubt.
At September 30, 1995 and December 31, 1994, restructured loans totalled $5.3
million and $2.0 million, respectively. The increase in restructured loans
since year-end was primarily due to the transfer of $2.1 million in nonaccrual
loans that had performed within their modified terms over a period of time.
However, there was one loan totalling $1.5 million that was transferred from
the performing loan portfolio to restructured loans in anticipation of a rate
modification on other restructuring. The weighted average interest rate on
restructured loans as of September 30, 1995 was approximately 6.89%. Interest
income that would have been recognized in 1995 if restructured loans had been
performing in accordance with their original terms was $268,000. The actual
amount of interest on these loans that was recognized in interest income in
1995 was $221,000.
- 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.
The following table shows the composition of other real estate owned at
September 30, 1995 and December 31, 1994:
<TABLE>
<CAPTION>
9/30/95 12/31/94
------- --------
(In thousands)
<S> <C> <C>
Residential real estate $ 988 $ 1,245
Commercial real estate 814 3,484
Multi-family real estate 2,698 2,405
Construction and land 1,418 2,377
------- -------
5,918 9,511
Valuation allowance (430) (715)
------- -------
Total other real estate owned $ 5,488 $ 8,796
======= =======
</TABLE>
The following table shows changes in the valuation allowance for other real
estate owned for the quarters and nine months ended September 30, 1995 and
1994:
<TABLE>
<CAPTION>
Quarters Ended Year-to-Date
September 30, September 30,
---------------- -----------------
1995 1994 1995 1994
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Balance, beginning of period $535 $ 961 $715 $ 1,086
Provision 160 390 580 1,040
Charge-offs (265) (270) (865) (1,045)
---- ------ ---- -------
Balance, end of period $430 $1,081 $430 $ 1,081
==== ====== ==== =======
</TABLE>
Properties substantively repossessed, for which the Bank has not completed
legal transfer of ownership but is in possession of the collateral, included in
the above, totalled $565,000 at September 30, 1995 and $2.3 million at December
31, 1994, respectively. 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 $1.5 million in the first nine months of 1995, as
compared to $1.8 million in the first nine months of 1994. The addition to the
valuation allowance for other real estate owned totalled $580,000 for the first
nine months of 1995 as compared to $1.0 million in the same period in 1994.
Operating costs associated with acquiring, maintaining and disposing of other
real estate owned added another $1.5 million to the losses on real estate
operations during the first nine months of 1995, as compared to $2.0 million in
the corresponding period in 1994.
During the first nine months of 1995, sales of other real estate owned
totalled $6.1 million, as compared to $6.9 million in the first nine months of
1994. In the first nine months of 1995, net gains of $510,000 on sales of
other real estate owned were recognized as compared to net gains of $1.3
million 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 $1.2 million are anticipated for the fourth
quarter. There is no assurance such sales will take place. There were no
commitments for capital expenditures on real estate acquired by foreclosure at
September 30, 1995.
- 12 -
<PAGE> 15
ALLOWANCE FOR LOAN LOSSES. The following table summarizes the activity in the
Bank's allowance for loan losses for the quarters and nine months ended
September 30, 1995 and 1994:
<TABLE>
<CAPTION>
Quarters Ended Year-to-Date
September 30, September 30,
--------------------- ---------------------
1995 1994 1995 1994
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $11,714 $14,286 $12,343 $13,392
Balance of acquired institution --- --- --- 1,715
Provision 480 --- 805 ---
Charge-offs:
Residential real estate (483) (645) (1,159) (935)
Commercial real estate (173) (838) (613) (1,391)
Construction and land (9) (16) (52) (16)
Commercial --- --- (22) (145)
Consumer (103) (60) (145) (133)
------- ------- ------- -------
Total charge-offs (768) (1,559) (1,991) (2,620)
------- ------- ------- -------
Recoveries:
Residential real estate 25 1 36 2
Commercial real estate 63 -- 180 56
Construction and land -- 7 2 7
Commercial 42 64 164 235
Consumer 7 6 24 18
------- ------- ------- -------
Total recoveries 137 78 406 318
------- ------- ------- -------
Net charge-offs (631) (1,481) (1,585) (2,302)
------- ------- ------- -------
Balance at end of period $11,563 $12,805 $11,563 $12,805
======= ======= ======= =======
Ratio of annualized net
charge-offs to average
loans outstanding 0.37% 0.98% 0.32% 0.55%
</TABLE>
Management periodically analyzes the adequacy of the allowance for loan losses.
See "Results of Operations - Provision for Loan Losses." Charge-offs totalled
$768,000 during the third quarter of 1995 and were spread out among 37 loans;
the largest charge-off during the quarter was $56,000.
INVESTMENTS. As of September 30, 1995, the Bank's total investment portfolio
amounted to $337.8 million, a decrease of $14.8 million from $352.7 million at
year-end 1994. This decrease resulted primarily from the sale of $27.4 million
in investments available for sale partially offset by an increase of $13.8
million in short-term investments. 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 primarily 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
The following table presents the carrying values of the investment portfolio at
September 30, 1995 and December 31, 1994:
<TABLE>
<CAPTION>
9/30/95 12/31/94
-------- --------
(In thousands)
<S> <C> <C>
SHORT-TERM INVESTMENTS $ 19,000 $ 5,200
======== ========
INVESTMENTS AVAILABLE FOR SALE (MARKET VALUE):
U.S. government and federal agency obligations $ 39,410 $ 52,523
Other bonds and obligations 9,006 11,496
-------- --------
Total bonds and obligations 48,416 64,019
-------- --------
FHLMC participation certificates 4,969 7,771
Collateralized mortgage obligations 1,217 12,948
GNMA mortgage-backed securities 38,521 38,711
-------- --------
Total mortgage-backed securities 44,707 59,430
-------- --------
Total investments available for sale $ 93,123 $123,449
======== ========
INVESTMENTS HELD TO MATURITY (AMORTIZED COST):
U.S. government and federal agency obligations $ 26,058 $ 16,259
Other bonds and obligations 28,384 24,349
-------- --------
Total bonds and obligations 54,442 40,608
-------- --------
FHLMC participation certificates 82,016 88,080
Collateralized mortgage obligations 1,368 1,752
GNMA mortgage-backed securities 4,583 4,939
FNMA pass-through certificates 81,808 86,920
Other asset-backed securities 1,498 1,737
-------- --------
Total mortgage-backed securities 171,273 183,428
-------- --------
Total investments held to maturity $225,715 $224,036
======== ========
Total investments $337,838 $352,685
======== ========
</TABLE>
The following table presents the gross unrealized gains and losses by major
categories of securities as of September 30, 1995.
<TABLE>
<CAPTION>
Unrealized Unrealized
Gains Losses
---------- ----------
(In thousands)
<S> <C> <C>
INVESTMENTS AVAILABLE FOR SALE:
U.S. government and federal agency obligations $ --- $ (766)
Other bonds and obligations 58 (51)
Mortgage-backed securities 308 (342)
------ -------
Total investments available for sale 366 (1,159)
------ -------
INVESTMENTS HELD TO MATURITY:
U.S. government and federal agency obligations $ 307 $ (19)
Other bonds and obligations 238 (77)
Mortgage-backed securities 1,254 (1,392)
------ -------
Total investments held to maturity 1,799 (1,488)
------ -------
Total unrealized gains and losses $2,165 $(2,647)
====== =======
</TABLE>
At September 30, 1995, the Bank's net unrealized loss on investments available
for sale, net of applicable income taxes, amounted to $453,000, for a change of
$4.1 million from a net loss of $4.6 million at December 31, 1994. At
September 30, 1995, the Bank's net unrealized gain on investments held to
maturity totalled $311,000, a change of $12.9 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 $15.7 million from
$727.9 million at December 31, 1994 to $743.6 million at September 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.
The following table shows the composition of the Bank's deposits at September
30, 1995 and December 31, 1994:
<TABLE>
<CAPTION>
9/30/95 12/31/94
------- --------
(In thousands)
<S> <C> <C>
Demand deposit accounts $ 50,308 $ 45,968
Regular savings accounts 69,725 76,571
NOW accounts 69,528 65,882
Money market deposit accounts 130,233 143,203
Certificates of deposit 423,842 396,234
-------- --------
Total deposits $743,636 $727,858
======== ========
</TABLE>
Securities sold under agreements to repurchase increased $28.4 million from
$4.0 million at December 31, 1994, to $32.4 at September 30, 1995. Federal
Home Loan Bank advances decreased $16.3 million from December 31, 1994, to
$230.9 million at September 30, 1995. The increase in total borrowings
reflects the Bank's need to fund the increase in total assets.
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 third quarter of 1995, the Company paid dividends in the amount of
$506,000 or $0.12 per share and the Bank paid a dividend to the Company in the
amount of $1.5 million. In October, 1995, the Company declared a dividend in
the amount of $0.12 per share or approximately $507,000, payable in the fourth
quarter of 1995.
Cash flows provided by operations decreased $24.3 million from the first nine
months of 1994 to $11.1 million in the first nine months of 1995 due to a
decrease in assets held for sale. Cash flows used by investing activities
totalled $20.7 million for the nine months ended September 30, 1995, down from
cash flows used by investing activities of $108.9 million during the equivalent
period last year. This was mainly attributable to fewer purchases of
mortgage-backed securities as well as reduced principal repayments on those
securities and a reduction in new loan volume. The Company's cash flows
provided by financing activities decreased for the period ended September 30,
1995 to $26.7 million, as compared to $82.7 million in the equivalent period in
1994 due to a decrease in new FHLB advances and a reduction in the growth of
total deposits.
At September 30, 1995, home equity, reserve credit and commercial unused lines
of credit totalled $76.5 million. Outstanding commitments to originate real
estate loans totalled $23.1 million. Unadvanced portions of real estate loans
amounted to $10.1 million. Standby letters of credit were $494,000. Loans
sold with recourse totalled $6.8 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 and Andover Bank NH continues to maintain a
level of capital in excess of all applicable minimum regulatory requirements.
The following table presents regulatory capital ratios for Andover Bank:
<TABLE>
<CAPTION>
Minimum Actuals
Regulatory -----------------
Requirements 9/30/95 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 12.7 12.2
Total capital ratio 8.0 13.9 13.5
</TABLE>
At September 30, 1995, the Company's leverage or core capital ratio was 7.7%
compared to 7.4% at December 31, 1994. At September 30, 1995, the Company's
ratio of Tier 1 and total capital to risk-weighted assets was 13.6% and 14.9%
respectively, as compared to 13.3% and 14.6% respectively, at the end of 1994.
Andover Bank NH maintained regulatory capital ratios of 85.6% for leverage and
196.6% for both the Tier 1 and total capital ratios as of September 30, 1995.
- 16 -
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
RESULTS OF OPERATIONS
GENERAL. Net income amounted to $6.8 million, $1.62 per share, for the nine
months ended September 30, 1995, compared to net income of $6.6 million, $1.57
per share, in the corresponding period of 1994.
The financial performance in the first nine months of 1995 was negatively
impacted by a $1.0 million pre-tax charge taken in the second quarter related
to the termination of the previously announced merger with Finest Financial
Corp. Additionally, the Company expanded its franchise with the opening of a
new community banking subsidiary, Andover Bank NH, in Salem, New Hampshire in
September, 1995. 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 $110,000 on sales and
redemptions of loans and the investment portfolio, compared to net losses of
$260,000 during the corresponding period of 1994. Andover's annualized return
on average assets decreased to 0.86% for the first nine months of 1995 compared
to 0.93% in the comparable period of 1994. The annualized return on average
stockholders' equity decreased to 11.35% in the first nine months of 1995 from
12.21% in the comparable period of 1994.
NET INTEREST AND DIVIDEND INCOME. Net interest and dividend income was $24.1
million for the first nine months of 1995, as compared to $22.3 million for the
same period in 1994, an increase of 8.1%. The amount of interest income
excluded from earnings on non-accruing loans amounted to $706,000 in the first
nine months of 1995 compared to $738,000 in the comparable period of 1994.
Increased market interest rates resulted in a 66 basis point rise in the yield
on earning assets from the first nine months of 1994 to the comparable period
of 1995. During this same period, the rate paid on interest-bearing
liabilities increased by 89 basis points. This continued compression resulted
in a reduced interest rate spread of 2.73% for the first nine months of 1995 as
compared to 2.97% in 1994.
PROVISION FOR LOAN LOSSES. The provision for loan losses for the first nine
months of 1995 was $805,000. 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 and restructured loans, delinquencies, prior
charge-offs and the collateral value of the underlying security. Net
charge-offs amounted to $1.6 million in the first nine months of 1995 versus
$2.3 million in the corresponding period last year.
NON-INTEREST INCOME. Andover recorded gains from non-interest sources of $2.9
million for the first nine months of 1995, as compared to $846,000 in the
corresponding period of 1994 primarily as a result of increased loan servicing
income and non-recurring gains of $384,000. Additionally, gains from sales and
redemptions of loans, and the investment portfolio, totalled $110,000 in 1995,
as compared to losses of $260,000 in the same period of 1994.
Losses on real estate operations totalled $1.5 million during the first nine
months of 1995 as compared to $1.8 million in the corresponding period of 1994.
A large component of the loss on real estate operations during the first nine
months of both 1995 and 1994 was comprised of write- downs of other real estate
owned totalling $580,000 and $1.0 million, respectively.
- 17 -
<PAGE> 20
Other income totalled $4.3 million in the first nine months of 1995 versus $2.9
million in the first nine months of 1994 due to increased loan servicing income
and reduced amortization of the deferred loan premium, increased fee income on
a larger deposit and loan base, and non-recurring gains on the sale of a
non-marketable security, former branch facility and the student loan portfolio.
NON-INTEREST EXPENSE. Non-interest expenses increased 15.5% to $15.1 million
in the first nine months of 1995 primarily due to the $1.0 million pre-tax
charge for the terminated merger with Finest as well as the cost of running a
larger institution. Salaries and benefits increased 6.7% to $7.2 million in
1995 due to increased personnel resulting from the Community acquisition as
well as merit increases. Office occupancy and equipment increased 7.4% to $1.7
million due to increased investments in computers and related costs for
depreciation. Deposit insurance premiums decreased to $813,000 due to the FDIC
premium refund totalling $471,000 in the third quarter of 1995. Data
processing expenses increased 18.5% to $896,000 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 slightly to $505,000 as a
result of increased cost control. Marketing expenses increased 14.2% to
$564,000 primarily due to an increased number of discretionary promotions and
the opening of the Salem, New Hampshire banking subsidiary. Other operating
expenses increased 38.2% to $2.4 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 $450,000 in the first
nine months of 1995. Offsetting this income tax benefit, the Company recorded
an income tax expense of $4.7 million on its financial statement earnings.
- 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
None
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.
November 13, 1995 /s/Gerald T. Mulligan
---------------------
President and
Chief Executive Officer
November 13, 1995 /s/Joseph F. Casey
------------------
Chief Financial Officer
and Treasurer
- 20 -
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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