<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 10-Q/A
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1996 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 13, 1996: 5,130,118 shares
<PAGE> 2
ANDOVER BANCORP, INC.
AND SUBSIDIARIES
----------------
Index
PART I - FINANCIAL INFORMATION
ITEM 1 Financial Statements Page
Consolidated Balance Sheets 1
Consolidated Statements of Operations 2
Consolidated Statements of Changes in
Stockholders' Equity 3
Consolidated Statements of Cash Flows 4-5
Notes to Consolidated Financial Statements 6
Analysis of Net Yield on Earning Assets 7
ITEM 2 Management's Discussion and Analysis of 8-17
Financial Condition and Results of Operations
For the Quarter Ended September 30, 1996
Management's Discussion and Analysis of 18-19
Results of Operations
For the Nine Months Ended September 30, 1996
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings 20
ITEM 2 Changes in Securities 20
ITEM 3 Defaults upon Senior Securities 20
ITEM 4 Submission of Matters to a Vote of Security Holders 20
ITEM 5 Other Information 20
ITEM 6 Exhibits and Reports on Form 8-K 20
Signatures 21
<PAGE> 3
ANDOVER BANCORP, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED BALANCE SHEETS
---------------------------
(Unaudited)
<CAPTION>
SEPT. 30, 1996 DEC. 31, 1995
-------------- -------------
(In thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 16,882 $ 19,236
Short-term investments 40,500 9,000
---------- ---------
Cash and cash equivalents 57,382 28,236
---------- ---------
Assets held for sale (Market value
$5,163 in 1995) --- 5,162
Investments available for sale (Amortized
cost of $102,079 in 1996 and $108,643
in 1995) 101,659 108,969
Investments held to maturity (Market value
$142,019 in 1996 and $169,761 in 1995) 143,273 167,263
Loans 859,616 768,598
Allowance for loan losses (12,035) (11,665)
---------- ---------
Net loans 847,581 756,933
---------- ---------
Other real estate owned, net 2,410 4,158
Premises and equipment, net 9,916 9,537
Accrued interest receivable 7,197 7,164
Stock in FHLBB, at cost 15,747 13,171
Deferred income taxes receivable 2,566 830
Mortgage servicing assets 8,196 6,609
Other assets 2,860 2,815
---------- ----------
Total assets $1,198,787 $1,110,847
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 787,740 $ 743,205
Securities sold under agreements
to repurchase 3,579 9,212
Federal Home Loan Bank advances 305,986 263,414
Mortgagors' escrow accounts 3,000 3,526
Income taxes payable 858 1,389
Accrued expenses and other liabilities 5,009 4,936
---------- ----------
Total liabilities 1,106,172 1,025,682
---------- ----------
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 5,154,968 in 1996
and 1995 515 515
Additional paid-in capital 71,493 71,515
Retained earnings 33,700 26,183
Treasury stock, at cost (890,329 shares
in 1996 and 917,997 shares in 1995) (12,848) (13,247)
Unrealized gains (losses) on investments
available for sale, net (245) 199
---------- ----------
Total stockholders' equity 92,615 85,165
---------- ----------
Total liabilities and stockholders' equity $1,198,787 $1,110,847
========== ==========
</TABLE>
The accompanying note(s) are an integral part of the consolidated financial
statements.
- 1 -
<PAGE> 4
ANDOVER BANCORP, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Unaudited)
<CAPTION>
QUARTERS ENDED YEAR-TO-DATE
SEPT. 30, SEPT. 30,
1996 1995 1996 1995
------- ------- ------- -------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Interest and dividend income:
Loans $16,585 $13,586 $47,688 $39,425
Mortgage-backed securities 3,297 3,816 10,061 11,813
Investment securities 1,369 1,770 4,115 5,312
Short-term investments 139 161 310 411
------- ------- ------- -------
Total interest and dividend income 21,390 19,333 62,174 56,961
------- ------- ------- -------
Interest expense:
Deposits 8,001 7,542 23,251 21,588
Federal Home Loan Bank advances 4,334 3,505 11,986 10,688
Securities sold under agreements to repurchase 161 313 742 623
------- ------- ------- -------
Total interest expense 12,496 11,360 35,979 32,899
------- ------- ------- -------
Net interest and dividend income 8,894 7,973 26,195 24,062
Provision for loan losses 1,305 480 2,060 805
------- ------- ------- -------
Net interest and dividend income
after provision for loan losses 7,589 7,493 24,135 23,257
------- ------- ------- -------
Non-interest income:
Net gains (losses) from sales and
redemptions of assets held for sale 32 (3) 197 85
Net gains (losses) from sales and redemptions
of investments available for sale (795) (52) (702) 21
Net gains from redemptions of
investments held to maturity --- 4 --- 4
Losses on real estate operations, net (371) (505) (1,239) (1,541)
Mortgage banking income 865 637 2,253 1,760
Other income 550 985 1,926 2,522
------- ------- ------- -------
Total non-interest income 281 1,066 2,435 2,851
------- ------- ------- -------
Non-interest expense:
Salaries and employee benefits 2,662 2,384 7,780 7,199
Office occupancy and equipment 656 556 2,034 1,719
Data processing 414 366 1,233 1,072
Mortgage banking expense 418 286 1,042 677
Professional fees 656 175 1,043 505
Marketing 232 171 688 564
Deposit insurance premiums 4 (39) 11 813
Merger expense --- --- (225) 1,000
Other operating expense 749 495 1,962 1,526
------- ------- ------- -------
Total non-interest expense 5,791 4,394 15,568 15,075
------- ------- ------- -------
Income before income tax expense
(benefit) and extraordinary item 2,079 4,165 11,002 11,033
Income tax expense (benefit) (1,743) 1,562 1,528 4,212
------- ------- ------- -------
Income before extraordinary item 3,822 2,603 9,474 6,821
Extraordinary item, net of tax (note 2) (173) --- (173) ---
------- ------- ------- -------
Net income $ 3,649 $ 2,603 $ 9,301 $ 6,821
======= ======= ======= =======
Average number of common shares outstanding 4,256 4,223 4,246 4,216
Income per share before extraordinary item $ 0.90 $ 0.62 $ 2.23 $ 1.62
Extraordinary item per share, net of taxes (note 2) (0.04) -- (0.04) --
------- ------- ------- -------
Net income per share $ 0.86 $ 0.62 $ 2.19 $ 1.62
======= ======= ======= =======
</TABLE>
The accompanying note(s) are an integral part of the consolidated financial
statements.
- 2 -
<PAGE> 5
ANDOVER BANCORP, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
Year Ended December 31, 1995 and Nine Months Ended September 30, 1996
(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, 1994 $513 $71,172 $18,701 $(13,247) $(4,617) $72,522
Net income --- --- 9,338 --- --- 9,338
Dividends declared and
paid ($0.44 per share) --- --- (1,856) --- --- (1,856)
Stock options exercised 2 343 --- --- --- 345
Change in unrealized
gains (losses) on
investments available
for sale --- --- --- --- 4,816 4,816
---- ------- ------- -------- ------- -------
Balance at December 31, 1995 515 71,515 26,183 (13,247) 199 85,165
Net income --- --- 9,301 --- --- 9,301
Dividends declared and
paid ($0.42 per share) --- --- (1,784) --- --- (1,784)
Stock options exercised --- (22) --- 399 --- 377
Change in unrealized
gains (losses) on
investments available
for sale --- --- --- --- (444) (444)
---- ------- ------- -------- ------- -------
Balance at September 30, 1996 $515 $71,493 $33,700 $(12,848) $ (245) $92,615
==== ======= ======= ======== ======= =======
<FN>
- -------------------------------------------------------
(1) Net of related tax effect.
</TABLE>
The accompanying note(s) are an integral part of the consolidated financial
statements.
- 3 -
<PAGE> 6
ANDOVER BANCORP, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
<CAPTION>
YEAR-TO-DATE
SEPT. 30,
-----------------------
1996 1995
--------- ---------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,301 $ 6,821
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 2,060 805
Net losses on sales and provisions
for other real estate owned 342 70
Net gains from sales and redemptions of
investments available for sale (703) (21)
Net gains from redemptions of investments
held to maturity -- (4)
Net gains from sales and writedowns of
assets held for sale (165) (85)
Depreciation and amortization 1,036 842
Amortization of fees, discounts and premiums, net 337 455
(Increase) decrease in:
Assets held for sale 3,196 (893)
Accrued interest receivable (33) (741)
Income taxes receivable (1,435) 2,876
Mortgage servicing assets (1,587) (1,497)
Other assets (45) 1,851
Increase (decrease) in:
Mortgagors' escrow accounts (526) 922
Accrued income taxes payable (531) (480)
Accrued expenses and other liabilities 73 154
--------- ---------
Net cash provided by operating activities 11,320 11,075
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments available for sale (77,535) ---
Purchases of investment securities and FHLB stock (4,120) (17,171)
Purchases of mortgage-backed securities --- (2,961)
Proceeds from sales of investments available for sale 76,173 27,370
Proceeds from maturities and redemptions of investments
available for sale 6,023 2,572
Proceeds from maturities and redemptions of investments
held to maturity 4,000 3,031
Principal repayments of investments available for sale 6,755 5,934
Principal repayments of mortgage-backed securities 21,284 14,907
Whole loan purchases (30,721) ---
Net increase in loans (65,537) (59,721)
Capital expenditures on premises and equipment, net (1,415) (538)
Proceeds from disposition of other real estate owned 2,881 6,120
Capital expenditures on other real estate owned (29) (250)
--------- ---------
Net cash used by investing activities (62,241) (20,707)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 44,535 15,778
Net increase (decrease) in securities sold
under agreements to repurchase (5,633) 28,382
Proceeds from issuance of FHLB advances 399,469 194,046
Principal repayments of FHLB advances (356,897) (210,341)
Dividends paid (1,784) (1,348)
Stock options exercised 377 222
--------- ---------
Net cash provided by financing activities 80,067 26,739
--------- ---------
Net increase in cash and cash equivalents 29,146 17,107
Cash and cash equivalents, at beginning of period 28,236 23,382
--------- ---------
Cash and cash equivalents, at end of period $ 57,382 $ 40,489
========= =========
</TABLE>
- 4 -
<PAGE> 7
ANDOVER BANCORP, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
-------------------------------------
(Unaudited)
YEAR-TO-DATE
SEPT. 30,
--------------------
1996 1995
------- -------
(In thousands)
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $36,193 $32,933
Income taxes 3,333 1,799
Supplemental noncash investing and financing activities:
Conversion of real estate loans to mortgage-backed
securities held for sale 27,169 10,192
Conversion of real estate loans to mortgage-backed
securities available for sale 2,199 ---
Transfer of mortgage-backed securities held for
sale to investments available for sale 2,131 ---
Transfer of loans to other real estate owned 1,446 2,632
</TABLE>
The accompanying note(s) are an integral part of the consolidated financial
statements.
- 5 -
<PAGE> 8
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES 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 and Andover Bank NH (collectively
the "Banks"), presented herein, should be read in conjunction with the
consolidated financial statements of the Company as of and for the
year ended December 31, 1995. Andover Bank (the "Bank") is a state
chartered savings bank with its headquarters located in Andover,
Massachusetts. Andover Bank NH ("ABNH") is a state chartered guaranty
savings bank established in September, 1995 and headquartered in
Salem, New Hampshire. 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.
2) EARLY EXTINGUISHMENT OF DEBT
During the third quarter of 1996, the Company refinanced approximately
$19.1 million of Federal Home Loan Bank (FHLB) advances which had a
weighted average cost of 7.88%, incurring a prepayment fee of $298,000
or $173,000 net of tax. The source of funds used was new FHLB advances
with a weighted average rate of 5.72%.
<TABLE>
3) STOCK DIVIDEND
After the close of the periods presented, the Company declared a 20%
stock dividend, payable in the form of one share for each five shares
of common stock outstanding, to stockholders of record on October 28,
1996. The payment date for the stock dividend is November 13, 1996.
The effect of this stock dividend on earnings per share for all
periods presented in the report is as follows:
<CAPTION>
Quarters Ended Year-to-Date
September 30, 1996 September 30, 1996
1996 1995 1996 1995
----- ----- ----- -----
<S> <C> <C> <C> <C>
Income Before Extraordinary Item $0.75 $0.51 $1.86 $1.35
Extraordinary Item, Net of Taxes (0.03) -- (0.03) --
----- ----- ----- -----
Net Income $0.72 $0.51 $1.83 $1.35
===== ===== ===== =====
Weighted Average Shares
Outstanding 5,106,948 5,067,474 5,095,547 5,058,947
</TABLE>
- 6 -
<PAGE> 9
ANDOVER BANCORP, INC. AND SUBSIDIARIES
<TABLE>
ANALYSIS OF NET YIELD ON EARNING ASSETS
(Unaudited)
<CAPTION>
Quarters Ended Sept. 30,
------------------------
1996 1995
--------------------------------- ----------------------------------
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 $ 10,751 $ 139 5.14% $ 10,823 $ 161 5.90%
Investment securities (1) 92,274 1,369 5.90 115,273 1,770 6.09
Mortgage-backed securities (1) 192,551 3,297 6.81 227,471 3,816 6.66
---------- ------- ---------- -------
Total investments 295,576 4,805 6.47 353,567 5,747 6.45
---------- ------- ---------- -------
Real estate loans (1) (2) 769,197 14,940 7.73 614,140 11,918 7.70
Consumer loans (2) 56,088 1,180 8.37 50,177 1,180 9.33
Commercial loans (2) 20,027 465 9.24 17,366 488 11.15
---------- ------- ---------- -------
Total loans 845,312 16,585 7.81 681,683 13,586 7.91
---------- ------- ---------- -------
Total interest-earning assets 1,140,888 21,390 7.46% 1,035,250 19,333 7.41%
------- -------
Allowance for loan losses (11,875) (11,550)
Other real estate owned 2,538 6,014
Other assets 52,420 44,483
---------- ----------
Total assets $1,183,971 $1,074,197
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts $ 68,308 $ 171 1.00% $ 63,753 $ 185 1.15%
Regular savings accounts 73,517 415 2.25 71,586 393 2.18
Money market deposit accounts 127,167 928 2.90 131,070 870 2.63
Certificates of deposit 451,429 6,487 5.72 424,568 6,094 5.69
---------- ------- ---------- -------
Total interest-bearing deposits 720,421 8,001 4.08 690,977 7,542 4.33
---------- ------- ---------- -------
Borrowed funds:
Reverse repurchase agreements 12,218 161 5.24 20,682 313 6.00
Federal Home Loan Bank advances 291,467 4,334 5.92 226,892 3,505 6.13
---------- ------- ---------- -------
Total borrowed funds 303,685 4,495 5.89 247,574 3,818 6.12
---------- ------- ---------- -------
Total interest-bearing
liabilities 1,024,106 12,496 4.85% 938,551 11,360 4.80%
------- -------
Demand deposits 60,474 48,648
Other liabilities 8,542 5,572
---------- ----------
Total liabilities 1,093,122 992,771
Stockholders' equity 90,849 81,426
---------- ----------
Total liabilities and stock-
holders' equity $1,183,971 $1,074,197
========== ==========
Net interest income $ 8,894 $ 7,973
======= =======
Interest rate spread 2.61% 2.61%
===== =====
Net yield on earning assets 3.10% 3.06%
===== =====
</TABLE>
<TABLE>
<CAPTION>
Year-to-Date Sept. 30,
----------------------
1996 1995
------------------------------------ ---------------------------------
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 $ 7,898 $ 310 5.24% $ 9,481 $ 411 5.80%
Investment securities (1) 92,661 4,115 5.93 113,361 5,312 6.27
Mortgage-backed securities (1) 197,117 10,061 6.82 235,367 11,813 6.71
---------- ------- -------- -------
Total investments 297,676 14,486 6.50 358,200 17,536 6.55
---------- ------- -------- -------
Real estate loans (1) (2) 736,116 42,767 7.76 596,129 34,563 7.75
Consumer loans (2) 54,210 3,506 8.64 50,529 3,457 9.15
Commercial loans (2) 19,357 1,415 9.76 16,754 1,405 11.21
---------- ------- -------- -------
Total loans 809,683 47,688 7.87 663,412 39,425 7.95
---------- ------- -------- -------
Total interest-earning assets 1,107,359 62,174 7.50% 1,021,621 56,961 7.45%
------- -------
Allowance for loan losses (11,760) (11,845)
Other real estate owned 3,046 7,323
Other assets 49,332 44,274
---------- --------
Total assets $1,147,977 $1,061,373
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts $ 66,430 $ 491 0.99% $ 62,322 $ 547 1.17%
Regular savings accounts 72,135 1,196 2.21 72,850 1,177 2.16
Money market deposit accounts 128,138 2,767 2.88 134,936 2,603 2.58
Certificates of deposit 437,157 18,797 5.74 417,517 17,261 5.53
---------- ------- -------- -------
Total interest-bearing deposits 703,860 23,251 4.41 687,625 21,588 3.94
---------- ------- -------- -------
Borrowed funds:
Reverse repurchase agreements 18,963 742 5.23 13,565 623 6.14
Federal Home Loan Bank advances 270,696 11,986 5.91 230,248 10,688 6.21
---------- ------- -------- -------
Total borrowed funds 289,659 12,728 5.87 243,813 11,311 6.20
---------- ------- -------- -------
Total interest-bearing
liabilities 1,051,087 35,979 4.84% 931,438 32,899 4.72%
------- -------
Demand deposits 57,568 44,158
Other liabilities 8,619 5,453
---------- --------
Total liabilities 1,059,706 981,049
Stockholders' equity 88,271 80,324
---------- --------
Total liabilities and stock-
holders' equity $1,147,977 $1,061,373
========== ==========
Net interest income $26,195 $24,062
======= =======
Interest rate spread 2.66% 2.73%
===== =====
Net yield on earning assets 3.16% 3.15%
===== =====
<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 92 days in the third quarter and 274 days in
the year-to-date period for 1996.
</TABLE>
- 7 -
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
----------------------------------------
This quarterly report contains certain statements that are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The
Company's actual results could differ materially from those projected in the
forward-looking statements as a result, among other factors, of the risk factors
set forth in the Company's filings with the Securities and Exchange Commission
and of changes in general economic conditions, changes in interest rates and
changes in the assumptions used in making such forward-looking statements.
RESULTS OF OPERATIONS
- ---------------------
GENERAL. Net income amounted to $3.6 million, $0.86 per share, for the quarter
ended September 30, 1996, compared to net income of $2.6 million, $0.62 per
share, in the corresponding quarter of 1995. The current quarter results include
a gain of $2.5 million (in the form of a tax benefit) in connection with the
recently enacted Small Business Job Protection Act of 1996. Also during the
current quarter, the Company restructured its balance sheet resulting in
increased professional fees as well as a pre-tax loss of $1.1 million from the
sale of low yielding investments and the early extinguishment of high cost debt.
Management believes that this restructuring will result in an improved net
interest margin. The 1995 third quarter's results included a $471,000 refund
from the Federal Deposit Insurance Corporation resulting from a decrease in
insurance rates as well as non-recurring gains of $309,000 related to the sale
of a non-marketable security and a former branch facility.
Progress continues to be made in the area of reducing non-performing assets and
related costs. While the regional economy remains uncertain, commercial real
estate values have shown signs of stabilizing. Residential real estate values
appear to have stabilized in most markets and, in some areas, have increased in
value. While continued progress has been made in reducing non-performing assets,
the overall levels of non-performing assets continue to result in foregone
income and other operating costs associated with holding and disposing of such
assets. Andover's annualized return on average assets increased to 1.23% for the
third quarter of 1996 compared to 0.96% in the third quarter of 1995. The
annualized return on average stockholders' equity increased to 15.98% in the
third quarter of 1996 from 12.68% in the third quarter of 1995.
NET INTEREST AND DIVIDEND INCOME. Net interest and dividend income was $8.9
million for the third quarter of 1996 as compared to $8.0 million for the same
period in 1995. This increase resulted from a rise in interest-earning assets
coupled with a flat interest rate spread. Foregone income, which represents the
amount of interest income earned but excluded from earnings on non-performing
loans, amounted to $190,000 in the third quarter of 1996, versus $179,000 in the
comparable quarter of 1995. The Company shifted its earning asset mix from 66%
loans on average during the third quarter of 1995 to 74% in the current quarter.
This shift was primarily accomplished through the sale of investments and the
reinvestment into loans, both originated by the Company and purchased from
another institution. This combination resulted in an increased yield on earning
assets of 3.10% for the third quarter of 1996 compared to 3.06% in 1995.
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 the collateral values of the underlying
security. Because the allowance for loan losses is based on various estimates,
and includes a high degree of judgment, 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 Banks' allowance and may require the Banks to provide additions to
the allowance based on their assessment, which may differ from management's
assessment.
- 8 -
<PAGE> 11
The provision for loan losses for the third quarter of 1996 was $1.3 million
versus $480,000 in the comparable period in 1995. There are several contributing
factors that led to management's conclusion that a higher provision for loan
losses was necessary in the third quarter of 1996. These factors include loan
growth, the level of nonaccrual and restructured loans as well as the level of
delinquent loans and charge-offs. Charge-offs in the third quarter of 1996
totalled $1.5 million versus $768,000 in the corresponding quarter last year.
The majority of the third quarter 1996 charge-offs resulted from the
restructuring of a previously reported potential problem loan.
The reserve coverage as a percentage of nonaccruing loans totalled 105.1% at
September 30, 1996. This was a slight increase from the respective reserve
coverage at the 1995 year-end. Additionally, $99,000 in interest payments
applied as principal reductions on nonaccrual loans instead of being recorded as
interest income and $405,000 in loan loss recoveries received during the third
quarter of 1996 further contributed to management's assessment of the adequacy
of the allowance for loan losses.
NON-INTEREST INCOME. Net losses from sales and redemptions of loans, investments
and mortgage-backed securities held for sale and available for sale totalled
$763,000 in the third quarter of 1996 and $51,000 in the comparable period of
1995. Included in the net loss for the quarter ended September 30, 1996 was a
net loss of $822,000 resulting from the sale of $40 million of low yielding
securities. The majority of these securities were replaced with similar
securities at higher yields.
Losses of $371,000 on real estate operations were recognized in the third
quarter of 1996 as compared to $505,000 in the third quarter of 1995. A
significant portion of the losses on real estate operations during the third
quarters of both 1996 and 1995 were operating costs associated with acquiring,
maintaining and disposing of other real estate owned totalling $272,000 and
$404,000, respectively. Provisions for losses on other real estate owned added
another $174,000 to the loss on real estate operations during the third quarter
of 1996, as compared to $160,000 in the third quarter of 1995. In the third
quarter of 1996, sales of other real estate owned totalled $484,000 as compared
to $1.4 million in the corresponding quarter of 1995.
Mortgage banking income totalled $865,000 in 1996's third quarter versus
$637,000 in 1995's comparable quarter due to an increase in the Company's
servicing portfolio. Total loans serviced for investors totalled $889.5 million
and $661.5 million, respectively, at September 30, 1996 and 1995.
Other income totalled $550,000 in 1996's third quarter as compared to $985,000
million in the third quarter of 1995. The majority of the decrease was due to
non-recurring gains of $309,000 recorded during the third quarter of 1995
related to the sale of a non-marketable security and a former branch facility,
as well as a non-recurring loss of $160,000 recorded during the current quarter
resulting from the pending liquidation of an ownership interest in a state
mandated loan program.
NON-INTEREST EXPENSE. Non-interest expenses increased by $1.4 million, or 31.8%,
to $5.8 million in the third quarter of 1996 from the third quarter of 1995.
Salaries and employee benefits, the largest component of non-interest expense,
increased $278,000 or 11.7% from $2.4 million for the third quarter of 1995 to
$2.7 million in the current year's corresponding quarter. This increase was
primarily due to a higher head count and salary increases. Office occupancy
expenses increased from $556,000 in the third quarter of 1995 to $656,000 for
the corresponding period of 1996. This increase reflects the costs of
maintaining an additional branch as well as the effects of increased investments
in technology and the related costs for depreciation. Data processing expenses
increased 13.1% from $366,000 for the quarter ended September 30, 1995 to
$414,000 for the third quarter of 1996 due to an increase in the number of loans
and deposits. Mortgage banking expenses increased $132,000 from $286,000 in the
third quarter of 1995 to $418,000 for the third quarter of 1996 due to increased
amortization of the purchased servicing rights. This amortization totalled
$347,000 in the third quarter of 1996 versus $194,000 in the comparable quarter
in 1995. Professional fees increased 274.9% from $175,000 in the third quarter
of 1995 to $656,000 in the corresponding period of 1996 as a result of tax
- 9 -
<PAGE> 12
planning strategies undertaken during the third quarter of 1996 as well as
increased corporate legal and miscellaneous consulting fees. Marketing expenses
increased 35.7% from $171,000 in the third quarter of 1995 to $232,000 in the
current year's corresponding quarter due to increased discretionary promotions.
Other operating expenses increased from $495,000 for the quarter ended September
30, 1995 to $749,000 in the third quarter of 1996 due mainly to a non-recurring
insurance expense of $155,000 in the current quarter.
INCOME TAX EXPENSE (BENEFIT). During the third quarter of 1996, the Company
recorded a one-time gain of $2.5 million (in the form of a tax benefit) in
connection with the enactment of the Small Business Job Protection Act of 1996
(SBA). This legislation resulted in the repeal of the thrift tax bad debt method
of accounting for tax purposes (Internal Revenue Code Section 593) and,
therefore, a portion of the deferred tax liability related to the tax bad debt
reserves was eliminated. 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 $125,000 for the third
quarter of 1996 as compared to $150,000 in the third quarter of 1995. Partially
offsetting these income tax benefits in 1996, the Company recorded an income tax
expense of $882,000, before extraordinary item, on its financial statement
earnings.
FINANCIAL CONDITION
- -------------------
Total assets increased $87.9 million from December 31, 1995 to $1,198.8 million
at September 30, 1996 principally due to an increase of $91.0 million in the
loan portfolio. This loan growth was funded by both deposits and borrowed funds.
<TABLE>
LOANS. The following table shows the composition of the Company'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>
9/30/96 12/31/95
-------- --------
(In thousands)
<S> <C> <C>
Real estate loans:
Residential $619,607 $558,231
Commercial 131,319 121,909
Construction and land 31,817 18,138
-------- --------
Total real estate loans 782,743 698,278
-------- --------
Consumer loans 56,680 51,170
Commercial loans 20,193 19,150
-------- --------
Total loans $859,616 $768,598
======== ========
</TABLE>
Residential real estate loans increased $61.4 million from December 31, 1995 to
$619.6 million at September 30, 1996. During the third quarter of 1996, the
Company purchased $26.7 million of residential loans from a local bank.
Residential loans closed during the first nine months of 1996 totalled $139.0
million as compared to $93.7 million during the corresponding period of 1995.
Interest rates affect both the mortgage refinance and home purchase markets and
were at relatively lower rates in the first nine months of 1996 resulting in the
higher level of closings in 1996 over 1995's level of closings.
Commercial real estate loans increased to $131.3 million at September 30, 1996
from $121.9 million at December 31, 1995, resulting primarily from new loan
volume. Construction and land loan balances increased $13.7 million to $31.8
million at September 30, 1996. Outstanding commercial loans increased $1.0
million from December 31, 1995, to $20.2 million at September 30, 1996.
Originations of commercial real estate, construction and land loans, and
commercial loans are sensitive to interest rates, real estate values and
business activity and totalled $65.0 million in the first nine months of 1996 as
compared to $29.0 million in the first nine months of 1995. The increase in
origination volume was also attributable to the de novo expansion into southern
New Hampshire.
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.
- 10 -
<PAGE> 13
Significant progress has been made over the past several years in reducing total
non-performing assets. However, Andover continues to experience levels of
non-performing assets that produce 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 1996 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 1996 on
nonaccruing loans amounted to approximately $258,000. Additionally, another
$242,000 in interest payments were applied as a reduction of the nonaccruing
loan balances instead of as interest income during the first nine months of
1996.
<TABLE>
The following table shows the composition of non-performing assets at September
30, 1996 and December 31, 1995:
<CAPTION>
9/30/96 12/31/95
------- --------
(Dollars in thousands)
<S> <C> <C>
Nonaccruing loans $11,456 $11,627
Other real estate owned 2,410 4,158
------- -------
Total non-performing assets $13,866 $15,785
======= =======
Total non-performing assets as a
percentage of total assets 1.2% 1.4%
</TABLE>
Total non-performing assets decreased $1.9 million in the first nine months of
1996, primarily due to the sale of other real estate owned. During the first
nine months of 1996, $1.4 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 ending on the date listed below:
<CAPTION>
9/30/96 6/30/96 3/31/96
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Beginning balance $14,212 $15,358 $15,785
Additions 1,904 3,465 1,852
Sales, restructurings,
payments and other decreases (1,611) (4,168) (1,880)
Charge-offs and valuation
adjustments (639) (443) (399)
------- ------- -------
Balance at end of quarter $13,866 $14,212 $15,358
======= ======= =======
<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>
At September 30, 1996, total impaired loans were $9.4 million, of which $2.8
million had related allowances of $158,000 and $6.6 million which did not
require a related allowance. During the period ended September 30, 1996, the
average recorded value of impaired loans was $11.1 million and the related
amount of interest income recognized was $161,000.
- 11 -
<PAGE> 14
<TABLE>
NONACCRUING LOANS. The following table shows the composition of nonaccruing loans
at September 30, 1996 and December 31, 1995:
<CAPTION>
9/30/96 12/31/95
------- --------
(Dollars in thousands)
<S> <C> <C>
Residential real estate $ 2,730 $ 3,037
Commercial real estate 7,786 7,195
Construction and Land 79 ---
Commercial 699 1,136
Consumer 162 259
------- -------
Total loans on nonaccrual $11,456 $11,627
======= =======
Allowance for loan losses $12,035 $11,665
======= =======
Allowance for loan losses as a
percentage of nonaccruing loans 105.1% 100.3%
Allowance for loan losses as a
percentage of total loans 1.4% 1.5%
</TABLE>
Of the $11.5 million in nonaccruing loans at September 30, 1996, $3.6 million or
31.3% were less than 90 days past due but have exhibited some other credit
weakness. Of the $3.6 million in loans less than 90 days past due, approximately
$964,000 or 26.9% have had the terms or interest rate, or both, modified.
Substantially all of the modified loans are performing in accordance with their
modified terms but have not demonstrated sufficient sustained performance
required to remove these loans from their nonaccrual status.
A significant portion of the nonaccrual 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 may result in a continued high level of
non-performing assets. At September 30, 1996, approximately $6.0 million of
non-accrual loans and $1.4 million of other real estate owned were secured by
properties located in Lawrence, consisting primarily of multi-family dwellings,
as compared to approximately $9.1 million and $2.3 million, respectively, at
December 31, 1995. The amount of accruing loans secured by properties in
Lawrence totalled approximately $49.7 million at September 30, 1996.
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, nonaccruing loans would
likely increase, reversing progress made by the Company 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 due to the
deterioration in the financial position of the borrower. Restructured loans are
classified as such until the obligation has performed for a sustained period of
time at a market rate of interest and its ultimate collectibility is no longer
in doubt.
At September 30, 1996 and December 31, 1995, restructured loans totalled $1.8
million and $5.6 million, respectively. The weighted average interest rate on
restructured loans as of September 30, 1996 was approximately 6.5%. Interest
income that would have been recognized in 1996 if restructured loans had been
performing in accordance with their original terms was $115,000. The actual
amount of interest on these loans that was recognized in interest income in 1996
was $91,000.
OTHER REAL ESTATE OWNED. The deterioration in the New England real estate market
and economy caused foreclosures resulting in the transfer of loans to other real
estate owned.
- 12 -
<PAGE> 15
<TABLE>
The following table shows the composition of other real estate owned at
September 30, 1996 and December 31, 1995:
<CAPTION>
9/30/96 12/31/95
------- --------
(In thousands)
<S> <C> <C>
Residential real estate $ 902 $ 1,131
Commercial real estate 439 572
Multi-family real estate 1,082 1,820
Construction and land 251 1,048
------- -------
2,674 4,571
Valuation allowance (264) (413)
------- -------
Total other real estate owned $ 2,410 $ 4,158
======= =======
</TABLE>
<TABLE>
The following table shows changes in the valuation allowance for other real
estate owned for the quarters and nine months ended September 30, 1996 and 1995:
<CAPTION>
Quarters Ended Year-to-Date
September 30, September 30,
---------------- -----------------
1996 1995 1996 1995
----- ----- ----- -----
(In thousands)
<S> <C> <C> <C> <C>
Balance, beginning of period $ 286 $ 535 $ 413 $ 715
Provision 174 160 479 580
Charge-offs (196) (265) (628) (865)
----- ----- ----- -----
Balance, end of period $ 264 $ 430 $ 264 $ 430
===== ===== ===== =====
</TABLE>
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 $1.2 million in the first nine months of 1996, as compared to $1.5
million in the first nine months of 1995. The addition to the valuation
allowance for other real estate owned totalled $479,000 for the first nine
months of 1996 as compared to $580,000 in the same period in 1995. Operating
costs associated with acquiring, maintaining and disposing of other real estate
owned added another $897,000 to the losses on real estate operations during the
first nine months of 1996, as compared to $1.5 million in the corresponding
period in 1995.
During the first nine months of 1996, sales of other real estate owned totalled
$2.9 million, as compared to $6.1 million in the first nine months of 1995. In
the first nine months of 1996, net gains of $137,000 on sales of other real
estate owned were recognized as compared to net gains of $510,000 on sales of
properties in the corresponding period in 1995. Pending sales under firm offers
or purchases and sales agreements on properties with carrying values of
approximately $1.1 million are anticipated for the fourth quarter of 1996.
However, 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, 1996.
- 13 -
<PAGE> 16
<TABLE>
ALLOWANCE FOR LOAN LOSSES. The following table summarizes the activity in the
Company's allowance for loan losses for the quarters and nine months ended
September 30, 1996 and 1995:
<CAPTION>
Quarters Ended Year-to-Date
September 30, September 30,
------------------- -------------------
1996 1995 1996 1995
------- ------- ------- -------
(Dollars In thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $11,802 $11,714 $11,665 $12,343
Provision 1,305 480 2,060 805
Charge-offs:
Residential real estate (232) (483) (529) (1,159)
Commercial real estate (1,150) (173) (1,836) (613)
Construction and land --- (9) --- (52)
Commercial (49) --- (100) (22)
Consumer (46) (103) (148) (145)
------- ------- ------- -------
Total charge-offs (1,477) (768) (2,613) (1,991)
------- ------- ------- -------
Recoveries:
Residential real estate 14 25 37 36
Commercial real estate 80 63 152 180
Construction and land 210 -- 389 2
Commercial 98 42 329 164
Consumer 3 7 16 24
------- ------- ------- -------
Total recoveries 405 137 923 406
------- ------- ------- -------
Net charge-offs (1,072) (631) (1,690) (1,585)
------- ------- ------- -------
Balance at end of period $12,035 $11,563 $12,035 $11,563
======= ======= ======= =======
Ratio of annualized net
charge-offs to average
loans outstanding 0.51% 0.37% 0.28% 0.32%
</TABLE>
Charge-offs totalled $1.5 million during the third quarter of 1996 and were
spread out among 26 loans; the largest charge-off during the quarter was
$760,000. Management periodically analyzes the adequacy of the allowance for
loan losses. See "Results of Operations - Provision for Loan Losses."
INVESTMENTS. As of September 30, 1996, the Company's total investment portfolio
amounted to $285.4 million, an increase of $200,000 from $285.2 million at
year-end 1995. During the third quarter of 1996, the Company restructured a
portion of its investment portfolio, selling $39.0 million of securities with a
book yield of 5.22% and recording a pre-tax loss on sale of $822,000. A majority
of the proceeds were utilized to purchase replacement securities at higher
yields.
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.
- 14 -
<PAGE> 17
<TABLE>
The following table presents the carrying values of the investment portfolio at
September 30, 1996 and December 31, 1995:
<CAPTION>
9/30/96 12/31/95
-------- --------
(In thousands)
<S> <C> <C>
SHORT-TERM INVESTMENTS $ 40,500 $ 9,000
======== ========
INVESTMENTS AVAILABLE FOR SALE (AT MARKET):
U.S. government and federal agency obligations $ 36,404 $ 52,490
Other bonds and obligations 7,576 14,382
-------- --------
Total bonds and obligations 43,980 66,872
-------- --------
GNMA mortgage-backed securities 28,258 37,195
FHLMC participation certificates 22,382 4,420
Collateralized mortgage obligations --- 482
FNMA pass-through certificates 7,039 ---
-------- --------
Total mortgage-backed securities 57,679 42,097
-------- --------
Total investments available for sale $101,659 $108,969
======== ========
INVESTMENTS HELD TO MATURITY (AMORTIZED COST):
U.S. government and federal agency obligations $ --- $ 1,500
Other bonds and obligations 11,713 12,758
-------- --------
Total bonds and obligations 11,713 14,258
-------- --------
FHLMC participation certificates 66,954 78,649
FNMA pass-through certificates 59,093 67,375
GNMA mortgage-backed securities 4,066 4,458
Other asset-backed securities 1,138 1,407
Collateralized mortgage obligations 309 1,116
-------- --------
Total mortgage-backed securities 131,560 153,005
-------- --------
Total investments held to maturity $143,273 $167,263
======== ========
Total investments $285,432 $285,232
======== ========
</TABLE>
<TABLE>
The following table presents the gross unrealized gains and losses by major
categories of securities as of September 30, 1996:
<CAPTION>
Unrealized Unrealized
Gains Losses
---------- ----------
(In thousands)
<S> <C> <C>
INVESTMENTS AVAILABLE FOR SALE:
U.S. government and federal agency obligations $ 129 $ (79)
Other bonds and obligations 58 (19)
Mortgage-backed securities 198 (707)
------ -------
Total investments available for sale 385 (805)
------ -------
INVESTMENTS HELD TO MATURITY:
Other bonds and obligations $ 67 $ (75)
Mortgage-backed securities 670 (1,916)
------ -------
Total investments held to maturity 737 (1,991)
------ -------
Total unrealized gains and losses $1,122 $(2,796)
====== =======
</TABLE>
At September 30, 1996, the Company's net unrealized loss on investments
available for sale amounted to $420,000, a market value decrease of $746,000
from a net unrealized gain of $326,000 at December 31, 1995. At September 30,
1996, the Company's net unrealized loss on investments held to maturity totalled
$1.3 million, a change of $3.8 million from a net unrealized gain of $2.5
million at December 31, 1995. The change in the net unrealized loss on the total
investment portfolio from the end of 1995 was primarily due to increased market
interest rates.
DEPOSITS AND BORROWED FUNDS. Total deposits increased from $743.2 million at
December 31, 1995 to $787.7 million at September 30, 1996. This increase was
most pronounced in certificates of deposit and regular savings accounts. All
other core deposits, excluding money market accounts, also experienced an
increase during the first nine months of 1996.
- 15 -
<PAGE> 18
<TABLE>
The following table shows the composition of the Company's deposits at September
30, 1996 and December 31, 1995:
<CAPTION>
9/30/96 12/31/95
-------- --------
(In thousands)
<S> <C> <C>
Demand deposit accounts $ 58,497 $ 54,516
Regular savings accounts 77,416 68,052
NOW accounts 69,379 67,275
Money market deposit accounts 123,630 130,437
Certificates of deposit 458,818 422,925
-------- --------
Total deposits $787,740 $743,205
======== ========
</TABLE>
Securities sold under agreements to repurchase decreased $5.6 million from $9.2
million at December 31, 1995, to $3.6 million at September 30, 1996. Federal
Home Loan Bank advances increased $42.6 million from December 31, 1995, to
$306.0 million at September 30, 1996. The increase in total borrowings was used
to augment deposit increases to fund the growth in loans during the first nine
months of 1996.
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 its bank subsidiaries.
ABNH will be limited in its ability to pay dividends during its initial years of
operation. The Banks have 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 Banks' 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 1996, the Company paid dividends in the amount of
$638,000. In October, 1996, the Company declared a dividend in the amount of
$769,000, as well as a 20% stock dividend, payable in the fourth quarter of
1996.
Cash flows provided by operations increased to $11.3 million in the first nine
months of 1996 from cash flows provided by operations of $11.1 million in the
corresponding period of 1995 due primarily to a decrease in assets held for sale
and investment trading accounts. Cash flows used by investing activities
increased to $62.3 million for the nine months ended September 30, 1996, from
cash flows used by investing activities of $20.7 million during the equivalent
period last year. This was mainly attributable to increased purchases of
investments available for sale and an increase in portfolio loans. Cash flows
provided by financing activities increased for the period ended September 30,
1996 to $80.1 million, as compared to $26.7 million in the equivalent period in
1995 due to an increase in total deposits and the issuance of FHLB advances.
At September 30, 1996, the Company had home equity, reserve credit and
commercial unused lines of credit totalling $72.2 million. Outstanding
commitments to originate real estate loans totalled $21.8 million. Unadvanced
portions of real estate loans amounted to $20.8 million. Standby letters of
credit were $2.4 million. Loans sold with recourse totalled $4.3 million.
Management believes that its sources of liquidity are sufficient to meet these
commitments if and as called upon.
<TABLE>
CAPITAL RESOURCES. The following table presents regulatory capital ratios under
current leverage and risk-based capital requirements as of September 30, 1996:
<CAPTION>
Risk-Based Capital Ratio
Leverage ------------------------
Ratio Tier 1 Total
----- ------ -----
<S> <C> <C> <C>
Andover Bancorp, Inc. 7.8% 13.3% 14.6%
Andover Bank 7.6 13.0 14.2
Andover Bank NH 13.2 18.6 19.1
</TABLE>
- 16 -
<PAGE> 19
Current minimum regulatory requirements for the Bank and the Company as of
September 30, 1996 were 4.0% for the leverage ratio and 4.0% and 8.0%,
respectively, for the tier 1 and total risk-based capital ratios. As a de novo
bank, Andover Bank NH is obligated to maintain a minimum leverage ratio of 8%.
Under the FDIC's prompt corrective action regulations promulgated pursuant to
the FDIC Improvement Act of 1991, the Banks have sufficient capital to be
considered "well-capitalized". Therefore, the Banks are entitled to pay the
lowest deposit premium assessment possible.
- 17 -
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
--------------------------------------------
This quarterly report contains certain statements that are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The
Company's actual results could differ materially from those projected in the
forward-looking statements as a result, among other factors, of the risk factors
set forth in the Company's filings with the Securities and Exchange Commission
and of changes in general economic conditions, changes in interest rates and
changes in the assumptions used in making such forward-looking statements.
RESULTS OF OPERATIONS
- ---------------------
GENERAL. Net income amounted to $9.3 million, $2.19 per share, for the nine
months ended September 30, 1996, compared to net income of $6.8 million, $1.62
per share, in the corresponding period of 1995.
The financial performance in the first nine months of 1996 was positively
impacted by a one-time gain (in the form of a tax benefit) of $2.5 million and a
pre-tax credit of $225,000 for the execution of a merger termination agreement,
partially offset by a pre-tax loss of $1.1 million from the sale of low yielding
investments and the early extinguishment of debt. The comparable period in 1995
was negatively impacted by a $1.0 million pre-tax charge related to the
termination of a merger, partially offset by non-recurring gains of $471,000
from a refund from the FDIC and $309,000 from the sale of a non-marketable
security and a former branch facility. Andover's annualized return on average
assets increased to 1.08% for the first nine months of 1996 compared to 0.86% in
the comparable period of 1995. The annualized return on average stockholders'
equity increased to 14.07% in the first nine months of 1996 from 11.35% in the
comparable period of 1995.
NET INTEREST AND DIVIDEND INCOME. Net interest and dividend income was $26.2
million for the first nine months of 1996, as compared to $24.1 million for the
same period in 1995, an increase of 8.9%. The amount of interest income excluded
from earnings on non-accruing loans amounted to $666,000 in the first nine
months of 1996 compared to $706,000 in the comparable period of 1995. Growth in
earning assets as well as a shift in the mix from investments to loans has more
than offset a rise in the Company's cost of funds. This resulted in a slightly
higher yield on earning assets of 3.16% for the first nine months of 1996 as
compared to 3.15% in 1995.
PROVISION FOR LOAN LOSSES. The provision for loan losses for the first nine
months of 1996 and 1995 was $2.1 million and $805,000, respectively. Among the
factors used to determine the provision were loan growth, the level of
nonaccrual and restructured loans as well as the level of delinquent loans and
charge-offs. Net charge-offs amounted to $1.7 million in the first nine months
of 1996 versus $1.6 million in the corresponding period last year. Approximately
45% of 1996 net charge-offs resulted from the restructuring of a previously
reported potential problem loan.
NON-INTEREST INCOME. Andover recorded gains from non-interest sources of $2.4
million for the first nine months of 1996, as compared to $2.9 million in the
corresponding period of 1995. Net losses from sales and redemptions of loans,
and the investment portfolio, totalled $505,000 in 1996, as compared to gains of
$106,000 in the same period of 1995. Included in the 1996 net loss was a loss of
$822,000 resulting from the sale of low yielding investments.
Losses on real estate operations totalled $1.2 million during the first nine
months of 1996 as compared to $1.5 million in the corresponding period of 1995.
A large component of the loss on real estate operations during the first nine
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<PAGE> 21
months of both 1996 and 1995 was comprised of operating costs associated with
acquiring, maintaining and disposing other real estate owned and totalled
$897,000 and $998,000, respectively.
Mortgage banking income totalled $2.3 million during the first nine months of
1996 as compared to $1.8 million in the corresponding period of 1995 due to an
increase in the Company's servicing portfolio.
Other income totalled $1.9 million in the first nine months of 1996 versus $2.5
million in the first nine months of 1995. This decrease was primarily the result
of non-recurring gains on the sale of a non-marketable security, former branch
facility and the student loan portfolio during 1995 totalling $387,000.
NON-INTEREST EXPENSE. Non-interest expenses increased 3.3% to $15.6 million in
the first nine months of 1996 primarily due to reduced FDIC deposit assessment
rates and a pre-tax credit of $225,000 for the execution of a merger termination
agreement as compared to a $1.0 million pre-tax charge for the terminated merger
in 1995. Salaries and benefits increased 8.1% to $7.8 million in 1996 due to
increased personnel and merit increases. Office occupancy and equipment
increased 18.3% to $2.0 million due to increased investments in computers and
related costs for depreciation as well as costs associated with the ABNH de novo
bank. Data processing expenses increased 15.2% to $1.2 million as a result of a
higher loan and deposit base resulting from the Company's growth as well as from
the purchase of mortgage loan servicing. Mortgage banking expenses increased
53.9% to $1.0 million due to increased amortization of the purchased servicing
rights. Marketing expenses increased 22.0% to $688,000 primarily due to an
increased number of discretionary promotions. Professional fees increased to
$1.0 million as a result of tax planning strategies as well as legal and
examination fees. Deposit insurance premiums decreased to $11,000 due to a
reduction in the FDIC assessment rates. Other operating expenses increased 28.6%
to $2.0 million primarily due to increased general overhead expenses from
operating a larger institution.
INCOME TAX EXPENSE. During the third quarter of 1996, the Company recorded a
one-time gain of $2.5 million (in the form of a tax benefit) in connection with
the enactment of the SBA. 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 $375,000 in the first nine
months of 1996 versus $450,000 for the same period in 1995. Partially offsetting
these income tax benefits, the Company recorded an income tax expense of $4.4
million on its financial statement earnings.
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<PAGE> 22
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
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<PAGE> 23
SIGNATURES
----------
Pursuant to 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 15, 1996 /s/ Gerald T. Mulligan
-----------------------
Gerald T. Mulligan
President and
Chief Executive Officer
November 15, 1996 /s/ Joseph F. Casey
-----------------------
Joseph F. Casey
Chief Financial Officer
and Treasurer
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