<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 Act
Exchange Act of 1934
For the quarterly period ended March 31, 1996 or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities Act
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 May 3, 1996: 4,245,671 shares
<PAGE> 2
ANDOVER BANCORP, INC.
AND SUBSIDIARIES
<TABLE>
Index
PART I - FINANCIAL INFORMATION
<CAPTION>
Page
----
<S> <C>
ITEM 1 Financial Statements
Consolidated Balance Sheets 1
Consolidated Statements of Operations 2
Consolidated Statements of Changes in
Stockholders' Equity 3
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial
Statements 5
Analysis of Net Yield on Earning Assets 6
ITEM 2 Management's Discussion and Analysis of 7-15
Results of Operations and Financial Condition
For the Quarter Ended March 31, 1996
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings 16
ITEM 2 Changes in Securities 16
ITEM 3 Defaults upon Senior Securities 16
ITEM 4 Submission of Matters to a Vote of Security Holders 16
ITEM 5 Other Information 16
ITEM 6 Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
<PAGE> 3
ANDOVER BANCORP, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
March 31, 1996 December 31, 1995
-------------- -----------------
(In thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 18,536 $ 19,236
Short-term investments 11,000 9,000
---------- ----------
Cash and cash equivalents 29,536 28,236
---------- ----------
Assets held for sale (Market value $7,393
in 1996 and $5,163 in 1995) 7,393 5,162
Investments available for sale (Amortized
cost of $127,814 in 1996 and $108,643
in 1995) 126,827 108,969
Investments held to maturity (Market value
$159,850 in 1996 and $169,761 in 1995) 160,214 167,263
Loans 784,297 768,598
Allowance for loan losses (11,568) (11,665)
---------- ----------
Net loans 772,729 756,933
---------- ----------
Other real estate owned, net 3,328 4,158
Premises and equipment, net 9,557 9,537
Accrued interest receivable 7,743 7,164
Stock in FHLBB, at cost 13,171 13,171
Deferred income taxes receivable 1,080 830
Mortgage servicing assets 6,480 6,609
Other assets 3,752 2,815
---------- ----------
Total assets $1,141,810 $1,110,847
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 763,366 $ 743,205
Securities sold under agreements
to repurchase 36,499 9,212
Federal Home Loan Bank advances 246,376 263,414
Mortgagors' escrow accounts 2,746 3,526
Income taxes payable 2,081 1,389
Accrued expenses and other liabilities 4,030 4,936
---------- ----------
Total liabilities 1,055,098 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 71,539 71,515
Retained earnings 28,407 26,183
Treasury stock, at cost (912,097 shares
in 1996 and 917,997 shares in 1995) (13,162) (13,247)
Unrealized gains (losses) on investments
available for sale, net (587) 199
---------- ----------
Total stockholders' equity 86,712 85,165
---------- ----------
Total liabilities and stockholders' equity $1,141,810 $1,110,847
========== ==========
</TABLE>
The accompanying note is 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
March 31,
-----------------------
1996 1995
---- ----
(In thousands, except per share amounts)
<S> <C> <C>
Interest and dividend income:
Loans $15,340 $12,710
Mortgage-backed securities 3,297 4,062
Investment securities 1,316 1,774
Short-term investments 117 102
------- -------
Total interest and dividend income 20,070 18,648
------- -------
Interest expense:
Deposits 7,613 6,757
Federal Home Loan Bank advances 3,734 3,726
Securities sold under agreements to repurchase 239 138
------- -------
Total interest expense 11,586 10,621
------- -------
Net interest and dividend income 8,484 8,027
Provision for loan losses 395 150
------- -------
Net interest and dividend income
after provision for loan losses 8,089 7,877
------- -------
Non-interest income:
Net gains from sales and
redemptions of assets held for sale 54 73
Net gains from sales and redemptions
of investments available for sale 92 73
Losses on real estate operations, net (477) (582)
Mortgage banking income 672 538
Other income 680 795
------- -------
Total non-interest income 1,021 897
------- -------
Non-interest expense:
Salaries and employee benefits 2,486 2,380
Office occupancy and equipment 681 564
Data processing 386 318
Mortgage banking expense 276 111
Marketing 216 179
Professional fees 187 148
Deposit insurance premiums 3 426
Other operating expense 567 542
------- -------
Total non-interest expense 4,802 4,668
------- -------
Income before income tax expense 4,308 4,106
Income tax expense 1,576 1,595
------- -------
Net income $ 2,732 $ 2,511
======= =======
Average number of common shares outstanding 4,239 4,209
Net income per share $0.64 $0.60
===== =====
</TABLE>
The accompanying note is 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 Three Months Ended March 31, 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 --- --- 2,732 --- --- 2,732
Dividends declared and
paid ($0.12 per share) --- --- (508) --- --- (508)
Stock options exercised --- 24 --- 85 --- 109
Change in unrealized
gains (losses) on
investments available
for sale --- --- --- --- (786) (786)
---- ------- ------- -------- ------- -------
Balance at March 31, 1996 $515 $71,539 $28,407 $(13,162) $ (587) $86,712
==== ======= ======= ======== ======= =======
<FN>
- -----------------
(1) Net of related tax effect.
</TABLE>
The accompanying note is 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
March 31,
------------------
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,732 $ 2,511
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for loan losses 395 150
Net losses on sales and provisions for
other real estate owned 174 109
Net gains from sales and redemptions of
investments available for sale (92) (73)
Net (gains) losses from sales and writedowns of
assets held for sale (54) (73)
Depreciation and amortization 336 270
Amortization of fees, discounts and premiums, net 120 183
(Increase) decrease in:
Assets held for sale (2,177) (481)
Accrued interest receivable (579) (182)
Income taxes receivable 276 961
Mortgage servicing assets 129 (639)
Other assets (937) 46
Increase (decrease) in:
Mortgagors' escrow accounts (780) 577
Accrued income taxes payable 692 65
Accrued expenses and other liabilities (906) (628)
-------- --------
Net cash provided (used) by operating activities (671) 2,796
-------- --------
Cash flows from investing activities:
Purchases of investments available for sale (40,031) ---
Purchases of investment securities and FHLB stock (1,544) (2,085)
Proceeds from sales of investments available for sale 14,108 13,478
Proceeds from maturities and redemptions of investments
available for sale 4,000 ---
Proceeds from maturities and redemptions of investments
held to maturity 2,000 1,020
Principal repayments of investments available for sale 2,777 1,727
Principal repayments of mortgage-backed securities 6,509 4,257
Net increase in loans (16,510) (3,146)
Capital expenditures on premises and equipment, net (356) (72)
Proceeds from disposition of other real estate owned 1,007 1,640
Capital expenditures on other real estate owned --- (107)
-------- --------
Net cash provided (used) by investing activities (28,040) 16,712
-------- --------
Cash flows from financing activities:
Net increase in deposits 20,161 1,992
Net increase in securities sold
under agreements to repurchase 27,287 7,715
Proceeds from issuance of FHLB advances 72,475 42,623
Principal repayments of FHLB advances (89,513) (60,642)
Dividends paid (508) (421)
Stock options exercised 109 9
-------- --------
Net cash provided (used) by financing activities 30,011 (8,724)
-------- --------
Net increase in cash and cash equivalents 1,300 10,784
Cash and cash equivalents, at beginning of period 28,236 23,382
-------- --------
Cash and cash equivalents, at end of period $ 29,536 $ 34,166
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 11,815 $10,572
Income taxes 571 569
Supplemental noncash investing and financing activities:
Conversion of real estate loans to mortgage-backed
securities held for sale 13,105 2,035
Transfer of loans to other real estate owned 351 801
</TABLE>
The accompanying note is an integral part of the
consolidated financial statements.
- 4 -
<PAGE> 7
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.
- 5 -
<PAGE> 8
ANDOVER BANCORP, INC. AND SUBSIDIARIES
<TABLE>
ANALYSIS OF NET YIELD ON EARNING ASSETS
(Unaudited)
<CAPTION>
Quarters Ended March 31,
---------------------------------------------------------------------
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 $ 8,796 $ 117 5.35% $ 7,071 $ 102 5.85%
Investment securities (1) 88,928 1,316 5.95 114,241 1,774 6.30
Mortgage-backed securities (1) 193,877 3,297 6.84 243,407 4,062 6.77
---------- ------- ---------- --------
Total investments 291,601 4,730 6.52 364,719 5,938 6.60
---------- ------- ---------- --------
Real estate loans (1) (2) 706,630 13,768 7.84 583,830 11,081 7.70
Consumer loans (2) 52,430 1,161 8.91 52,814 1,171 8.99
Commercial loans (2) 17,796 411 9.29 15,405 458 12.06
---------- ------- ---------- --------
Total loans 776,856 15,340 7.94 652,049 12,710 7.91
---------- ------- ---------- --------
Total interest-earning assets 1,068,457 20,070 7.55% 1,016,768 18,648 7.44%
------- --------
Allowance for loan losses (11,707) (12,189)
Other real estate owned 3,617 8,365
Other assets 45,555 44,414
---------- ----------
Total assets $1,105,922 $1,057,358
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts $ 64,165 159 1.00% $ 60,945 $ 179 1.19%
Regular savings accounts 69,959 387 2.22 74,340 387 2.11
Money market deposit accounts 129,832 923 2.86 139,397 858 2.50
Certificates of deposit 426,683 6,144 5.79 407,864 5,333 5.30
---------- ------- ---------- --------
Total interest-bearing deposits 690,639 7,613 4.43 682,546 6,757 4.01
---------- ------- ---------- --------
Borrowed funds:
Reverse repurchase agreements 17,931 239 5.36 8,969 138 6.24
Federal Home Loan Bank advances 250,575 3,734 5.99 242,065 3,726 6.24
---------- ------- ---------- --------
Total borrowed funds 268,506 3,973 5.95 251,034 3,864 6.24
---------- ------- ---------- --------
Total interest-bearing
liabilities 959,145 11,586 4.85% 933,580 10,621 4.61%
------- --------
Demand deposits 52,433 39,313
Other liabilities 9,025 5,676
---------- ----------
Total liabilities 1,020,603 978,569
Stockholders' equity 85,319 78,789
---------- ----------
Total liabilities and stock-
holders' equity $1,105,922 $1,057,358
========== ==========
Net interest income $ 8,484 $ 8,027
======= ========
Interest rate spread 2.70% 2.83%
==== ====
Net yield on earning assets 3.19% 3.20%
==== ====
<FN>
(1) Included in the average balance amounts are the corresponding components of
the assets held for sale, available for sale and held to maturity. The
yield is calculated using interest income divided by the average balance
of the amortized historical cost.
(2) Interest on nonaccruing loans has been included only to the extent
reflected in the statement of operations. However, the loan balances are
included in the average amounts outstanding.
(3) Average Yield/Rate calculation based on an annualized basis reflecting 91
days in the first quarter of 1996 and 90 days in the first quarter of 1995.
</TABLE>
- 6 -
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE QUARTER ENDED MARCH 31, 1996
RESULTS OF OPERATIONS
- ---------------------
GENERAL. Net income amounted to $2.7 million, $0.64 per share, for the
quarter ended March 31, 1996, compared to net income of $2.5 million, $0.60
per share, in the corresponding quarter of 1995.
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 isolated
areas, have increased slightly in value. While continued progress has been
made in reducing non-performing assets, the overall levels of non-
performing assets continue to result in high levels of foregone income and
other operating costs associated with holding and disposing of such assets.
Andover's annualized return on average assets increased to 0.99% for the first
quarter of 1996 compared to 0.96% in the first quarter of 1995. The
annualized return on average stockholders' equity decreased to 12.88% in the
first quarter of 1996 from 12.93% in the first quarter of 1995.
NET INTEREST AND DIVIDEND INCOME. Net interest and dividend income was
$8.5 million for the first 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, 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 $237,000 in the first quarter of 1996, versus $286,000 in the
comparable quarter of 1995. Thus, repricing loans and investments,
offset by foregone interest income, resulted in an 11 basis point increase
in the yield on earning assets in the first quarter of 1996 compared to the
corresponding quarter of 1995. The cause for the modest decline in the
net yield on earning assets was the 24 basis point increase in the
average rate paid on interest-bearing liabilities during the same period. This
combination resulted in a reduced yield on earning assets of 3.19% for the
first quarter of 1996 versus 3.20% for the comparable quarter of 1995.
The Company's growth in total assets during 1996 was funded with increased
deposits and borrowed funds. This enabled the Company to experience
increased growth in real estate loans and, to a lesser extent, a modest
increase in the investment portfolio from the end of the year.
PROVISION FOR LOAN LOSSES. The allowance for loan losses is established
through a provision for loan losses charged to the statement of operations.
Assessing the adequacy of the allowance for loan losses involves substantial
uncertainties and is based upon management's estimation of the amount
required to meet reasonably foreseeable loan losses in light of several
factors. Among the factors management considers are the quality of
specific loans, risk characteristics of the loan portfolio generally,
the level of nonaccruing loans in the various categories, current
economic conditions, trends in delinquencies, the actual charge-off
experience, and collateral values of the underlying security. Because the
allowance for loan losses is based on various estimates, and includes a
high degree of 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.
The provision for loan losses for the first three months of 1996 was $395,000
versus $150,000 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 first 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 first quarter of 1996 totalled $680,000 versus $663,000 in the
corresponding quarter last year. The resulting reserve coverage as a
percentage of nonaccruing loans totalled 96.2% at March 31, 1996. This was a
slight decrease from the respective reserve
- 7 -
<PAGE> 10
coverage at the 1995 year-end. Additionally, $86,000 in interest payments
applied as principal reductions on nonaccrual loans instead of being
recorded as interest income and $188,000 in loan loss recoveries received
during the first quarter of 1996 further contributed to management's
assessment of the adequacy of the allowance for loan losses.
NON-INTEREST INCOME (LOSS). Net gains from sales and redemptions of loans,
investments and mortgage-backed securities held for sale and available for
sale totalled $146,000 in the first quarters of 1996 and 1995. Included
in the first quarters of 1996 and 1995 were unrealized losses on loans held
for sale of $89,000 and $38,000, respectively. Offsetting the 1996
unrealized loss on loans held for sale was a $147,000 gain realized due
to the adoption of Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights" ("SFAS 122"). SFAS 122 requires
the capitalization of the rights to service mortgage loans for others upon
the sale of the underlying loan based on the fair value of those rights.
The carrying balance of these rights is included in the mortgage servicing
asset.
Losses of $477,000 on real estate operations were recognized in the first
quarter of 1996 as compared to $582,000 in the first quarter of 1995. A
significant portion of the losses on real estate operations during the first
quarters of both 1996 and 1995 were net losses on sales and provisions for
other real estate owned totalling $174,000 and $109,000, respectively.
Operating costs associated with acquiring, maintaining and disposing of
other real estate owned added another $303,000 to the losses on real estate
operations during the first quarter of 1996, as compared to $473,000 in the
first quarter of 1995. In the first quarter of 1996, sales of other real
estate owned totalled $1.0 million as compared to $1.6 million in the
corresponding quarter of 1995.
Mortgage banking income totalled $672,000 in 1996's first quarter versus
$538,000 in 1995's comparable quarter due to an increase in the Company's
servicing portfolio. Total loans serviced for investors totalled $765.7
million and $566.3 million, respectively, at March 31, 1996 and 1995.
Other income totalled $680,000 in 1996's first quarter as compared to
$795,000 in the first quarter of 1995. The majority of the decrease was
due to a non-recurring gain of $78,000 recognized in 1995 from the sale of
student loans.
NON-INTEREST EXPENSE. Non-interest expenses increased by $134,000, or
2.9%, to $4.8 million in the first quarter of 1996 from the first quarter of
1995. Salaries and employee benefits, the largest component of non-interest
expense, increased $106,000 or 4.5% from $2.4 million for the first quarter of
1995 to $2.5 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 $564,000 in the first quarter of
1995 to $681,000 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 systems and the related
costs for depreciation. In addition, winter related costs were higher than
the previous year due to the harsh winter conditions. Deposit insurance
expense decreased $423,000 or 99.3% from the first quarter of 1995 as a
result of the reduction in the FDIC deposit assessment rates. Data processing
expenses increased 21.4% from $318,000 for the quarter ended March 31, 1995 to
$386,000 for the first quarter of 1996 due to an increase in the number of
loans and deposits. Mortgage banking expenses increased $165,000 from
$111,000 in the first quarter of 1995 to $276,000 for the first quarter of
1996 due to increased amortization of the purchased servicing rights. This
amortization totalled $51,000 in the first quarter of 1995 versus $184,000
in the comparable quarter in 1996. Marketing expenses increased 20.7% from
$179,000 in the first quarter of 1995 to $216,000 in the current
year's corresponding quarter due to increased discretionary promotions.
Professional fees increased 26.4% from $148,000 in the first quarter of
1995 to $187,000 in the corresponding period of 1996 as a result of
increased corporate legal and miscellaneous consulting fees. Other
operating expenses increased slightly over the comparable period of last
year.
INCOME TAX EXPENSE. As a result of continued earnings of the Company, it
is more likely than not that the Company will realize a greater portion of
its deferred tax asset than has previously been recognized. This has
resulted in a decrease in the valuation allowance on these items of
$125,000 for the first quarter of
- 8 -
<PAGE> 11
1996 as compared to $150,000 in the first quarter of 1995. Offsetting the
income tax benefit in 1996, the Company recorded an income tax expense of $1.7
million on its financial statement earnings.
Financial Condition
- -------------------
Total assets increased $31.0 million from December 31, 1995 to $1,141.8 million
at March 31, 1996. The rise is attributable primarily to an increase of $15.7
million in the loan portfolio as well as an increase of $12.8 in the investment
portfolio. Corresponding with these increases was an increase in both deposits
and borrowed funds to support the growth.
<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>
3/31/96 12/31/95
------- --------
(In thousands)
<S> <C> <C>
Real estate loans:
Residential $561,334 $558,231
Commercial 129,230 121,909
Construction and land 22,621 18,138
-------- --------
Total real estate loans 713,185 698,278
-------- --------
Consumer 52,402 51,170
Commercial 18,710 19,150
-------- --------
Total loans $784,297 $768,598
======== ========
</TABLE>
Residential real estate loans increased $3.1 million from December 31, 1995 to
$561.3 million at March 31, 1996. Loans held for sale increased from $5.2
million at December 31, 1995, to $7.4 million at March 31, 1996. Residential
loans closed during the first three months of 1996 totalled $38.2 million as
compared to $23.7 million during the corresponding period of 1995. Interest
rates affect both the mortgage refinance and home purchase markets and were at
relatively low rates in the first quarter of 1996. Since that time, rates
have increased, resulting in a reduction in refinance activity.
Commercial real estate loans increased to $129.2 million at March 31, 1996 from
$121.9 million at December 31, 1995, resulting primarily from new loan volume.
Construction and land loan balances increased $4.5 million to $22.6 million at
March 31, 1996. Outstanding commercial loans decreased $440,000 from December
31, 1995, to $18.7 million at March 31, 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 $18.6
million in the first three months of 1996 as compared to $13.6 million in the
first three months of 1995.
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 levels
of non-performing assets higher than their peers and, therefore, corresponding
high levels of foregone income, provisions for other real estate owned losses,
loan charge-offs and other costs associated with non-performing assets.
Interest income of approximately $424,000 would have been recorded in the first
three 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
$111,000. Additionally, another $86,000 in interest payments which were
applied as a reduction of the nonaccruing loan balances instead of as interest
income during the first three months of 1996.
-9-
<PAGE> 12
<TABLE>
The following table shows the composition of non-performing assets at
March 31, 1996 and December 31, 1995:
<CAPTION>
3/31/96 12/31/95
------- --------
(Dollars in thousands)
<S> <C> <C>
Nonaccruing loans $12,030 $11,627
Restructured loans 2,861 5,583
------- -------
Total non-performing loans 14,891 17,210
Other real estate owned 3,328 4,158
------- -------
Total non-performing assets $18,219 $21,368
======= =======
Total non-performing assets as a
percentage of total assets 1.6% 1.9%
</TABLE>
Total non-performing assets decreased $3.1 million in the first quarter of
1996, primarily due to restructured loans returned to the accruing loan
portfolio as well as from the sale of other real estate owned. During the
first three months of 1996, $351,000 of loans were written down to their net
fair value and reclassified out of loans and into other real estate owned.
Excluded from the above table is a loan that is classified as a potential
problem loan by management. This loan totals $3.7 million and is less than 90
days past due, evidences one or more weaknesses or potential weaknesses and may
become a non-performing asset in future periods depending on the circumstances
of the loan.
<TABLE>
The following table shows detailed activity by quarter of nonaccruing loans and
other real estate owned for the quarters ending March 31, 1996 and 1995 and
December 31, 1995:
<CAPTION>
3/31/96 12/31/95 3/31/95
------- -------- -------
(In thousands)
<S> <C> <C> <C>
Beginning balance $15,785 $17,503 $23,312
Additions 1,852 2,447 2,254
Sales, restructurings,
payments and other decreases (1,880) (3,429) (2,949)
Charge-offs and valuation
adjustments (415) (736) (870)
------- ------- -------
Balance at end of quarter $15,342 $15,785 $21,747
======= ======= =======
</TABLE>
At March 31, 1996, total impaired loans were $11.6 million, of which $4.2
million had related allowances of $0.8 million and $7.4 million which did not
require a related allowance. During the period ended March 31, 1996, the
average recorded value of impaired loans was $11.7 million and the related
amount of interest income recognized was $54,000.
<TABLE>
NONACCRUING LOANS. The following table shows the composition of nonaccruing
loans at March 31, 1996 and December 31, 1995:
<CAPTION>
3/31/96 12/31/95
------- --------
(Dollars in thousands)
<S> <C> <C>
Residential real estate $ 3,218 $ 3,037
Commercial real estate 7,586 7,195
Commercial 1,102 1,136
Consumer 124 259
------- -------
Total loans on nonaccrual $12,030 $11,627
======= =======
Allowance for loan losses $11,568 $11,665
======= =======
Allowance for loan losses as a
percentage of nonaccruing loans 96.2% 100.3%
Allowance for loan losses as a
percentage of non-performing loans 77.7% 67.8%
Allowance for loan losses as a
percentage of total loans 1.5% 1.5%
</TABLE>
-10-
<PAGE> 13
During the first three months of 1996, loans on nonaccrual increased slightly
to $12.0 million. As part of the first quarter increase was a loan totalling
$475,000 that had been in the restructured loan balance as of December 31,
1995. Included in the $12.0 million in total nonaccruing loans at March 31,
1996, $3.6 million or 30.2% are 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 $326,000 or 9.0% 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 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 March 31, 1996, approximately $6.6
million of non-performing loans and $1.9 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 $50.7 million at
March 31, 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 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 sustained period of time at a market rate of interest and its ultimate
collectibility is no longer in doubt.
At March 31, 1996 and December 31, 1995, restructured loans totalled $2.9
million and $5.6 million, respectively. This decrease was primarily due to
restructured loans being returned to the accruing loan portfolio. The weighted
average interest rate on restructured loans as of March 31, 1996 was
approximately 6.72%. Interest income that would have been recognized in 1996
if restructured loans had been performing in accordance with their original
terms was $46,000. The actual amount of interest on these loans that was
recognized in interest income in 1996 was $36,000.
OTHER REAL ESTATE OWNED. The deterioration in the New England real estate
market and economy caused foreclosures resulting in the Bank's holding other
real estate owned.
<TABLE>
The following table shows the composition of other real estate owned at
March 31, 1996 and December 31, 1995:
<CAPTION>
3/31/96 12/31/95
------- --------
(In thousands)
<S> <C> <C>
Residential real estate $ 996 $ 1,131
Commercial real estate 506 572
Multi-family real estate 1,513 1,820
Construction and land 662 1,048
------- -------
3,677 4,571
Valuation allowance (349) (413)
------- -------
Total other real estate owned $ 3,328 $ 4,158
======= =======
</TABLE>
-11-
<PAGE> 14
<TABLE>
The following table shows changes in the valuation allowance for other real
estate owned for the quarters ended March 31, 1996 and 1995:
<CAPTION>
Quarters Ended
March 31,
----------------
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Balance, beginning of period $ 413 $ 715
Provision 140 210
Net charge-offs (204) (291)
----- ------
Balance, end of period $ 349 $ 634
===== ======
</TABLE>
Properties substantively repossessed, for which the Bank has not completed
legal transfer of ownership, included in the above, totalled $76,000 at
March 31, 1996 and $384,000 at December 31, 1995. 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 $477,000 in the
first three months of 1996, as compared to $582,000 in the first three months
of 1995. The addition to the valuation allowance for other real estate owned
totalled $140,000 for the first three months of 1996 as compared to $210,000 in
the same period in 1995. Operating costs associated with acquiring,
maintaining and disposing of other real estate owned added another $303,000 to
the losses on real estate operations during the first three months of 1996, as
compared to $473,000 in the corresponding period in 1995.
During the first three months of 1996, sales of other real estate owned
totalled $1.0 million, as compared to $1.6 million in the first three months
of 1995. In the first three months of 1996, net losses of $34,000 on sales of
other real estate owned were recognized as compared to net gains of $101,000 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 $900,000 are anticipated for the second quarter. There
is no assurance such sales will take place. There were no commitments for
capital expenditures on real estate acquired by foreclosure at March 31, 1996.
<TABLE>
ALLOWANCE FOR LOAN LOSSES. The following table summarizes the activity in the
Banks' allowance for loan losses for the quarters ended March 31, 1996 and 1995:
<CAPTION>
Quarters Ended
--------------
03/31/96 03/31/95
-------- --------
(Dollars in Thousands)
<S> <C> <C>
Balance at beginning of quarter $11,665 $12,343
Provision 395 150
Charge-offs:
Residential real estate (210) (309)
Commercial real estate (347) (271)
Construction and land --- (43)
Commercial (43) (21)
Consumer (80) (19)
------- -------
Total charge-offs (680) (663)
------- -------
Recoveries:
Residential real estate --- ---
Commercial real estate 54 31
Construction and land 59 2
Commercial 66 87
Consumer 9 5
------- -------
Total recoveries 188 125
------- -------
Net charge-offs (492) (538)
------- -------
Balance at end of quarter $11,568 $11,955
======= =======
Ratio of net charge-offs to
average loans outstanding 0.25% 0.33%
</TABLE>
-12-
<PAGE> 15
Management periodically analyzes the adequacy of the allowance for loan losses.
See "Results of Operations - Provision for Loan Losses." Charge-offs totalled
$680,000 during the first quarter of 1996 and were spread out among 24 loans;
the largest charge-off during the quarter was $230,000.
INVESTMENTS. As of March 31, 1996, the Banks' total investment portfolio
amounted to $298.0 million, an increase of $12.8 million from $285.2 million at
year-end 1995. This increase resulted primarily from the purchase of $40.0
million in investments available for sale. Offsetting these purchases was the
sale of $14.1 million in investments available for sale.
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.
<TABLE>
The following table presents the carrying values of the investment portfolio at
March 31, 1996 and December 31, 1995:
<CAPTION>
3/31/96 12/31/95
------- --------
(In thousands)
<S> <C> <C>
SHORT-TERM iNVESTMENTS $ 11,000 $ 9,000
======== ========
INVESTMENTS AVAILABLE FOR SALE (AT MARKET):
U.S. government and federal agency obligations $ 52,540 $ 52,490
Other bonds and obligations 15,251 14,382
-------- --------
Total bonds and obligations 67,791 66,872
-------- --------
GNMA mortgage-backed securities 35,030 37,195
FHLMC participation certificates 24,006 4,420
Collateralized mortgage obligations --- 482
-------- --------
Total mortgage-backed securities 59,036 42,097
-------- --------
Total investments available for sale $126,827 $108,969
======== ========
INVESTMENTS HELD TO MATURITY (AMORTIZED COST):
U.S. government and federal agency obligations $ --- $ 1,500
Other bonds and obligations 13,772 12,758
-------- --------
Total bonds and obligations 13,772 14,258
-------- --------
FHLMC participation certificates 74,920 78,649
FNMA pass-through certificates 65,156 67,375
GNMA mortgage-backed securities 4,356 4,458
Other asset-backed securities 1,319 1,407
Collateralized mortgage obligations 691 1,116
-------- --------
Total mortgage-backed securities 146,442 153,005
-------- --------
Total investments held to maturity $160,214 $167,263
======== ========
Total investments $298,041 $285,232
======== ========
</TABLE>
<TABLE>
The following table presents the gross unrealized gains and losses by major
categories of securities as of March 31, 1996.
<CAPTION>
Unrealized Unrealized
Gains Losses
---------- ----------
(In thousands)
<S> <C> <C>
INVESTMENTS AVAILABLE FOR SALE:
U.S. government and federal agency obligations $ 148 $ (883)
Other bonds and obligations 131 (22)
Mortgage-backed securities 208 (569)
------ -------
Total investments available for sale 487 (1,474)
------ -------
INVESTMENTS HELD TO MATURITY:
Other bonds and obligations $ 109 $ (65)
Mortgage-backed securities 1,020 (1,428)
------- -------
Total investments held to maturity 1,129 (1,493)
------- -------
Total unrealized gains and losses $ 1,616 $(2,967)
======= =======
</TABLE>
- 13 -
<PAGE> 16
At March 31, 1996, the Banks' net unrealized loss on investments available for
sale, net of applicable income taxes, amounted to $587,000, a decrease of
$786,000 from a net unrealized gain of $199,000 at December 31, 1995. At
March 31, 1996, the Banks' net unrealized loss on investments held to maturity
totalled $364,000, a decrease of $2.9 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 $763.4 million at March 31, 1996. This increase was most
pronounced in official checks and demand deposit accounts but all core deposit
types experienced an increase during the first quarter of 1996.
<TABLE>
The following table shows the composition of the Banks' deposits at March 31,
1996 and December 31, 1995:
<CAPTION>
3/31/96 12/31/95
------- --------
(In thousands)
<S> <C> <C>
Demand deposit accounts $ 65,122 $ 54,516
Regular savings accounts 72,257 68,052
NOW accounts 69,452 67,275
Money market deposit accounts 131,440 130,437
Certificates of deposit 425,095 422,925
-------- --------
Total deposits $763,366 $743,205
======== ========
</TABLE>
Securities sold under agreements to repurchase increased $27.3 million from
$9.2 million at December 31, 1995, to $36.5 at March 31, 1996. Federal Home
Loan Bank advances decreased $17.0 million from December 31, 1995, to $246.4
million at March 31, 1996. The increase in total borrowings was used to fund
the growth in loans and investments in the first quarter 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 severly 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 first quarter of 1996, the Company paid dividends in the amount of
$508,000. In April, 1996, the Company declared a dividend in the amount of
$640,000, payable in the second quarter of 1996.
Cash flows used by operations decreased $3.5 million to an outflow of $671,000
in the first three months of 1996 from the corresponding period of 1995 due
primarily to an increase in assets held for sale. Cash flows used by investing
activities increased to $28.0 million for the three months ended March 31,
1996, from cash flows provided by investing activities of $16.7 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.
The Company's cash flows provided by financing activities increased for the
period ended March 31, 1996 to $30.0 million, as compared to $8.7 million used
by financing activities in the equivalent period in 1995 due to an increase in
total deposits and securities sold under agreements to repurchase.
At March 31, 1996, the Company had home equity, reserve credit and commercial
unused lines of credit totalling $78.8 million. Outstanding commitments to
originate real estate loans totalled $31.4 million. Unadvanced portions of
real estate loans amounted to $10.7 million. Standby letters of credit were
$1.2 million. Loans sold with recourse totalled $5.5 million. Management
believes
-14-
<PAGE> 17
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 March 31, 1996:
<CAPTION>
Risk Based Capital Ratio
Leverage ------------------------
Ratio Tier 1 Total
-------- ------ -----
<S> <C> <C> <C>
Andover Bancorp 7.9% 13.4% 14.7%
Andover Bank 7.5 12.9 14.1
Andover Bank NH 33.2 47.7 48.5
</TABLE>
Current minimum regulatory requirements as of March 31, 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. 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.
- 15 -
<PAGE> 18
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings
Not Applicable
ITEM 2 Changes in Securities
Not Applicable
ITEM 3 Defaults Upon Senior Securities
Not Applicable
ITEM 4 Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of the registrant was held on
April 25, 1996. All nominees of the Board of Directors of the
registrant were re-elected for a three-year term. Other matters
voted on at the meeting included approval of the amendment
and restatement of the Directors' Deferred Compensation Plan and
ratification of KPMG Peat Marwick LLP as Andover's independent
auditors. Votes were cast as follows:
<TABLE>
I. Election of three Class III Directors
<CAPTION>
Nominee For Withheld
------- --- --------
<S> <C> <C>
Clifford E. Elias 3,570,129 34,416
Gerald T. Mulligan 3,566,698 37,847
Fred P. Shaheen 3,569,984 34,561
</TABLE>
<TABLE>
II. Approval of the amendment and restatement of the Directors'
Deferred Compensation Plan
<CAPTION>
Broker
For Against Abstain Non Vote
--- ------- ------- --------
<S> <C> <C> <C>
3,372,273 151,482 80,790 -0-
</TABLE>
<TABLE>
III. Ratification of KPMG Peat Marwick LLP as Independent
Auditors
<CAPTION>
Broker
For Against Abstain Non Vote
--- ------- ------- --------
<S> <C> <C> <C>
3,567,238 11,102 26,205 -0-
</TABLE>
ITEM 5 Other Information
None
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
- 16 -
<PAGE> 19
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.
May 14, 1996 /s/ Gerald T. Mulligan
-----------------------------
Gerald T. Mulligan
President and
Chief Executive Officer
May 14, 1996 /s/ Joseph F. Casey
-----------------------------
Joseph F. Casey
Chief Financial Officer
and Treasurer
- 17 -
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements dated March 31, 1996 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 18,536
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 11,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 126,827
<INVESTMENTS-CARRYING> 160,214
<INVESTMENTS-MARKET> 159,850
<LOANS> 784,297
<ALLOWANCE> 11,568
<TOTAL-ASSETS> 1,141,810
<DEPOSITS> 763,366
<SHORT-TERM> 36,499
<LIABILITIES-OTHER> 8,857
<LONG-TERM> 246,376
<COMMON> 515
0
0
<OTHER-SE> 86,197
<TOTAL-LIABILITIES-AND-EQUITY> 1,141,810
<INTEREST-LOAN> 15,340
<INTEREST-INVEST> 4,730
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 20,070
<INTEREST-DEPOSIT> 7,613
<INTEREST-EXPENSE> 11,586
<INTEREST-INCOME-NET> 8,484
<LOAN-LOSSES> 395
<SECURITIES-GAINS> 146
<EXPENSE-OTHER> 4,802
<INCOME-PRETAX> 4,308
<INCOME-PRE-EXTRAORDINARY> 4,308
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,732
<EPS-PRIMARY> 0.64
<EPS-DILUTED> 0
<YIELD-ACTUAL> 3.19
<LOANS-NON> 12,030
<LOANS-PAST> 0
<LOANS-TROUBLED> 2,861
<LOANS-PROBLEM> 3,700
<ALLOWANCE-OPEN> 11,665
<CHARGE-OFFS> 680
<RECOVERIES> 188
<ALLOWANCE-CLOSE> 11,568
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
