<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 March 31, 1997 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)
Former name, former address and for new fiscal year, if changed since last
report.
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 issuer's classes of Common
Stock, as of the latest practicable date is:
Class: Common Stock, par value $0.10 per share
Outstanding as of April 30, 1997: 5,148,458 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
Notes to Consolidated Financial
Statements 5
Analysis of Net Yield on Earning Assets 6
ITEM 2 Management's Discussion and Analysis of 7-15
Financial Condition and Results of Operations
For the Quarter Ended March 31, 1997
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
<PAGE> 3
ANDOVER BANCORP, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED BALANCE SHEETS
---------------------------
(Unaudited)
<CAPTION>
MARCH 31, 1997 DEC. 31, 1996
-------------- -------------
(In thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 18,990 $ 20,489
Short-term investments 11,500 25,600
---------- ----------
Cash and cash equivalents 30,490 46,089
---------- ----------
Assets held for sale (Market value of $1,752
in 1997 and $2,220 in 1996) 1,752 2,220
Investments available for sale (Amortized
cost of $135,351 in 1997 and $113,623
in 1996) 134,384 114,125
Investments held to maturity (Market value
of $128,912 in 1997 and $137,007 in 1996) 130,828 136,926
Loans 873,786 870,035
Allowance for loan losses (12,374) (12,229)
---------- ----------
Net loans 861,412 857,806
---------- ----------
Other real estate owned, net 1,942 1,683
Premises and equipment, net 10,134 10,194
Accrued interest receivable 7,737 7,164
Stock in FHLBB, at cost 15,747 15,747
Deferred income taxes receivable 2,216 1,374
Income taxes receivable --- 478
Mortgage servicing assets 10,279 8,006
Other assets 2,683 3,001
---------- ----------
Total assets $1,209,604 $1,204,813
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 861,386 $ 824,311
Securities sold under agreements
to repurchase 5,552 2,833
Federal Home Loan Bank advances 235,179 271,585
Mortgagors' escrow accounts 2,416 2,294
Income taxes payable 3,209 2,570
Accrued expenses and other liabilities 4,292 5,374
---------- ----------
Total liabilities 1,112,034 1,108,967
---------- ----------
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 5,154,792 in 1997
and 1996 515 515
Additional paid-in capital 59,177 59,222
Retained earnings 38,545 36,109
Treasury stock, at cost (8,334 shares
in 1997 and 20,862 shares in 1996) (120) (301)
Unrealized gains (losses) on investments
available for sale, net (547) 301
---------- ----------
Total stockholders' equity 97,570 95,846
---------- ----------
Total liabilities and stockholders' equity $1,209,604 $1,204,813
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
- 1 -
<PAGE> 4
ANDOVER BANCORP, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Unaudited)
<CAPTION>
QUARTERS ENDED
MARCH 31,
------------------------
1997 1996
---- ----
(In thousands, except per share amounts)
<S> <C> <C>
Interest and dividend income:
Loans $17,076 $15,340
Mortgage-backed securities 3,077 3,297
Investment securities 1,552 1,316
Short-term investments 190 117
------- -------
Total interest and dividend income 21,895 20,070
------- -------
Interest expense:
Deposits 8,768 7,613
Federal Home Loan Bank advances 3,655 3,734
Securities sold under agreements to repurchase 63 239
------- -------
Total interest expense 12,486 11,586
------- -------
Net interest and dividend income 9,409 8,484
Provision for loan losses 330 395
------- -------
Net interest and dividend income
after provision for loan losses 9,079 8,089
------- -------
Non-interest income:
Net gains from sales and
redemptions of assets held for sale 29 54
Net gains from sales and redemptions
of investments available for sale --- 92
Losses on real estate operations, net (357) (477)
Mortgage banking income 672 487
Other income 719 680
------- -------
Total non-interest income 1,063 836
------- -------
Non-interest expense:
Salaries and employee benefits 2,887 2,486
Office occupancy and equipment 684 681
Data processing 425 386
Marketing 219 216
Professional fees 189 187
Other operating expense 764 661
------- -------
Total non-interest expense 5,168 4,617
------- -------
Income before income tax expense 4,974 4,308
Income tax expense 1,766 1,576
------- -------
Net income $ 3,208 $ 2,732
======= =======
Average number of common shares outstanding 5,138 5,087
Net income per share $ 0.62 $ 0.53
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
- 2 -
<PAGE> 5
ANDOVER BANCORP, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
Year Ended December 31, 1996 and Three Months Ended March 31, 1997
(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, 1995 $515 $71,515 $26,183 $(13,247) $ 199 $85,165
Net income --- --- 12,479 --- --- 12,479
Dividends declared and
paid ($0.50 per share) --- --- (2,553) --- --- (2,553)
Stock options exercised --- 41 --- 612 --- 653
Stock dividend --- (12,334) --- 12,334 --- ---
Change in unrealized
gains (losses) on
investments available
for sale --- --- --- --- 102 102
---- ------- ------- -------- ----- -------
Balance at December 31, 1996 515 59,222 36,109 (301) 301 95,846
Net income --- --- 3,208 --- --- 3,208
Dividends declared and
paid ($0.15 per share) --- --- (772) --- --- (772)
Stock options exercised --- (45) --- 181 --- 136
Change in unrealized
gains (losses) on
investments available
for sale --- --- --- --- (848) (848)
---- ------- ------- -------- ----- -------
Balance at March 31, 1997 $515 $59,177 $38,545 $ (120) $(547) $97,570
==== ======= ======= ======== ===== =======
- ----------------------------------------
<FN>
(1) Net of related tax effect.
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
- 3 -
<PAGE> 6
ANDOVER BANCORP, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
<CAPTION>
QUARTERS ENDED
MARCH 31,
-----------------------
1997 1996
---- ----
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,208 $ 2,732
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 330 395
Net losses on sales and provisions
for other real estate owned 136 174
Net gains from sales and redemptions of
investments available for sale --- (92)
Net gains from sales and writedowns of
assets held for sale (29) (54)
Depreciation and amortization 349 336
Amortization of fees, discounts and premiums, net 112 120
(Increase) decrease in:
Assets held for sale 497 (2,177)
Accrued interest receivable (573) (579)
Income taxes receivable 256 276
Mortgage servicing assets 293 265
Other assets 318 (937)
Increase (decrease) in:
Mortgagors' escrow accounts 122 (780)
Accrued income taxes payable 639 692
Accrued expenses and other liabilities (1,082) (906)
--------- --------
Net cash provided (used) by operating activities 4,576 (535)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment and mortgage-backed securities available for sale:
Purchases (24,377) (40,031)
Proceeds from sales --- 14,108
Proceeds from maturities and redemptions 1,000 4,000
Principal repayments 1,623 2,777
Investment and mortgage-backed securities held to maturity:
Purchases --- (1,544)
Proceeds from maturities and redemptions 500 2,000
Principal repayments 5,539 6,509
Purchases of whole loans (1,024) ---
Purchases of mortgage servicing rights (2,566) (136)
Net increase in loans (3,712) (16,510)
Capital expenditures on premises and equipment, net (289) (356)
Proceeds from disposition of other real estate owned 423 1,007
Capital expenditures on other real estate owned (44) ---
--------- --------
Net cash used by investing activities (22,927) (28,176)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 37,075 20,161
Net increase in securities sold
under agreements to repurchase 2,719 27,287
Proceeds from issuance of FHLB advances 65,000 72,475
Principal repayments of FHLB advances (101,406) (89,513)
Dividends paid (772) (508)
Stock options exercised 136 109
--------- --------
Net cash provided by financing activities 2,752 30,011
--------- --------
Net increase (decrease) in cash and cash equivalents (15,599) 1,300
Cash and cash equivalents, at beginning of period 46,089 28,236
--------- --------
Cash and cash equivalents, at end of period $ 30,490 $ 29,536
========= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 12,681 $ 11,815
Income taxes 869 571
Supplemental noncash investing and financing activities:
Conversion of real estate loans to mortgage-backed
securities held for sale 5,010 13,105
Transfer of loans to other real estate owned 774 351
</TABLE>
The accompanying notes are 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, 1996. Andover Bank (the "Bank") is a state chartered savings bank with
its headquarters located in Andover, Massachusetts. Andover Bank NH
("ABNH") is a state chartered guaranty savings bank established in
September, 1995 and headquartered in Salem, New Hampshire. In the opinion
of management, the unaudited consolidated financial statements presented
herein reflect all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation. Interim results are not
necessarily indicative of results to be expected for the entire year.
2) STOCK DIVIDEND
<TABLE>
The per share data for the first quarter of 1996 was restated to reflect a
20% stock dividend distributed on November 13, 1996. The effect of this
stock dividend on the Company's earnings per share and dividends per share
for the first quarter of 1996 is presented below.
<CAPTION>
As reported As restated
----------- -----------
<S> <C> <C>
Net income per share - 3/31/96 $0.64 $0.53
Dividends declared per share - 3/31/96 $0.12 $0.10
</TABLE>
- 5 -
<PAGE> 8
ANDOVER BANCORP, INC. AND SUBSIDIARIES
<TABLE>
ANALYSIS OF NET YIELD ON EARNING ASSETS
---------------------------------------
(Unaudited)
<CAPTION>
QUARTERS ENDED MARCH 31,
------------------------
1997 1996
---- ----
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 $ 14,148 $ 190 5.45% $ 8,796 $ 117 5.35%
Investment securities (1) 93,528 1,552 6.73 88,928 1,316 5.95
Mortgage-backed securities (1) 180,692 3,077 6.91 193,877 3,297 6.84
---------- ------- ---------- -------
Total investments 288,368 4,819 6.78 291,601 4,730 6.52
---------- ------- ---------- -------
Real estate loans (1) (2) 796,808 15,410 7.84 706,630 13,768 7.84
Consumer loans (2) 60,803 1,229 8.20 52,430 1,161 8.91
Commercial loans (2) 18,944 437 9.36 17,796 411 9.29
---------- ------- ---------- -------
Total loans 876,555 17,076 7.90 776,856 15,340 7.94
---------- ------- ---------- -------
Total interest-earning assets 1,164,923 21,895 7.62% 1,068,457 20,070 7.55%
------- -------
Allowance for loan losses (12,264) (11,707)
Other real estate owned 1,652 3,617
Other assets 54,519 45,555
---------- ----------
Total assets $1,208,830 $1,105,922
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts $ 66,833 169 1.03% $ 64,165 $ 159 1.00%
Regular savings accounts 104,046 808 3.15 69,959 387 2.22
Money market deposit accounts 117,204 871 3.01 129,832 923 2.86
Certificates of deposit 488,434 6,920 5.75 426,683 6,144 5.79
---------- ------- ---------- -------
Total interest-bearing deposits 776,517 8,768 4.58 690,639 7,613 4.43
---------- ------- ---------- -------
Borrowed funds:
Reverse repurchase agreements 5,667 63 4.51 17,931 239 5.36
Federal Home Loan Bank advances 257,945 3,655 5.75 250,575 3,734 5.99
---------- ------- ---------- -------
Total borrowed funds 263,612 3,718 5.72 268,506 3,973 5.95
---------- ------- ---------- -------
Total interest-bearing liabilities 1,040,129 12,486 4.87% 959,145 11,586 4.85%
------- -------
Demand deposits 62,249 52,433
Other liabilities 10,436 9,025
---------- ----------
Total liabilities 1,112,814 1,020,603
Stockholders' equity 96,016 85,319
---------- ----------
Total liabilities and stock-
holders' equity $1,208,830 $1,105,922
========== ==========
Net interest income $ 9,409 $ 8,484
======= =======
Interest rate spread 2.75% 2.70%
==== ====
Net yield on earning assets 3.28% 3.19%
==== ====
<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 has
been 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) The Average Yield/Rate calculation is based on an annualized basis
reflecting 90 days in the first quarter of 1997 and 91 days in the first quarter
of 1996.
</TABLE>
- 6 -
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE QUARTER ENDED MARCH 31, 1997
------------------------------------
This quarterly report contains certain statements that are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The
Company's actual results could differ materially from those projected in the
forward-looking statements as a result, among other factors, of the risk factors
set forth in the Company's filings with the Securities and Exchange Commission
and of changes in general economic conditions, changes in interest rates and
changes in the assumptions used in making such forward-looking statements.
RESULTS OF OPERATIONS
- ---------------------
GENERAL. Net income amounted to $3.2 million, or $0.62 per share, for the
quarter ended March 31, 1997 as compared to net income of $2.7 million, or $0.53
per share, in the corresponding quarter of 1996. The current quarter results
includes an increase in the net interest margin, non-interest income and a
reduction in the provision for loan losses, offset by an increase in
non-interest expenses. Andover's annualized return on average assets increased
to 1.08% for the first quarter of 1997 compared to 0.99% in the first quarter of
1996. The annualized return on average stockholders' equity increased to 13.55%
in the first quarter of 1997 from 12.88% in the first quarter of 1996.
NET INTEREST AND DIVIDEND INCOME. Net interest and dividend income was $9.4
million for the first quarter of 1997 as compared to $8.5 million for the same
period in 1996. This increase resulted from a rise in interest-earning assets as
well as an increase in the net yield earned. 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. Foregone income, which
represents the amount of interest income earned but excluded from earnings on
nonaccruing loans, amounted to $195,000 in the first quarter of 1997, versus
$237,000 in the comparable quarter of 1996. The Company continues to shift its
earning asset mix from investments to loans, which averaged 75% of total
interest-earning assets in the current quarter. This combination resulted in an
increased net yield on earning assets of 3.28% for the first quarter of 1997
compared to 3.19% in 1996.
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 first quarter of 1997 was $330,000 versus
$395,000 in the comparable period in 1996. Management considered several
contributing factors in determining that a lower provision for loan losses was
appropriate in the first quarter of 1997. These factors include, without
limitation, the level and mix of loan growth, the level of nonaccrual and
restructured loans as well as the level of delinquent loans, charge-offs and
recoveries. Charge-offs in the first quarter of 1997 totalled $628,000 versus
$680,000 in the corresponding quarter last year while recoveries totalled
$443,000 and $188,000, respectively, for 1997 and 1996. The reserve coverage as
a percentage of nonaccruing loans totalled 118.7% at March 31, 1997, this
represents a slight increase from the 1996 year-end reserve coverage.
- 7 -
<PAGE> 10
NON-INTEREST INCOME. Net gains from sales and redemptions of loans, investments
and mortgage-backed securities held for sale and available for sale totalled
$29,000 in the first quarter of 1997 and $146,000 in the comparable period of
1996.
Losses of $357,000 on real estate operations were recognized in the first
quarter of 1997 as compared to $477,000 in the first quarter of 1996. A
significant portion of the losses on real estate operations during the first
quarters of both 1997 and 1996 were operating costs associated with acquiring,
maintaining and disposing of other real estate owned totalling $221,000 and
$303,000, respectively. Provisions for losses on other real estate owned added
another $125,000 to the loss on real estate operations during the first quarter
of 1997, as compared to $140,000 in the first quarter of 1996. In the first
quarter of 1997, sales of other real estate owned totalled $423,000 as compared
to $1.0 million in the corresponding quarter of 1996.
Mortgage banking income totalled $672,000 in 1997's first quarter versus
$487,000 in 1996's comparable quarter due to an increase in the Company's
servicing portfolio. Total loans serviced for investors totalled $1,070.3
million and $765.7 million, respectively, at March 31, 1997 and 1996. Included
in the balances for March 31, 1997, were rights to service $209 million in
residential loans that were purchased in the first quarter of 1997, although the
loans were subserviced by the original servicer at quarter-end.
Other income totalled $719,000 in 1997's first quarter as compared to $680,000
in the first quarter of 1996, primarily due to an increase in deposit fee
income.
NON-INTEREST EXPENSE. Non-interest expenses increased by $551,000, or 11.9%, to
$5.2 million in the first quarter of 1997 from the first quarter of 1996.
Salaries and employee benefits, the largest component of non-interest expense,
increased $401,000 or 16.1% from $2.5 million for the first quarter of 1996 to
$2.9 million in the current year's corresponding quarter. This increase was
primarily due to a higher head count and salary increases. Other employee
benefits, which includes retirement, medical, ESOP and 401(k) benefits, among
others, have also increased over the first quarter of 1996.
Data processing expenses increased 10.1% from $386,000 for the quarter ended
March 31, 1996 to $425,000 for the first quarter of 1997 due to an increase in
the number of loans and deposits.
Other operating expenses increased from $661,000 for the quarter ended March 31,
1996 to $764,000 in the first quarter of 1997 due mainly to various expenses
incurred in running a larger institution. These expenses, which increased over
the prior year's quarter, include postage, printing and telephone expenses as
well as office supplies and directors fees.
All other non-interest expense components had no significant increase or
decrease from the first quarter of 1996 to the first quarter of 1997.
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
1997 and 1996. Offsetting the income tax benefit in 1997, the Company recorded
an income tax expense of $1.9 million, on its financial statement earnings.
FINANCIAL CONDITION
- -------------------
Total assets increased slightly from $1,204.8 million at December 31, 1996 to
$1,209.6 million at March 31, 1997. The modest loan growth and increase in the
investment portfolio was funded by the solid growth experienced in the deposit
balances.
- 8 -
<PAGE> 11
<TABLE>
LOANS. The following table shows the composition of the Company's loan portfolio
at March 31, 1997 and December 31, 1996. The balances shown in the table are net
of unadvanced funds and deferred loan origination fees and costs.
<CAPTION>
3/31/97 12/31/96
------- --------
(In thousands)
<S> <C> <C>
Real estate loans:
Residential $625,777 $619,955
Commercial 135,116 136,454
Construction and land 32,801 35,001
-------- --------
Total real estate loans 793,694 791,410
-------- --------
Consumer loans 61,301 59,224
Commercial loans 18,791 19,401
-------- --------
Total loans $873,786 $870,035
======== ========
</TABLE>
Total loans increased $3.8 million in the first quarter of 1997 to $873.8
million at March 31, 1997. Total originations of residential real estate and
corporate loans decreased in the first quarter, as reflected by the modest
growth in the total loan balances. Contributing to the modest loan growth in the
first quarter of 1997 were several large corporate loans which were repaid due,
in part, to the competitive market for corporate relationships.
Interest rates affect both the residential mortgage refinance and home purchase
markets and were at relatively high levels in the first quarter of 1997.
Originations of corporate loans, which include commercial real estate,
construction and land loans as well as commercial loans, are also sensitive to
interest rates, real estate values and business activity. The corporate loan
balances declined from the year-end balances by approximately 9% on an
annualized basis to $186.7 million at March 31, 1997. Residential loan balances
increased $5.8 million, or approximately 4% on an annualized basis, to $625.8
million at March 31, 1997. Consumer loan balances increased by approximately 14%
on an annualized basis, to $61.3 million at March 31, 1997, primarily resulting
from an increase in home equity lines and second mortgage loans as a result of a
recent promotional offer undertaken by the Banks.
<TABLE>
RISK ELEMENTS. The following table shows the composition of non-performing
assets at March 31, 1997 and December 31, 1996:
<CAPTION>
3/31/97 12/31/96
------- --------
(Dollars in thousands)
<S> <C> <C>
Nonaccruing loans $10,424 $10,699
Other real estate owned 1,942 1,683
------- -------
Total non-performing assets $12,366 $12,382
======= =======
Total non-performing assets as a
percentage of total assets 1.0% 1.0%
</TABLE>
Total non-performing assets decreased slightly in the first three months of
1997, primarily due to nonaccruing loans moving back into performing status as
well as the sale of other real estate owned. During the first three months of
1997, $774,000 of loans were written down to their net fair value and
reclassified out of loans and into other real estate owned.
Significant progress has been made over the past several years in reducing total
non-performing assets. However, Andover continues to experience levels of
non-performing assets that divert management's attention and 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 $313,000 would have been recorded in the first three
months of 1997 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 1997 on nonaccruing loans amounted to approximately $41,000.
Additionally, another $77,000 in interest payments were applied as a reduction
of the nonaccruing loan balances instead of as interest income during the first
three months of 1997.
- 9 -
<PAGE> 12
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. 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
March 31, 1997, approximately $5.5 million of nonaccrual loans and $1.3 million
of other real estate owned were secured by properties located in Lawrence,
consisting primarily of multi-family dwellings, as compared to approximately
$6.0 million and $1.4 million, respectively, at December 31, 1996.
At March 31, 1997, total impaired loans were $8.5 million, of which $2.8 million
had related allowances of $0.5 million and $5.7 million which did not require a
related allowance. During the period ended March 31, 1997, the average recorded
value of impaired loans was $8.8 million and the related amount of interest
income recognized was approximately $20,000.
NONACCRUING LOANS. Management places loans on nonaccrual status when loan
payments are 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.
<TABLE>
The following table shows the composition of nonaccruing loans at March 31, 1997
and December 31, 1996:
<CAPTION>
3/31/97 12/31/96
------- --------
(Dollars in thousands)
<S> <C> <C>
Residential real estate $ 3,084 $ 2,838
Commercial real estate 6,592 6,901
Construction and land --- 79
Commercial 663 727
Consumer 85 154
------- -------
Total loans on nonaccrual $10,424 $10,699
======= =======
Allowance for loan losses $12,374 $12,229
======= =======
Allowance for loan losses as a
percentage of nonaccruing loans 118.7% 114.3%
Allowance for loan losses as a
percentage of total loans 1.4% 1.4%
</TABLE>
Of the $10.4 million in nonaccruing loans at March 31, 1997, $3.4 million or
32.5% were less than 90 days past due but have exhibited some other credit
weakness. Of the $3.4 million in loans less than 90 days past due, approximately
$850,000 or 25.1% 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.
While stabilization has appeared in certain sectors of the economy and real
estate markets, if the regional economy deteriorates, nonaccruing loans would
likely increase, reversing progress made by the Company in reducing
non-performing assets over the past several years.
RESTRUCTURED LOANS. A restructured loan is one for which the Bank has modified
the terms to provide a temporary reduction in the rate of interest due to the
deterioration in the financial position of the borrower. Restructured loans are
classified as such until the obligation has performed for a sustained period of
time at a market rate of interest and its ultimate collectibility is no longer
in doubt. At March 31, 1997 and December 31, 1996, restructured loans totalled
$1.5 million and $2.2 million, respectively. The weighted average interest rate
on restructured loans as of March 31, 1997 was approximately 5.3%.
- 10 -
<PAGE> 13
OTHER REAL ESTATE OWNED. The deterioration in the New England real estate market
and economy caused foreclosures resulting in the transfer of loans to other real
estate owned.
<TABLE>
The following table shows the composition of other real estate owned at March
31, 1997 and December 31, 1996:
<CAPTION>
3/31/97 12/31/96
------- --------
(In thousands)
<S> <C> <C>
Residential real estate $ 495 $ 456
Commercial real estate 473 544
Multi-family real estate 1,109 658
Construction and land 101 201
------ ------
2,178 1,859
Valuation allowance (236) (176)
------ ------
Total other real estate owned $1,942 $1,683
====== ======
</TABLE>
<TABLE>
The following table shows changes in the valuation allowance for other real
estate owned for the quarters ended March 31, 1997 and 1996:
<CAPTION>
March 31,
------------------
1997 1996
---- ----
(In thousands)
<S> <C> <C>
Balance, beginning of period $176 $ 413
Provision 125 140
Charge-offs (65) (204)
---- -----
Balance, end of period $236 $ 349
==== =====
</TABLE>
All other real estate owned is carried at the lower of the carrying value 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. Additions to the valuation
allowance for other real estate owned totalled $125,000 for the first three
months of 1997 as compared to $140,000 in the same period in 1996.
During the first three months of 1997, sales of other real estate owned totalled
$423,000, as compared to $1.0 million in the first three months of 1996. In the
first three months of 1997, net losses of $11,000 on sales of other real estate
owned were recognized as compared to $34,000 in the corresponding period in
1996. Pending sales under firm offers or purchases and sales agreements on
properties with carrying values of approximately $700,000 are anticipated for
the second quarter of 1997. However, 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, 1997.
- 11 -
<PAGE> 14
<TABLE>
ALLOWANCE FOR LOAN LOSSES. The following table summarizes the activity in the
Company's allowance for loan losses for the quarters ended March 31, 1997 and
1996:
<CAPTION>
Quarters Ended
----------------------
03/31/97 03/31/96
-------- --------
(Dollars in Thousands)
<S> <C> <C>
Balance at beginning of quarter $12,229 $11,665
Provision 330 395
Charge-offs:
Residential real estate (302) (210)
Commercial real estate (253) (347)
Construction and land --- ---
Commercial (54) (43)
Consumer (19) (80)
------- -------
Total charge-offs (628) (680)
------- -------
Recoveries:
Residential real estate --- ---
Commercial real estate 89 54
Construction and land 88 59
Commercial 263 66
Consumer 3 9
------- -------
Total recoveries 443 188
------- -------
Net charge-offs (185) (492)
------- -------
Balance at end of quarter $12,374 $11,568
======= =======
Ratio of annualized net
charge-offs to average loans
outstanding 0.08% 0.25%
</TABLE>
Charge-offs totalled $628,000 during the first quarter of 1997 and were spread
out among 33 loans; the largest charge-off during the quarter was $58,000.
Management periodically analyzes the adequacy of the allowance for loan losses.
See "Results of Operations - Provision for Loan Losses."
INVESTMENTS. As of March 31, 1997, the Company's total investment portfolio
amounted to $276.7 million. Although the investment portfolio balance remained
essentially unchanged as compared to the balances as of year-end, the mix of
investments changed. The purchase of $31.8 million in investments available for
sale, primarily U.S. government and federal agency obligations, was offset by
the decline of $14.1 million in short-term investments as well as principal
repayments and the sale of $7.3 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.
- 12 -
<PAGE> 15
<TABLE>
The following table presents the carrying values of the investment portfolio at
March 31, 1997 and December 31, 1996:
<CAPTION>
3/31/97 12/31/96
-------- --------
(In thousands)
<S> <C> <C>
SHORT-TERM INVESTMENTS $ 11,500 $ 25,600
======== ========
INVESTMENTS AVAILABLE FOR SALE (AT FAIR VALUE):
U.S. government and federal agency obligations $ 63,224 $ 41,740
Other bonds and obligations 14,812 14,993
-------- --------
Total bonds and obligations 78,036 56,733
-------- --------
GNMA mortgage-backed securities 27,711 27,526
FHLMC participation certificates 24,087 25,103
FNMA pass-through certificates 4,550 4,763
-------- --------
Total mortgage-backed securities 56,348 57,392
-------- --------
Total investments available for sale $134,384 $114,125
======== ========
INVESTMENTS HELD TO MATURITY (AMORTIZED COST):
U.S. government and federal agency obligations $ 1,450 $ 1,448
Other bonds and obligations 9,163 9,686
-------- --------
Total bonds and obligations 10,613 11,134
-------- --------
FHLMC participation certificates 60,257 63,639
FNMA pass-through certificates 55,172 57,192
GNMA mortgage-backed securities 3,790 3,899
Other asset-backed securities 996 1,062
-------- --------
Total mortgage-backed securities 120,215 125,792
-------- --------
Total investments held to maturity $130,828 $136,926
======== ========
Total investments $276,712 $276,651
======== ========
</TABLE>
<TABLE>
The following table presents the gross unrealized gains and losses by major
categories of securities as of March 31, 1997:
<CAPTION>
Unrealized Unrealized
Gains Losses
---------- ----------
(In thousands)
<S> <C> <C>
INVESTMENTS AVAILABLE FOR SALE:
U.S. government and federal agency obligations $ 30 $ (542)
Other bonds and obligations 32 (161)
Mortgage-backed securities 241 (567)
---- -------
Total investments available for sale 303 (1,270)
---- -------
INVESTMENTS HELD TO MATURITY:
U.S. government and federal agency obligations $--- $ (43)
Other bonds and obligations 48 (73)
Mortgage-backed securities 486 (2,334)
---- -------
Total investments held to maturity 534 (2,450)
---- -------
Total unrealized gains and losses $837 $(3,720)
==== =======
</TABLE>
At March 31, 1997, the Company's net unrealized loss on investments available
for sale amounted to $967,000, a fair value decline of $1.5 million from a net
unrealized gain of $502,000 at December 31, 1996. At March 31, 1997, the
Company's net unrealized loss on investments held to maturity totalled $1.9
million, a change of $2.0 million from a net unrealized gain of $81,000 at
December 31, 1996. The change in the net unrealized loss on the total investment
portfolio from the end of 1996 was primarily due to increased market interest
rates.
- 13 -
<PAGE> 16
DEPOSITS AND BORROWED FUNDS. Total deposits increased 4.5% to $861.4 million at
March 31, 1997 from $824.3 million at December 31, 1996. This increase was most
pronounced in regular savings accounts and certificates of deposit and reflects
the success of various promotions. All other core deposits, excluding NOW
accounts, also experienced an increase during the first three months of 1997.
<TABLE>
The following table shows the composition of the Company's deposits at March 31,
1997 and December 31, 1996:
<CAPTION>
3/31/97 12/31/96
------- --------
(In thousands)
<S> <C> <C>
Demand deposit accounts $ 65,092 $ 60,245
Regular savings accounts 110,480 96,690
NOW accounts 71,263 75,297
Money market deposit accounts 116,462 116,019
Certificates of deposit 498,089 476,060
-------- --------
Total deposits $861,386 $824,311
======== ========
</TABLE>
Federal Home Loan Bank advances decreased $36.4 million from December 31, 1996,
to $235.2 million at March 31, 1997. The funds used to pay down these advances
resulted from the growth experienced in total deposits. Securities sold under
agreements to repurchase increased $2.7 million to $5.6 million at March 31,
1997.
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. ABNH received an additional capital contribution of $1.0 million in
the first quarter of 1997 to maintain its required capital ratios in light of
its balance sheet growth. In the first quarter of 1997, the Company paid
dividends to stockholders in the amount of $772,000. In April, 1997, the Company
declared a dividend in the amount of $875,000, payable in the second quarter of
1997.
The Banks have a diverse base of funding sources including customer deposits,
borrowed funds, repayments and amortization of the loan and investment
portfolios. 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 Banks may also obtain funds from the
Federal Reserve Bank of Boston by pledging certain assets.
Cash flows provided by operations increased $5.1 million to $4.6 million in the
first three months of 1997 as compared to cash flows used by operations of
$535,000 in the corresponding period of 1996 due primarily to a decrease in
assets held for sale. Cash flows used by investing activities decreased by $5.2
million to $22.9 million for the three months ended March 31, 1997, from $28.2
million during the equivalent period last year. This was mainly attributable to
fewer purchases of investments available for sale and a smaller increase in
portfolio loans. Cash flows provided by financing activities decreased $27.3
million for the period ended March 31, 1997 to $2.8 million, as compared to
$30.0 million in the equivalent period in 1996 due to a significant decline in
securities sold under agreements to repurchase as well as higher FHLB advance
repayments in the first quarter of 1997.
At March 31, 1997, the Company had home equity, reserve credit and commercial
unused lines of credit totalling $87.2 million. Outstanding commitments to
originate real estate loans totalled $31.8 million. Unadvanced portions of real
estate loans amounted to $14.8 million. Standby letters of credit were $1.9
million. Loans sold with recourse totalled $4.1 million. Management believes
that its sources of liquidity are sufficient to meet these commitments if and as
called upon.
- 14 -
<PAGE> 17
<TABLE>
CAPITAL RESOURCES. The following table presents regulatory capital ratios under
current leverage and risk-based capital requirements as of March 31, 1997:
<CAPTION>
Risk-Based Capital Ratio
Leverage ------------------------
Ratio Tier 1 Total
----- ------ -----
<S> <C> <C> <C>
Andover Bancorp, Inc. 8.1% 13.6% 14.9%
Andover Bank 7.9 13.3 14.5
Andover Bank NH 9.5 16.2 16.5
</TABLE>
Current minimum regulatory requirements for the Bank and the Company as of March
31, 1997 were 4.0% for the leverage ratio and 4.0% and 8.0%, respectively, for
the Tier 1 and total risk-based capital ratios. As a de novo bank, Andover Bank
NH is obligated to maintain a minimum leverage ratio of 8%. Under the FDIC's
prompt corrective action regulations promulgated pursuant to the FDIC
Improvement Act of 1991, the Banks have sufficient capital to be considered
"well- capitalized". Therefore, the Banks are entitled to pay the lowest deposit
premium 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 1997 Annual Meeting of Shareholders of the registrant
was held on April 24, 1997. 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
ratification of KPMG Peat Marwick LLP as Andover's
independent auditors. Votes were cast as follows:
I. Election of two Class I Directors
Nominee For Withheld
------- --- --------
Thomas F. Caffrey 4,312,353 41,111
Cornelius J. McCarthy 4,308,069 45,395
II. Ratification of KPMG Peat Marwick LLP as Independent Auditors
Broker
For Against Abstain Non Vote
--- ------- ------- --------
4,309,911 18,297 25,254 -0-
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
----------
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.
May 13, 1997 /s/Gerald T. Mulligan
---------------------
Gerald T. Mulligan
President and
Chief Executive Officer
May 13, 1997 /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, 1997 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-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 18,990
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 11,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,752
<INVESTMENTS-CARRYING> 130,828
<INVESTMENTS-MARKET> 134,384
<LOANS> 873,786
<ALLOWANCE> 12,374
<TOTAL-ASSETS> 1,209,604
<DEPOSITS> 861,386
<SHORT-TERM> 5,552
<LIABILITIES-OTHER> 9,917
<LONG-TERM> 235,179
0
0
<COMMON> 515
<OTHER-SE> 97,055
<TOTAL-LIABILITIES-AND-EQUITY> 1,209,604
<INTEREST-LOAN> 17,076
<INTEREST-INVEST> 4,819
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 21,895
<INTEREST-DEPOSIT> 8,768
<INTEREST-EXPENSE> 12,486
<INTEREST-INCOME-NET> 9,409
<LOAN-LOSSES> 330
<SECURITIES-GAINS> 29
<EXPENSE-OTHER> 5,168
<INCOME-PRETAX> 4,974
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,208
<EPS-PRIMARY> 0.62
<EPS-DILUTED> 0
<YIELD-ACTUAL> 3.28
<LOANS-NON> 10,424
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,473
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 12,229
<CHARGE-OFFS> 628
<RECOVERIES> 443
<ALLOWANCE-CLOSE> 12,374
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
