<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------------
FORM 10-Q
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 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 August 7, 1996: 4,255,639 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
Note to Consolidated Financial
Statements 5
Analysis of Net Yield on Earning Assets 6
ITEM 2 Management's Discussion and Analysis of 7-17
Financial Condition and Results of Operations
For the Quarter Ended June 30, 1996
For the Six Months Ended June 30, 1996
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings 18
ITEM 2 Changes in Securities 18
ITEM 3 Defaults upon Senior Securities 18
ITEM 4 Submission of Matters to a Vote of Security Holders 18
ITEM 5 Other Information 18
ITEM 6 Exhibits and Reports on Form 8-K 18
Signatures 19
<PAGE> 3
ANDOVER BANCORP, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED BALANCE SHEETS
---------------------------
(Unaudited)
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
(In thousands)
ASSETS
<S> <C> <C>
Cash and due from banks $ 22,368 $ 19,236
Short-term investments 13,700 9,000
---------- ---------
Cash and cash equivalents 36,068 28,236
---------- ---------
Assets held for sale (Market value $1,001
in 1996 and $5,163 in 1995) 1,001 5,162
Investments available for sale (Amortized
cost of $130,067 in 1996 and $108,643
in 1995) 128,473 108,969
Investments held to maturity (Market value
$150,096 in 1996 and $169,761 in 1995) 151,700 167,263
Loans 821,867 768,598
Allowance for loan losses (11,802) (11,665)
---------- ---------
Net loans 810,065 756,933
---------- ---------
Other real estate owned, net 2,554 4,158
Premises and equipment, net 9,539 9,537
Accrued interest receivable 7,626 7,164
Stock in FHLBB, at cost 14,600 13,171
Deferred income taxes receivable 761 830
Mortgage servicing assets 8,570 6,609
Other assets 2,999 2,815
---------- ----------
Total assets $1,173,956 $1,110,847
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 780,500 $ 743,205
Securities sold under agreements
to repurchase 29,324 9,212
Federal Home Loan Bank advances 268,331 263,414
Mortgagors' escrow accounts 2,275 3,526
Income taxes payable 495 1,389
Accrued expenses and other liabilities 4,329 4,936
---------- ----------
Total liabilities 1,085,254 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 71,503 71,515
Retained earnings 30,690 26,183
Treasury stock, at cost (905,129 shares
in 1996 and 917,997 shares in 1995) (13,062) (13,247)
Unrealized gains (losses) on investments
available for sale, net (944) 199
---------- ----------
Total stockholders' equity 88,702 85,165
---------- ----------
Total liabilities and stockholders' equity $1,173,956 $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 YEAR-TO-DATE
JUNE 30, JUNE 30,
1996 1995 1996 1995
-------------- -------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Interest and dividend income:
Loans $15,763 $13,129 $31,103 $25,839
Mortgage-backed securities 3,467 3,935 6,764 7,997
Investment securities 1,430 1,768 2,746 3,542
Short-term investments 54 148 171 250
------- ------- ------- -------
Total interest and dividend income 20,714 18,980 40,784 37,628
------- ------- ------- -------
Interest expense:
Deposits 7,637 7,289 15,250 14,046
Federal Home Loan Bank advances 3,918 3,457 7,652 7,183
Securities sold under agreements to repurchase 342 172 581 310
------- ------- ------- -------
Total interest expense 11,897 10,918 23,483 21,539
------- ------- ------- -------
Net interest and dividend income 8,817 8,062 17,301 16,089
Provision for loan losses 360 175 755 325
------- ------- ------- -------
Net interest and dividend income
after provision for loan losses 8,457 7,887 16,546 15,764
------- ------- ------- -------
Non-interest income:
Net gains from sales and redemptions of
assets held for sale 111 15 165 88
Net gains from sales and redemptions
of investments available for sale 1 --- 93 73
Losses on real estate operations, net (391) (454) (868) (1,036)
Mortgage banking income 716 584 1,388 1,123
Other income 696 743 1,376 1,537
------- ------- ------- -------
Total non-interest income 1,133 888 2,154 1,785
------- ------- ------- -------
Non-interest expense:
Salaries and employee benefits 2,632 2,435 5,118 4,815
Office occupancy and equipment 697 599 1,378 1,163
Data processing 433 335 819 706
Mortgage banking expense 348 280 624 391
Marketing 240 214 456 393
Professional fees 200 182 387 330
Deposit insurance premiums 4 426 7 852
Merger expense (225) 1,000 (225) 1,000
Other operating expense 646 542 1,213 1,031
------- ------- ------- -------
Total non-interest expense 4,975 6,013 9,777 10,681
------- ------- ------- -------
Income before income tax expense 4,615 2,762 8,923 6,868
Income tax expense 1,695 1,055 3,271 2,650
------- ------- ------- -------
Net income $ 2,920 $ 1,707 $ 5,652 $ 4,218
======= ======= ======= =======
Average number of common shares outstanding 4,246 4,215 4,241 4,212
Net income per share $ 0.69 $ 0.40 $ 1.33 $ 1.00
======= ======= ======= =======
</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 Six Months Ended June 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 --- --- 5,652 --- --- 5,652
Dividends declared and
paid ($0.27 per share) --- --- (1,145) --- --- (1,145)
Stock options exercised --- (12) --- 185 --- 173
Change in unrealized
gains (losses) on
investments available
for sale --- --- --- --- (1,143) (1,143)
---- ------- ------- -------- ------- -------
Balance at June 30, 1996 $515 $71,503 $30,690 $(13,062) $ (944) $88,702
==== ======= ======= ======== ======= =======
- ----------
<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
JUNE 30,
------------------
1996 1995
---- ----
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,652 $ 4,218
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for loan losses 755 325
Net (gains) losses on sales and provisions
for other real estate owned 243 (31)
Net gains from sales and redemptions of
investments available for sale (93) (73)
Net gains from sales and writedowns of
assets held for sale (165) (88)
Depreciation and amortization 677 561
Amortization of fees, discounts and premiums, net 248 327
(Increase) decrease in:
Assets held for sale 4,326 1,026
Investment trading accounts --- (10,000)
Accrued interest receivable (462) (88)
Income taxes receivable 845 1,678
Mortgage servicing assets (1,961) (1,493)
Other assets (184) 962
Increase (decrease) in:
Mortgagors' escrow accounts (1,251) 77
Accrued income taxes payable (894) (480)
Accrued expenses and other liabilities (607) 78
--------- --------
Net cash provided (used) by operating activities 7,129 (3,001)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments available for sale (52,655) ---
Purchases of investment securities and FHLB stock (2,973) (4,166)
Purchases of mortgage-backed securities --- (2,961)
Proceeds from sales of investments available for sale 20,132 13,478
Proceeds from maturities and redemptions of investments
available for sale 6,023 2,072
Proceeds from maturities and redemptions of investments
held to maturity 2,000 1,020
Principal repayments of investments available for sale 5,035 3,824
Principal repayments of mortgage-backed securities 14,938 8,582
Net increase in loans (54,842) (22,451)
Capital expenditures on premises and equipment, net (679) (334)
Proceeds from disposition of other real estate owned 2,372 4,717
Capital expenditures on other real estate owned --- (235)
--------- --------
Net cash provided (used) by investing activities (60,649) 3,546
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 37,295 19,630
Net increase in securities sold
under agreements to repurchase 20,112 11,704
Proceeds from issuance of FHLB advances 208,475 99,623
Principal repayments of FHLB advances (203,558) (112,536)
Dividends paid (1,145) (842)
Stock options exercised 173 139
--------- --------
Net cash provided by financing activities 61,352 17,718
--------- --------
Net increase in cash and cash equivalents 7,832 18,263
Cash and cash equivalents, at beginning of period 28,236 23,382
--------- --------
Cash and cash equivalents, at end of period $ 36,068 $ 41,645
========= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 23,736 $ 21,549
Income taxes 3,284 1,434
Supplemental noncash investing and financing activities:
Conversion of real estate loans to mortgage-backed
securities held for sale 26,180 6,129
Transfer of loans to other real estate owned 1,011 1,710
</TABLE>
The accompanying note is an integral part of the consolidated financial
statements.
- 4 -
<PAGE> 7
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------
1) BASIS OF PRESENTATION
The unaudited consolidated financial statements of Andover Bancorp, Inc.
("Andover" or the "Company") and its subsidiaries, including its
principal subsidiaries, Andover Bank 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 June 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 $ 4,111 $ 54 5.28% $ 10,506 $ 148 5.65%
Investment securities (1) 96,799 1,430 5.94 110,558 1,768 6.41
Mortgage-backed securities (1) 204,833 3,467 6.81 235,397 3,935 6.70
---------- ------- ---------- -------
Total investments 305,743 4,951 6.51 356,461 5,851 6.58
---------- ------- ---------- -------
Real estate loans (1) (2) 732,913 14,059 7.72 590,085 11,564 7.86
Consumer loans (2) 54,317 1,165 8.63 48,625 1,106 9.12
Commercial loans (2) 19,995 539 10.84 17,469 459 10.54
---------- ------- ---------- -------
Total loans 807,225 15,763 7.85 656,179 13,129 8.03
---------- ------- ---------- -------
Total interest-earning assets 1,112,968 20,714 7.49% 1,012,640 18,980 7.52%
------- -------
Allowance for loan losses (11,699) (11,803)
Other real estate owned 2,992 7,616
Other assets 49,089 43,927
---------- ----------
Total assets $1,153,350 $1,052,380
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts $ 66,651 $ 161 0.97% $ 62,238 $ 183 1.18%
Regular savings accounts 72,027 395 2.21 72,654 397 2.19
Money market deposit accounts 128,400 915 2.87 134,432 875 2.61
Certificates of deposit 433,082 6,166 5.73 419,936 5,834 5.57
---------- ------- ---------- -------
Total interest-bearing deposits 759,936 7,637 4.39 689,260 7,289 4.24
---------- ------- ---------- -------
Borrowed funds:
Reverse repurchase agreements 26,182 342 5.25 10,915 172 6.32
Federal Home Loan Bank advances 269,644 3,918 5.84 221,953 3,457 6.25
---------- ------- ---------- -------
Total borrowed funds 295,826 4,260 5.79 232,868 3,629 6.25
---------- ------- ---------- -------
Total interest-bearing
liabilities 1,055,762 11,897 4.80% 922,128 10,918 4.75%
------- -------
Demand deposits 59,776 44,410
Other liabilities 9,006 5,114
---------- ----------
Total liabilities 1,064,768 971,652
Stockholders' equity 88,582 80,728
---------- ----------
Total liabilities and stock-
holders' equity $1,153,350 $1,052,380
========== ==========
Net interest income $ 8,817 $ 8,062
======= =======
Interest rate spread 2.69% 2.77%
===== =====
Net yield on earning assets 3.19% 3.19%
===== =====
<CAPTION>
Year-to-Date June 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 $ 6,456 $ 171 5.33% $ 8,798 $ 250 5.73%
Investment securities (1) 92,864 2,746 5.95 112,389 3,542 6.36
Mortgage-backed securities (1) 199,355 6,764 6.82 239,380 7,997 6.74
---------- ------- ---------- -------
Total investments 298,675 9,681 6.52 360,567 11,789 6.59
---------- ------- ---------- -------
Real estate loans (1) (2) 719,772 27,827 7.77 586,975 22,645 7.78
Consumer loans (2) 53,373 2,326 8.76 50,708 2,277 9.06
Commercial loans (2) 18,895 950 10.11 16,443 917 11.25
---------- ------- ---------- -------
Total loans 792,040 31,103 7.90 654,126 25,839 7.97
---------- ------- ---------- -------
Total interest-earning assets 1,090,715 40,784 7.52% 1,014,693 37,628 7.48%
------- -------
Allowance for loan losses (11,703) (11,995)
Other real estate owned 3,305 7,988
Other assets 47,319 44,169
---------- ----------
Total assets $1,129,636 $1,054,855
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts $ 65,408 $ 320 0.98% $ 61,595 $ 362 1.19%
Regular savings accounts 70,993 782 2.22 73,492 784 2.15
Money market deposit accounts 129,116 1,838 2.86 136,901 1,733 2.55
Certificates of deposit 429,882 12,310 5.76 413,934 11,167 5.44
---------- ------- ---------- -------
Total interest-bearing deposit 695,399 15,250 4.41 685,922 14,046 4.13
---------- ------- ---------- -------
Borrowed funds:
Reverse repurchase agreements 22,057 581 5.30 9,947 310 6.28
Federal Home Loan Bank advances 260,109 7,652 5.92 231,954 7,183 6.24
---------- ------- ---------- -------
Total borrowed funds 282,166 8,233 5.87 241,901 7,493 6.25
---------- ------- ---------- -------
Total interest-bearing
liabilities 977,565 23,483 4.83% 927,823 21,539 4.68%
------- -------
Demand deposits 56,105 41,875
Other liabilities 9,015 5,394
---------- ----------
Total liabilities 1,042,685 975,092
Stockholders' equity 86,951 79,763
---------- ----------
Total liabilities and stock-
holders' equity $1,129,636 $1,054,855
========== ==========
Net interest income $17,301 $16,089
======= =======
Interest rate spread 2.69% 2.80%
===== =====
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 second quarter and 181 days in the year-to-date period for
1996.
</TABLE>
- 6 -
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE QUARTER ENDED JUNE 30, 1996
-----------------------------------
RESULTS OF OPERATIONS
- ---------------------
GENERAL. Net income amounted to $2.9 million, $0.69 per share, for the quarter
ended June 30, 1996, compared to net income of $1.7 million, $0.40 per share, in
the corresponding quarter of 1995. The results for 1995 included a pre-tax
charge of $1.0 million related to the terminated merger with Finest Financial
Corp., while the current quarter's results include a pre-tax credit of $225,000
for the execution of a merger termination agreement with Finest.
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 foregone income and other operating costs associated with holding and
disposing of such assets. Andover's annualized return on average assets
increased to 1.02% for the second quarter of 1996 compared to 0.65% in the
second quarter of 1995. The annualized return on average stockholders' equity
increased to 13.26% in the second quarter of 1996 from 8.48% in the second
quarter of 1995.
NET INTEREST AND DIVIDEND INCOME. Net interest and dividend income was $8.8
million for the second quarter of 1996 as compared to $8.1 million for the same
period in 1995. This increase resulted from a rise in interest-earning assets,
partially offset by a slight 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 $255,000 in the second quarter of
1996, versus $241,000 in the comparable quarter of 1995. Thus, repricing loans
and investments, offset by foregone interest income, resulted in a flat yield on
earning assets in the second quarter of 1996 compared to the corresponding
quarter of 1995. The cause for the stability in the net yield on earning assets
despite the 5 basis point increase in the average rate paid on interest-bearing
liabilities during the same period is due to higher average earning assets. This
combination resulted in a yield on earning assets of 3.19% for both the second
quarters of 1996 and 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
consumer and commercial loans.
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.
The provision for loan losses for the second quarter of 1996 was $360,000 versus
$175,000 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 second 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 second quarter of 1996
totalled $455,000 versus $559,000 in the corresponding quarter last year. The
- 7 -
<PAGE> 10
reserve coverage as a percentage of nonaccruing loans totalled 101.2% at June
30, 1996. This was a slight increase from the respective reserve coverage at the
1995 year-end. Additionally, $57,000 in interest payments applied as principal
reductions on nonaccrual loans instead of being recorded as interest income and
$329,000 in loan loss recoveries received during the second quarter of 1996
further contributed to management's assessment of the adequacy of the allowance
for loan losses.
NON-INTEREST INCOME. Net gains from sales and redemptions of loans, investments
and mortgage-backed securities held for sale and available for sale totalled
$112,000 in the second quarter of 1996 and $15,000 in the comparable period of
1995. Included in the $112,000 for the quarter ended June 30, 1996 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 $391,000 on real estate operations were recognized in the second
quarter of 1996 as compared to $454,000 in the second quarter of 1995. A
significant portion of the losses on real estate operations during the second
quarters of both 1996 and 1995 were operating costs associated with acquiring,
maintaining and disposing of other real estate owned totalling $322,000 and
$594,000, respectively. Provisions for other real estate owned added another
$165,000 to the loss on real estate operations during the second quarter of
1996, as compared to $210,000 in the second quarter of 1995. In the second
quarter of 1996, sales of other real estate owned totalled $1.4 million as
compared to $3.1 million in the corresponding quarter of 1995.
Mortgage banking income totalled $716,000 in 1996's second quarter versus
$584,000 in 1995's comparable quarter due to an increase in the Company's
servicing portfolio. Total loans serviced for investors totalled $908.7 million
and $662.3 million, respectively, at June 30, 1996 and 1995.
Other income totalled $696,000 in 1996's second quarter as compared to $743,000
million in the second 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 decreased by $1.0 million, or 17.3%,
to $5.0 million in the second quarter of 1996 from the second quarter of 1995,
primarily due to $1.0 million merger termination charge taken in the second
quarter of 1995. Salaries and employee benefits, the largest component of
non-interest expense, increased $197,000 or 8.1% from $2.4 million for the
second quarter of 1995 to $2.6 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 $599,000 in the second
quarter of 1995 to $697,000 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. Data processing expenses increased 29.3% from $335,000 for the
quarter ended June 30, 1995 to $433,000 for the second quarter of 1996 due to an
increase in the number of loans and deposits. Mortgage banking expenses
increased $68,000 from $280,000 in the second quarter of 1995 to $348,000 for
the second quarter of 1996 due to increased amortization of the purchased
servicing rights. This amortization totalled $228,000 in the second quarter of
1996 versus $194,000 in the comparable quarter in 1995. Marketing expenses
increased 12.1% from $214,000 in the second quarter of 1995 to $240,000 in the
current year's corresponding quarter due to increased discretionary promotions.
Professional fees increased 9.9% from $182,000 in the second quarter of 1995 to
$200,000 in the corresponding period of 1996 as a result of increased corporate
legal and miscellaneous consulting fees. Deposit insurance expense decreased
$422,000 or 99.1% from the second quarter of 1995 as a result of the reduction
in the FDIC deposit assessment rates. Other operating expenses increased
slightly over the comparable period of last year.
- 8 -
<PAGE> 11
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 second quarter of
1996 as compared to $150,000 in the second quarter of 1995. Offsetting the
income tax benefit in 1996, the Company recorded an income tax expense of $1.8
million on its financial statement earnings.
FINANCIAL CONDITION
- -------------------
Total assets increased $63.1 million from December 31, 1995 to $1,174.0 million
at June 30, 1996. The rise is attributable primarily to an increase of $53.1
million in the loan portfolio as well as an increase of $8.6 million 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>
6/30/96 12/31/95
-------- --------
(In thousands)
<S> <C> <C>
Real estate loans:
Residential $589,338 $558,231
Commercial 132,293 121,909
Construction and land 25,173 18,138
-------- --------
Total real estate loans 746,804 698,278
-------- --------
Consumer 54,817 51,170
Commercial 20,246 19,150
-------- --------
Total loans $821,867 $768,598
======== ========
</TABLE>
Residential real estate loans increased $31.1 million from December 31, 1995 to
$589.3 million at June 30, 1996. Loans held for sale decreased from $5.2 million
at December 31, 1995, to $1.0 million at June 30, 1996. Residential loans closed
during the first six months of 1996 totalled $106.9 million as compared to $40.3
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 six months of 1996 resulting in the high level of closings in 1996
over 1995's level of closings.
Commercial real estate loans increased to $132.3 million at June 30, 1996 from
$121.9 million at December 31, 1995, resulting primarily from new loan volume.
Construction and land loan balances increased $7.0 million to $25.2 million at
June 30, 1996. Outstanding commercial loans increased $1.1 million from December
31, 1995, to $20.2 million at June 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 $44.3
million in the first six months of 1996 as compared to $29.0 million in the
first six 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 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 $800,000
would have been recorded in the first six 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 $181,000. Additionally, another $143,000 in interest
payments were applied as a reduction of the nonaccruing loan balances instead of
as interest income during the first six months of 1996.
- 9 -
<PAGE> 12
<TABLE>
The following table shows the composition of non-performing assets at June 30,
1996 and December 31, 1995:
<CAPTION>
6/30/96 12/31/95
------- --------
(Dollars in thousands)
<S> <C> <C>
Nonaccruing loans $11,658 $11,627
Restructured loans 2,566 5,583
------- -------
Total non-performing loans 14,224 17,210
Other real estate owned 2,554 4,158
------- -------
Total non-performing assets $16,778 $21,368
======= =======
Total non-performing assets as a
percentage of total assets 1.4% 1.9%
</TABLE>
Total non-performing assets decreased $4.6 million in the first six months of
1996, primarily due to restructured loans returned to the performing loan
portfolio as well as from the sale of other real estate owned. During the first
six months of 1996, $1.0 million 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 and June 30, 1996 and
1995:
<CAPTION>
6/30/96 3/31/96 6/30/95 3/31/95
------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C>
Beginning balance $15,358 $15,785 $21,747 $23,312
Additions 3,465 1,852 2,276 2,254
Sales, restructurings,
payments and other decreases (4,168) (1,880) (4,164) (2,949)
Charge-offs and valuation
adjustments (443) (399) (625) (870)
------- ------- ------- -------
Balance at end of quarter $14,212 $15,538 $19,234 $21,747
======= ======= ======= =======
</TABLE>
At June 30, 1996, total impaired loans were $11.5 million, of which $4.2 million
had related allowances of $0.7 million and $7.3 million which did not require a
related allowance. During the period ended June 30, 1996, the average recorded
value of impaired loans was $11.6 million and the related amount of interest
income recognized was $131,000.
<TABLE>
Nonaccruing Loans. The following table shows the composition of nonaccruing
loans at June 30, 1996 and December 31, 1995:
<CAPTION>
6/30/96 12/31/95
------- --------
(Dollars in thousands)
<S> <C> <C>
Residential real estate $ 2,654 $ 3,037
Commercial real estate 8,009 7,195
Construction and Land 79 ---
Commercial 695 1,136
Consumer 221 259
------- -------
Total loans on nonaccrual $11,658 $11,627
======= =======
Allowance for loan losses $11,802 $11,665
======= =======
Allowance for loan losses as a
percentage of nonaccruing loans 101.2% 100.3%
Allowance for loan losses as a
percentage of non-performing loans 83.0% 67.8%
Allowance for loan losses as a
percentage of total loans 1.4% 1.5%
</TABLE>
- 10 -
<PAGE> 13
During the first six months of 1996, loans on nonaccrual increased slightly to
$11.7 million. Part of the increase was due to a loan totalling $475,000 that
had been in the restructured loan balance as of December 31, 1995. Included in
the $11.7 million in total nonaccruing loans at June 30, 1996, $1.8 million or
15.0% are less than 90 days past due but have exhibited some other credit
weakness. Of the $1.8 million in loans less than 90 days past due, approximately
$662,000 or 37.8% 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 June 30, 1996, approximately $6.0 million of
non-performing loans and $1.7 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 $50.1 million at June 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 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 borrower. 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 June 30, 1996 and December 31, 1995, restructured loans totalled $2.6 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 June 30, 1996 was approximately 7.2%.
Interest income that would have been recognized in 1996 if restructured loans
had been performing in accordance with their original terms was $105,000. The
actual amount of interest on these loans that was recognized in interest income
in 1996 was $89,000.
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 June 30,
1996 and December 31, 1995:
<CAPTION>
6/30/96 12/31/95
------- --------
(In thousands)
<S> <C> <C>
Residential real estate $ 774 $1,131
Commercial real estate 340 572
Multi-family real estate 1,353 1,820
Construction and land 373 1,048
------ ------
2,840 4,571
Valuation allowance (286) (413)
------ ------
Total other real estate owned $2,554 $4,158
====== ======
</TABLE>
- 11 -
<PAGE> 14
<TABLE>
The following table shows changes in the valuation allowance for other real
estate owned for the quarters and six months ended June 30, 1996 and 1995:
<CAPTION>
Quarters Ended Year-to-Date
June 30, June 30,
------------------- -------------------
1996 1995 1996 1995
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Balance, beginning of period $ 349 $ 634 $ 413 $ 715
Provision 165 210 305 420
Charge-offs (228) (309) (432) (600)
----- ----- ----- -----
Balance, end of period $ 286 $ 535 $ 286 $ 535
===== ===== ===== =====
</TABLE>
Properties substantively repossessed, for which the Bank has not completed legal
transfer of ownership, included in the above, totalled $50,000 at June 30, 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 $868,000 in the first six months of
1996, as compared to $1.0 million in the first six months of 1995. The addition
to the valuation allowance for other real estate owned totalled $305,000 for the
first six months of 1996 as compared to $420,000 in the same period in 1995.
Operating costs associated with acquiring, maintaining and disposing of other
real estate owned added another $625,000 to the losses on real estate operations
during the first six months of 1996, as compared to $1.1 million in the
corresponding period in 1995.
During the first six months of 1996, sales of other real estate owned totalled
$2.4 million, as compared to $4.7 million in the first six months of 1995. In
the first six months of 1996, net gains of $62,000 on sales of other real estate
owned were recognized as compared to net gains of $451,000 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 $650,000 are anticipated for the third quarter. There is no
assurance Such sales will take place. There were no commitments for capital
expenditures on real estate acquired by foreclosure at June 30, 1996.
<TABLE>
ALLOWANCE FOR LOAN LOSSES. The following table summarizes the activity in the
Company's allowance for loan losses for the quarters and six months ended June
30, 1996 and 1995:
<CAPTION>
Quarters Ended Year-to-Date
June 30, June 30,
------------------- ------------------
1996 1995 1996 1995
------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $11,568 $11,955 $11,665 $12,343
Provision 360 175 755 325
Charge-offs:
Residential real estate (87) (367) (297) (676)
Commercial real estate (338) (169) (685) (440)
Construction and land (43)
Commercial (8) (51) (21)
Consumer (22) (23) (102) (42)
------- ------- ------- -------
Total charge-offs (455) (559) (1,135) (1,222)
------- ------- ------- -------
Recoveries:
Residential real estate 23 10 23 10
Commercial real estate 18 87 23 ll8
Construction and land 119 -- 178 2
Commercial 165 35 231 122
Consumer 4 11 13 16
------- ------- ------- -------
Total recoveries 329 143 517 268
------- ------- ------- -------
Net charge-offs (126) (416) (618) (954)
Balance at end of period $11,802 $11,714 $11,802 $11,714
======= ======= ======= =======
Ratio of anualized net
charge-offs to average
loans outstanding 0.06% 0.25% 0.16% 0.29%
</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
$455,000 million during the second quarter of 1996 and were spread out among 20
loans; the largest charge-off during the quarter was $100,000.
INVESTMENTS. As of June 30, 1996, the Company's total investment portfolio
amounted to $293.9 million, an increase of $8.7 million from $285.2 million at
year-end 1995. This increase resulted primarily from the purchase of $52.7
million in investments available for sale. Offsetting these purchases was the
sale and maturity of $26.2 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
June 30, 1996 and December 31, 1995:
<CAPTION>
6/30/96 12/31/95
------- --------
(In thousands)
<S> <C> <C>
SHORT-TERM INVESTMENTS $ 13,700 $ 9,000
======== ========
INVESTMENTS AVAILABLE FOR SALE (AT MARKET):
U.S. government and federal agency obligations $ 57,708 $ 52,490
Other bonds and obligations 9,133 14,382
-------- --------
Total bonds and obligations 66,841 66,872
-------- --------
GNMA mortgage-backed securities 33,199 37,195
FHLMC participation certificates 23,506 4,420
Collateralized mortgage obligations --- 482
FNMA pass-through certificates 4,927 ---
-------- --------
Total mortgage-backed securities 61,632 42,097
-------- --------
Total investments available for sale $128,473 $108,969
======== ========
INVESTMENTS HELD TO MATURITY (AMORTIZED COST):
U.S. government and federal agency obligations $ --- $ 1,500
Other bonds and obligations 13,740 12,758
-------- --------
Total bonds and obligations 13,740 14,258
-------- --------
FHLMC participation certificates 70,625 78,649
FNMA pass-through certificates 61,493 67,375
GNMA mortgage-backed securities 4,188 4,458
Other asset-backed securities 1,220 1,407
Collateralized mortgage obligations 434 1,116
-------- --------
Total mortgage-backed securities 137,960 153,005
-------- --------
Total investments held to maturity $151,700 $167,263
======== ========
Total investments $293,873 $285,232
======== ========
</TABLE>
<TABLE>
The following table presents the gross unrealized gains and losses by major
categories of securities as of June 30, 1996:
<CAPTION>
Unrealized Unrealized
Gains Losses
----- ------
(In thousands)
<S> <C> <C>
INVESTMENTS AVAILABLE FOR SALE:
U.S. government and federal agency obligations $ 139 $(1,158)
Other bonds and obligations 61 (21)
Mortgage-backed securities 239 (854)
------ -------
Total investments available for sale 439 (2,033)
------ -------
INVESTMENTS HELD TO MATURITY:
Other bonds and obligations $ 71 $ (86)
Mortgage-backed securities 539 (2,128)
------ -------
Total investments held to maturity 610 (2,214)
------ -------
Total unrealized gains and losses $1,049 $(4,247)
====== =======
</TABLE>
- 13 -
<PAGE> 16
At June 30, 1996, the Company's net unrealized loss on investments available for
sale, net of applicable income taxes, amounted to $944,000, a market value
decrease of $1.1 million from a net unrealized gain of $199,000 at December 31,
1995. At June 30, 1996, the Company's net unrealized loss on investments held to
maturity totalled $1.6 million, a change of $4.1 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 $780.5 million at June 30, 1996. This increase was most
pronounced in certificates of deposit and demand deposit accounts. All other
core deposits, excluding money market accounts, also experienced an increase
during the first six months of 1996.
<TABLE>
The following table shows the composition of the Company's deposits at June 30,
1996 and December 31, 1995:
<CAPTION>
6/30/96 12/31/95
------- --------
(In thousands)
<S> <C> <C>
Demand deposit accounts $ 64,113 $ 54,516
Regular savings accounts 71,825 68,052
NOW accounts 73,649 67,275
Money market deposit accounts 127,456 130,437
Certificates of deposit 443,457 422,925
-------- --------
Total deposits $780,500 $743,205
======== ========
</TABLE>
Securities sold under agreements to repurchase increased $20.1 million from $9.2
million at December 31, 1995, to $29.3 million at June 30, 1996. Federal Home
Loan Bank advances increased $4.9 million from December 31, 1995, to $268.3
million at June 30, 1996. The increase in total borrowings was used to augment
deposit increases to fund the growth in loans and investments during the first
six 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 second quarter of 1996, the Company paid dividends in the amount of
$637,000. In July, 1996, the Company declared a dividend in the amount of
$638,000, payable in the third quarter of 1996.
Cash flows provided by operations increased to $7.1 million in the first six
months of 1996 from cash flows used by operations of $3.0 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 $60.6 million for the six months ended June 30, 1996, from cash
flows provided by investing activities of $3.5 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 June 30, 1996 to
$61.4 million, as compared to $17.7 million in the equivalent period in 1995 due
to an increase in total deposits and securities sold under agreements to
repurchase.
- 14 -
<PAGE> 17
At June 30, 1996, the Company had home equity, reserve credit and commercial
unused lines of credit totalling $78.6 million. Outstanding commitments to
originate real estate loans totalled $30.7 million. Unadvanced portions of real
estate loans amounted to $14.9 million. Standby letters of credit were $1.8
million. Loans sold with recourse totalled $4.7 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 June 30, 1996:
<CAPTION>
Risk-Based Capital Ratio
Leverage ------------------------
Ratio Tier 1 Total
----- ------ -----
<S> <C> <C> <C>
Andover Bancorp 7.8% 13.3% 14.5%
Andover Bank 7.4 12.7 14.0
Andover Bank NH 23.4 23.3 23.9
</TABLE>
Current minimum regulatory requirements as of June 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. 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
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
--------------------------------------
RESULTS OF OPERATIONS
- ---------------------
GENERAL. Net income amounted to $5.7 million, $1.33 per share, for the six
months ended June 30, 1996, compared to net income of $4.2 million, $1.00 per
share, in the corresponding period of 1995.
The financial performance in the first six months of 1995 was negatively
impacted by a $1.0 million pre-tax charge taken in the second quarter related to
the termination of the previously announced merger with Finest Financial Corp.
("Finest"), while the financial results in 1996 included a pre-tax credit of
$225,000 for the execution of the termination agreement with Finest. However,
mitigating those affects have been high levels of non-performing assets which
result in high levels of foregone income, provision for loan and other real
estate owned losses and other operating costs associated with holding and
disposing of other real estate owned. Included in the year-to-date 1996 results
were net gains of $258,000 on sales and redemptions of loans and the investment
portfolio, compared to net gains of $161,000 during the corresponding period of
1995. Andover's annualized return on average assets increased to 1.01% for the
first six months of 1996 compared to 0.81% in the comparable period of 1995. The
annualized return on average stockholders' equity increased to 13.07% in the
first six months of 1996 from 10.66% in the comparable period of 1995.
NET INTEREST AND DIVIDEND INCOME. Net interest and dividend income was $17.3
million for the first six months of 1996, as compared to $16.1 million for the
same period in 1995, an increase of 7.5%. The amount of interest income excluded
from earnings on non-accruing loans amounted to $476,000 in the first six months
of 1996 compared to $527,000 in the comparable period of 1995. Increased market
interest rates resulted in a 4 basis point rise in the yield on earning assets
from the first six months of 1995 to the comparable period of 1996. During this
same period, the rate paid on interest-bearing liabilities increased by 15 basis
points. This compression resulted in a slightly reduced yield on earning assets
of 3.19% for the first six months of 1996 as compared to 3.20% in 1995.
PROVISION FOR LOAN LOSSES. The provision for loan losses for the first six
months of 1996 and 1995 was $755,000 and $325,000, 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 $618,000 in the first six months of
1996 versus $954,000 in the corresponding period last year.
NON-INTEREST INCOME. Andover recorded gains from non-interest sources of $2.2
million for the first six months of 1996, as compared to $1.8 million in the
corresponding period of 1995 primarily as a result of increased loan servicing
income and a reduction of the losses on real estate operations. Additionally,
gains from sales and redemptions of loans, and the investment portfolio,
totalled $258,000 in 1996, as compared to $161,000 in the same period of 1995.
Losses on real estate operations totalled $868,000 during the first six months
of 1996 as compared to $1.0 million in the corresponding period of 1995. A large
component of the loss on real estate operations during the first six months of
both 1996 and 1995 was comprised of operating costs associated with acquiring,
maintaining and disposing other real estate owned and totalled $625,000 and $1.1
million, respectively.
Mortgage banking income totalled $1.4 million during the first six months of
1996 as compared to $1.1 million in the corresponding period of 1995 due to an
increase in the Company's servicing portfolio.
- 16 -
<PAGE> 19
Other income totalled $1.4 million in the first six months of 1996 versus $1.5
million in the first six 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.
NON-INTEREST EXPENSE. Non-interest expenses decreased 8.5% to $9.8 million in
the first six 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 with Finest as compared to a the $1.0 million pre-tax charge for the
terminated merger with Finest in 1995. Salaries and benefits increased 6.3% to
$5.1 million in 1996 due to increased personnel and merit increases. Office
occupancy and equipment increased 18.5% to $1.4 million due to increased
investments in computers and related costs for depreciation as well as costs
associated with the ABNH branch. Data processing expenses increased 16.0% to
$819,000 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 59.6% to $624,000 due to increased
amortization of the purchased servicing rights. Marketing expenses increased
16.0% to $456,000 primarily due to an increased number of discretionary
promotions. Professional fees increased to $387,000 as a result of legal and
examination fees. Deposit insurance premiums decreased to $7,000 due to a
reduction in the FDIC assessment rates. Other operating expenses increased 17.7%
to $1.2 million primarily due to increased general overhead expenses from
operating a larger institution.
INCOME TAX EXPENSE. As a result of continued earnings of the Company, it is more
likely than not that the Company will realize a greater portion of its deferred
tax asset than has previously been recognized. This has resulted in a decrease
in the valuation allowance on these items of $250,000 in the first six months of
1996. Offsetting this income tax benefit, the Company recorded an income tax
expense of $3.5 million on its financial statement earnings.
- 17 -
<PAGE> 20
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
- 18 -
<PAGE> 21
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.
August 13, 1996 /s/Gerald T. Mulligan
---------------------------
Gerald T. Mulligan
President and
Chief Executive Officer
August 13, 1996 /s/Joseph F. Casey
---------------------------
Joseph F. Casey
Chief Financial Officer
and Treasurer
- 19 -
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS DATED JUNE 30, 1996 AND IS QUALFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C>
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0
0
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