<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, 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 July 29, 1997: 5,148,458 shares
<PAGE> 2
ANDOVER BANCORP, INC.
AND SUBSIDIARIES
Index
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
<S> <C>
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 7-17
Financial Condition and Results of Operations
For the Quarter Ended June 30, 1997
For the Six Months Ended June 30, 1997
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
</TABLE>
<PAGE> 3
ANDOVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, 1997 Dec. 31, 1996
------------- -------------
(In thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 26,857 $ 20,489
Short-term investments 19,900 25,600
---------- ----------
Cash and cash equivalents 46,757 46,089
---------- ----------
Assets held for sale (Market value of $2,142
in 1997 and $2,220 in 1996) 2,142 2,220
Investments available for sale (Amortized
cost of $151,024 in 1997 and $113,623 in 1996) 151,492 114,125
Investments held to maturity (Market value
of $124,921 in 1997 and $137,007 in 1996) 124,930 136,926
Loans 888,904 870,035
Allowance for loan losses (12,531) (12,229)
---------- ----------
Net loans 876,373 857,806
---------- ----------
Other real estate owned, net 1,425 1,683
Premises and equipment, net 9,953 10,194
Accrued interest receivable 7,714 7,164
Stock in FHLBB, at cost 15,747 15,747
Deferred income taxes receivable 1,798 1,374
Income taxes receivable --- 478
Mortgage servicing assets 9,969 8,006
Other assets 2,643 3,001
---------- ----------
Total assets $1,250,943 $1,204,813
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 920,191 $ 824,311
Securities sold under agreements to repurchase 6,412 2,833
Federal Home Loan Bank advances 214,797 271,585
Mortgagors' escrow accounts 2,325 2,294
Income taxes payable 2,131 2,570
Accrued expenses and other liabilities 4,258 5,374
---------- ----------
Total liabilities 1,150,114 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 59,255 59,222
Retained earnings 40,852 36,109
Treasury stock, at cost (6,334 shares
in 1997 and 20,862 shares in 1996) (91) (301)
Unrealized gains on investments vailable for sale, net 298 301
---------- ----------
Total stockholders' equity 100,829 95,846
---------- ----------
Total liabilities and stockholders' equity $1,250,943 $1,204,813
========== ==========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
- 1 -
<PAGE> 4
ANDOVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
QUARTERS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
------------------ ------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Interest and dividend income:
Loans $17,241 $15,763 $34,387 $31,103
Mortgage-backed securities 3,043 3,467 6,120 6,764
Investment securities 1,787 1,430 3,339 2,746
Short-term investments 212 54 402 171
------- ------- ------- -------
Total interest and dividend income 22,283 20,714 44,248 40,784
------- ------- ------- -------
Interest expense:
Deposits 9,501 7,637 18,269 15,250
Federal Home Loan Bank advances 3,218 3,918 6,873 7,652
Securities sold under agreements to repurchase 79 342 142 581
------- ------- ------- -------
Total interest expense 12,798 11,897 25,284 23,483
------- ------- ------- -------
Net interest and dividend income 9,485 8,817 18,964 17,301
Provision for loan losses 223 360 553 755
------- ------- ------- -------
Net interest and dividend income
after provision for loan losses 9,262 8,457 18,411 16,546
------- ------- ------- -------
Non-interest income:
Net gains from sales and redemptions of
assets held for sale 54 111 83 165
Net gains from sales and redemptions
of investments available for sale 87 1 87 93
Losses on real estate operations, net (228) (391) (585) (868)
Mortgage banking income 584 513 1,186 1,000
Other income 779 696 1,498 1,376
------- ------- ------- -------
Total non-interest income 1,276 930 2,269 1,766
------- ------- ------- -------
Non-interest expense:
Salaries and employee benefits 2,987 2,632 5,874 5,118
Office occupancy and equipment 755 697 1,439 1,378
Data processing 434 433 859 819
Marketing 276 240 495 456
Professional fees 224 200 413 387
Merger recovery -- (225) -- (225)
Other operating expense 880 795 1,644 1,456
------- ------- ------- -------
Total non-interest expense 5,556 4,772 10,724 9,389
------- ------- ------- -------
Income before income tax expense 4,982 4,615 9,956 8,923
Income tax expense 1,800 1,695 3,566 3,271
------- ------- ------- -------
Net income $ 3,182 $ 2,920 $ 6,390 $ 5,652
======= ======= ======= =======
Average number of common shares outstanding 5,148 5,095 5,143 5,090
Net income per share $ 0.62 $ 0.57 $ 1.24 $ 1.11
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
- 2 -
<PAGE> 5
ANDOVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Year Ended December 31, 1996 and Six Months Ended June 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
UNREALIZED
GAINS (LOSSES) TOTAL
ADDITIONAL ON INVESTMENTS STOCK-
COMMON PAID-IN RETAINED TREASURY AVAILABLE HOLDERS'
STOCK CAPITAL EARNINGS STOCK FOR SALE(1) EQUITY
------ ---------- -------- -------- ----------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 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 -- -- 6,390 -- -- 6,390
Dividends declared and
paid ($0.32 per share) -- -- (1,647) -- -- (1,647)
Stock options exercised -- 33 -- 210 -- 243
Change in unrealized
gains (losses) on
investments available
for sale -- -- -- -- (3) (3)
---- ------- ------- -------- ------- --------
Balance at June 30, 1997 $515 $59,255 $40,852 $ (91) $ 298 $100,829
==== ======= ======= ======== ======= ========
</TABLE>
[FN]
- ------------------------------
(1) Net of related tax effect.
[/FN]
The accompanying notes are an integral part of the consolidated financial
statements.
- 3 -
<PAGE> 6
ANDOVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED,
JUNE 30,
-------------------------
1997 1996
---- ----
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,390 $ 5,652
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 553 755
Net losses on sales and provisions
for other real estate owned 169 243
Net gains from sales and redemptions of
investments available for sale (87) (93)
Net gains from sales and writedowns of
assets held for sale (83) (165)
Depreciation and amortization 719 677
Amortization of fees, discounts and premiums, net 237 248
(Increase) decrease in:
Assets held for sale 161 4,326
Accrued interest receivable (550) (462)
Income taxes 84 845
Mortgage servicing assets 637 336
Other assets 358 (184)
Increase (decrease) in:
Mortgagors' escrow accounts 31 (1,251)
Accrued income taxes payable (439) (894)
Accrued expenses and other liabilities (1,116) (607)
--------- ---------
Net cash provided by operating activities 7,064 9,426
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment and mortgage-backed securities available for sale:
Purchases (50,979) (52,655)
Proceeds from sales 8,087 20,132
Proceeds from maturities and redemptions 2,000 6,023
Principal repayments 3,570 5,035
Investment and mortgage-backed securities held to maturity:
Purchases -- (1,543)
Proceeds from maturities and redemptions 2,000 2,000
Principal repayments 9,897 14,938
Net change in FHLB Stock -- (1,430)
Purchases of whole loans (2,310) (26,704)
Purchases of mortgage servicing rights (2,600) (2,297)
Net increase in loans (18,464) (28,138)
Capital expenditures on premises and equipment, net (478) (679)
Proceeds from disposition of other real estate owned 1,668 2,372
Capital expenditures on other real estate owned (54) --
--------- ---------
Net cash used by investing activities (47,663) (62,946)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 95,880 37,295
Net increase in securities sold
under agreements to repurchase 3,579 20,112
Proceeds from issuance of FHLB advances 130,000 208,475
Principal repayments of FHLB advances (186,788) (203,558)
Dividends paid (1,647) (1,145)
Stock options exercised 243 173
--------- ---------
Net cash provided by financing activities 41,267 61,352
--------- ---------
Net increase in cash and cash equivalents 668 7,832
Cash and cash equivalents, at beginning of period 46,089 28,236
--------- ---------
Cash and cash equivalents, at end of period $ 46,757 $ 36,068
========= =========
Supplemental disclosures of cash flow information: Cash paid
during the period for:
Interest $ 25,559 $ 23,736
Income taxes 3,829 3,284
Supplemental noncash investing and financing activities:
Conversion of real estate loans to mortgage-backed
securities held for sale 11,028 26,180
Transfer of loans to other real estate owned 1,525 1,011
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
- 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
The per share data for the first six months 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 second quarter and year-to-date results of
1996 is presented below.
<TABLE>
<CAPTION>
As reported As restated
----------- -----------
<S> <C> <C>
Net income per share - quarter ended 6/30/96 $0.69 $0.57
Dividends declared per share -
quarter ended 6/30/96 $0.15 $0.13
Net income per share - year-to-date 6/30/96 $1.33 $1.11
Dividends declared per share -
year-to-date 6/30/96 $0.27 $0.23
</TABLE>
- 5 -
<PAGE> 8
ANDOVER BANCORP, INC. AND SUBSIDIARIES
ANALYSIS OF NET YIELD ON EARNING ASSETS
(Unaudited)
<TABLE>
<CAPTION>
QUARTERS ENDED JUNE 30,
-----------------------
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 $ 15,710 $ 212 5.41% $ 4,111 $ 54 5.28%
Investment securities (1) 106,520 1,787 6.73 96,799 1,430 5.94
Mortgage-backed securities (1) 176,849 3,043 6.90 204,833 3,467 6.81
---------- ------- ---------- -------
Total investments 299,079 5,042 6.76 305,743 4,951 6.51
---------- ------- ---------- -------
Residential loans (1) (2) 631,865 11,520 7.31 580,847 10,570 7.32
Commercial loans (2) 131,627 2,934 8.94 127,944 2,871 9.03
Construction and land loans 35,647 918 10.33 24,122 618 10.30
---------- ------ ---------- -------
Total real estate loans 799,139 15,372 7.72 732,913 14,059 7.72
Consumer loans (2) 64,333 1,322 8.24 54,317 1,165 8.63
Commercial loans (2) 22,460 547 9.77 19,995 539 10.84
---------- ------- --------- -------
Total loans 885,932 17,241 7.81 807,225 15,763 7.85
---------- ------- --------- -------
Total interest-earning assets 1,185,011 22,283 7.54% 1,112,968 20,714 7.49%
------- -------
Allowance for loan losses (12,398) (11,699)
Other real estate owned 1,774 2,992
Other assets 57,759 49,089
---------- ----------
Total assets $1,232,146 $1,153,350
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts $ 72,812 $ 181 1.00% $ 66,651 $ 161 0.97%
Regular savings accounts 116,968 935 3.21 72,027 395 2.21
Money market deposit accounts 112,248 819 2.93 128,400 915 2.87
Certificates of deposit 523,370 7,566 5.80 433,082 6,166 5.73
---------- ------- ---------- -------
Total interest-bearing deposits 825,398 9,501 4.62 700,160 7,637 4.39
---------- ------- ---------- -------
Borrowed funds:
Reverse repurchase agreements 6,649 79 4.77 26,182 342 5.25
Federal Home Loan Bank advances 221,459 3,218 5.83 269,644 3,918 5.84
---------- ------- ---------- -------
Total borrowed funds 228,108 3,297 5.80 295,826 4,260 5.79
---------- ------- ---------- -------
Total interest-bearing
liabilities 1,122,780 12,798 4.87% 1,055,762 11,897 4.80%
------- -------
Demand deposits 69,274 59,776
Other liabilities 10,766 9,006
---------- ----------
Total liabilities 1,133,546 1,064,768
Stockholders' equity 98,600 88,582
---------- ----------
Total liabilities and stock-
holders' equity $1,232,146 $1,153,350
========== ==========
Net interest income $ 9,485 $ 8,817
======= =======
Interest rate spread 2.67% 2.69%
==== ====
Net yield on earning assets 3.21% 3.19%
==== ====
</TABLE>
<PAGE> 9
ANDOVER BANCORP, INC. AND SUBSIDIARIES
ANALYSIS OF NET YIELD ON EARNING ASSETS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
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 $ 14,933 $ 402 5.43% $ 6,456 $ 171 5.33%
Investment securities (1) 100,060 3,339 6.73 92,864 2,746 5.95
Mortgage-backed securities (1) 178,760 6,120 6.90 199,355 6,764 6.52
---------- ------- ---------- -------
Total investments 293,753 9,861 6.77 298,675 9,681 6.32
---------- ------- ---------- -------
Residential loans (1) (2) 629,603 23,199 7.43 571,126 20,950 7.38
Commercial loans (2) 133,390 5,929 8.96 126,778 5,700 9.04
Construction and land loans 35,011 1,724 9.93 21,868 1,177 10.82
---------- ------- ---------- -------
Total real estate loans 798,004 30,852 7.80 719,772 27,827 7.77
Consumer loans (2) 62,577 2,551 8.22 53,373 2,326 8.76
Commercial loans (2) 20,712 984 9.58 18,895 950 10.11
---------- ------- ---------- -------
Total loans 881,293 34,387 7.87 792,040 31,103 7.90
---------- ------- ---------- -------
Total interest-earning assets 1,175,046 44,248 7.59% 1,090,715 40,784 7.46%
------- -------
Allowance for loan losses (12,331) (11,703)
Other real estate owned 1,713 3,305
Other assets 56,086 47,319
---------- ----------
Total assets $1,220,514 $1,129,636
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUIT
Interest-bearing deposits:
NOW accounts $ 69,839 $ 350 1.01% $ 65,408 $ 320 0.98%
Regular savings accounts 110,510 1,743 3.18 70,993 782 2.22
Money market deposit accounts 114,712 1,690 2.97 129,116 1,838 2.86
Certificates of deposit 506,031 14,486 5.77 429,882 12,310 5.76
---------- ------- ---------- -------
Total interest-bearing deposits 801,092 18,269 4.60 695,399 15,250 4.41
---------- ------- ---------- -------
Borrowed funds:
Reverse repurchase agreements 6,161 142 4.65 22,057 581 5.30
Federal Home Loan Bank advances 239,601 6,873 5.78 260,109 7,652 5.92
---------- ------- ---------- -------
Total borrowed funds 245,762 7,015 5.76 282,166 8,233 5.87
---------- ------- ---------- -------
Total interest-bearing
liabilities 1,046,854 25,284 4.87% 977,565 23,483 4.83%
------- -------
Demand deposits 65,781 56,105
Other liabilities 10,564 9,015
---------- ----------
Total liabilities 1,123,199 1,042,685
Stockholders' equity 97,315 86,951
---------- ----------
Total liabilities and stock-
holders' equity $1,220,514 $1,129,636
========== ==========
Net interest income $18,964 $17,001
======= =======
Interest rate spread 2.72% 2.63%
==== ====
Net yield on earning assets 3.25% 3.13%
==== ====
<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) The Average Yield/Rate calculation is based on an annualized basis reflecting 91 days in the second quarter of both years and
181 days in the year-to-date period for 1997 and 182 days in the year-to-date period for 1996.
</FN>
</TABLE>
- 6 -
<PAGE> 10
MANAGEMENT'S DISCUSSION AND
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE QUARTER ENDED JUNE 30, 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. Th
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 June 30, 1997 as compared to net income of $2.9 million, or $0.57
per share, in the corresponding quarter of 1996. The current quarter results
include 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 1.04% for the second quarter of 1997 compared to 1.02% in the second quarter
of 1996. The annualized return on average stockholders' equity decreased to
12.94% in the second quarter of 1997 from 13.26% in the second quarter of 1996.
NET INTEREST AND DIVIDEND INCOME. Net interest and dividend income was $9.5
million for the second quarter of 1997 as compared to $8.8 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 $167,000 in the second quarter of 1997, versus
$255,000 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 3.21% for the second 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 second quarter of 1997 was $223,000 versus
$360,000 in the comparable period in 1996. Management considered several
contributing factors in determining that a lower provision for loan losses was
appropriate in the second 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 second quarter of 1997 totalled $379,000 versus
$455,000 in the corresponding quarter last year, while recoveries totalled
$313,000 and $329,000 respectively, for 1997 and 1996. The reserve coverage as
a percentage of nonaccruing loans totalled 127.7% at June 30, 1997, an increase
from the 1996 year-end reserve coverage.
- 7 -
<PAGE> 11
NON-INTEREST INCOME. Net gains from sales and redemptions of loans, investments
and mortgage-backed securities held for sale and available for sale totalled
$141,000 in the second quarter of 1997 and $112,000 in the comparable period of
1996.
Losses of $228,000 on real estate operations were recognized in the second
quarter of 1997 as compared to $391,000 in the second quarter of 1996. A
significant portion of the losses on real estate operations during the second
quarters of both 1997 and 1996 were operating costs associated with acquiring,
maintaining and disposing of other real estate owned totalling $194,000 and
$322,000, respectively. Provisions for losses on other real estate owned added
another $75,000 to the loss on real estate operations during the second quarter
of 1997, as compared to $165,000 in the second quarter of 1996. In the second
quarter of 1997, sales of other real estate owned totalled $1.2 million as
compared to $1.4 million in the corresponding quarter of 1996.
Mortgage banking income totalled $584,000 in 1997's second quarter versus
$513,000 in 1996's comparable quarter due to an increase in the Company's
servicing portfolio. Loans serviced for investors totalled $1,038.8 million and
$908.7 million, respectively, at June 30, 1997 and 1996.
Other income totalled $779,000 in 1997's second quarter as compared to $696,000
in the second quarter of 1996, primarily due to an increase in deposit fee
income and loan late fees resulting from higher loans and deposits outstanding.
NON-INTEREST EXPENSE. Non-interest expenses increased by $784,000, or 16.4%, to
$5.6 million in the second quarter of 1997 from the second quarter of 1996. A
contributing factor to the increase over 1996 was the merger recovery recorded
in the second quarter of 1996 from the execution of a merger termination
agreement, without which non-interest expenses would have only increased by
approximately 11%.
Salaries and employee benefits, the largest component of non-interest expense,
increased $355,000 or 13.5% from $2.6 million for the second quarter of 1996 to
$3.0 million in the current year's corresponding quarter. This increase was
primarily due to a higher head count and salary increases as well as overtime
costs and temporary help incurred in conjunction with a conversion of the
Company's loan and deposit processing system during the second quarter of 1997.
Office occupancy and equipment increased $58,000, or 8.3%, to $755,000 in the
second quarter of 1997 from $697,000 in the comparable period of 1996 due to
increased technology throughout the Company and the addition of the Londonderry
branch in the fourth quarter of 1996.
Data processing had no significant change from the second quarter of 1996 to the
second quarter of 1997.
Marketing expenses increased 15.0% to $276,000 for the quarter ended June 30,
1997 from $240,000 for the second quarter of 1996 due to an increase in
discretionary promotions, primarily for home equity loans and deposits.
Professional fees increased 12.0%, or $24,000, to $224,000 from $200,000 for the
quarters ended June 30, 1997 and 1996, respectively, due to an increase in
outside consulting projects.
Included in 1996's second quarter results was the recovery of $225,000 for the
execution of a merger termination agreement with Finest Financial Corp.
Other operating expenses increased from $795,000 for the quarter ended June 30,
1996 to $880,000 in the second quarter of 1997 due mainly to various expenses
incurred in running a larger institution and more branches. These expenses,
which increased over the prior year's quarter, include office supplies, printing
and telephone expenses as well as contributions and directors fees.
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
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.
- 8 -
<PAGE> 12
FINANCIAL CONDITION
Total assets increased 3.8% from $1,204.8 million at December 31, 1996 to
$1,250.9 million at June 30, 1997. The modest loan growth and the increase in
the investment portfolio were funded by the solid growth experienced in the
deposit balances.
LOANS. The following table shows the composition of the Company's loan portfolio
at June 30, 1997 and December 31, 1996. The balances shown in the table are net
of unadvanced funds and deferred loan origination fees and costs.
<TABLE>
<CAPTION>
6/30/97 12/31/96
------- ---------
(In thousands)
<S> <C> <C>
Real estate loans:
Residential $633,148 $619,955
Commercial 137,500 136,454
Construction and land 28,902 35,001
-------- --------
Total real estate loans 799,550 791,410
-------- --------
Consumer loans 66,264 59,224
Commercial loans 23,090 19,401
-------- --------
Total loans $888,904 $870,035
======== ========
</TABLE>
Total loans increased $18.9 million in the second quarter of 1997 to $888.9
million at June 30, 1997 primarily due to increases in residential real estate
and consumer loans.
Interest rates affect both the residential mortgage refinance and home purchase
markets and were at fairly stable levels in the first six months of 1997.
Residential loan balances increased $13.2 million, or approximately 4% on an
annualized basis, to $633.1 million at June 30, 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 slightly from the
year-end balances to $189.5 million at June 30, 1997. Consumer loan balances
increased by approximately 24% on an annualized basis, to $66.3 million at June
30, 1997, primarily due to an increase in home equity balances and second
mortgage loans as a result of a recent promotional offer undertaken by the
Banks.
RISK ELEMENTS. The following table shows the composition of non-performing
assets at June 30, 1997 and December 31, 1996:
<TABLE>
<CAPTION>
6/30/97 12/31/96
------- --------
(Dollars in thousands)
<S> <C> <C>
Nonaccruing loans $ 9,814 $10,699
Other real estate owned 1,425 1,683
------- -------
Total non-performing assets $11,239 $12,382
======= =======
Total non-performing assets as a
percentage of total assets 0.9% 1.0%
</TABLE>
Total non-performing assets decreased 9.2% in the first six 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 six months of 1997, $1.5
million 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 $615,000 would have been recorded in the first six
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 $78,000.
Additionally, another $175,000 in interest payments were applied as a reduction
of the nonaccruing loan balances instead of as interest income during the first
six months of 1997.
- 9 -
<PAGE> 13
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 June
30, 1997, approximately $4.9 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 June 30, 1997, total impaired loans were $7.5 million, of which $2.2 million
had related allowances of $0.3 million and $5.3 million which did not require a
related allowance. During the six months ended June 30, 1997, the average
recorded value of impaired loans was $8.4 million and the related amount of
interest income recognized was approximately $35,000.
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.
The following table shows the composition of nonaccruing loans at June 30, 1997
and December 31, 1996:
<TABLE>
<CAPTION>
6/30/97 12/31/96
------- --------
(Dollars in thousands)
<S> <C> <C>
Residential real estate $ 2,742 $ 2,838
Commercial real estate 6,132 6,901
Construction and land 291 79
Commercial 597 727
Consumer 52 154
------- -------
Total loans on nonaccrual $ 9,814 $10,699
======= =======
Allowance for loan losses $12,531 $12,229
======= =======
Allowance for loan losses as a
percentage of nonaccruing loans 127.7% 114.3%
Allowance for loan losses as a
percentage of total loans 1.4% 1.4%
</TABLE>
Of the $9.8 million in nonaccruing loans at June 30, 1997, $3.1 million or 31.7%
were less than 90 days past due but have exhibited some other credit weakness.
Of the $3.1 million in loans less than 90 days past due, approximately $1.8
million or 57% 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 June 30, 1997 and December 31, 1996, restructured loans totalled
$1.4 million and $2.2 million, respectively. The weighted average interest rate
on restructured loans as of June 30, 1997 was approximately 7.7%.
- 10 -
<PAGE> 14
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.
The following table shows the composition of other real estate owned at June 30,
1997 and December 31, 1996:
<TABLE>
<CAPTION>
6/30/97 12/31/96
------- --------
(In thousands)
<S> <C> <C>
Residential real estate $ 215 $ 456
Commercial real estate 301 544
Multi-family real estate 1,043 658
Construction and land 1 201
------ ------
1,560 1,859
Valuation allowance (135) (176)
------ ------
Total other real estate owned $1,425 $1,683
====== ======
</TABLE>
The following table shows changes in the valuation allowance for other real
estate owned for the quarters and six months ended June 30, 1997 and 1996:
<TABLE>
<CAPTION>
Quarters Ended Six Months Ended
June 30, June 30,
---------------- ------------------
1997 1996 1997 1996
---- ---- ---- -----
(In thousands)
<S> <C> <C> <C> <C>
Balance, beginning of period $ 236 $ 349 $ 176 $ 413
Provision 75 165 200 305
Charge-offs (176) (228) (241) (432)
----- ----- ------ ------
Balance, end of period $ 135 $ 286 $ 135 $ 286
===== ===== ====== ======
</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 $200,000 for the first six months
of 1997 as compared to $305,000 in the same period in 1996.
During the first six months of 1997, sales of other real estate owned totalled
$1.7 million, as compared to $2.4 million in the first six months of 1996. In
the first six months of 1997, net gains of $31,000 on sales of other real estate
owned were recognized as compared to net gains of $62,000 in the corresponding
period in 1996. Pending sales under firm offers or purchases and sales
agreements on properties with carrying values of approximately $600,000 are
anticipated for the third 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 June 30, 1997.
- 11 -
<PAGE> 15
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, 1997 and 1996:
<TABLE>
<CAPTION>
Quarters Ended Six Months Ended
June 30, June 30,
---------------- ------------------
1997 1996 1997 1996
---- ---- ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $12,374 $11,568 $12,229 $11,665
Provision 223 360 553 755
Charge-offs:
Residential real estate (150) (87) (452) (297)
Commercial real estate (228) (338) (480) (685)
Construction and land -- -- -- ---
Commercial -- (8) (55) (51)
Consumer (1) (22) (21) (102)
------- ------- ------- -------
Total charge-offs (379) (455) (1,008) (1,135)
------- ------- ------- -------
Recoveries:
Residential real estate -- 23 -- 23
Commercial real estate 14 18 103 72
Construction and land 80 119 167 178
Commercial 215 165 479 231
Consumer 4 4 8 13
------- ------- ------- -------
Total recoveries 313 329 757 517
------- ------- ------- -------
Net charge-offs (66) (126) (251) (618)
------- ------- ------- -------
Balance at end of period $12,531 $11,802 $12,531 $11,802
======= ======= ======= =======
Ratio of annualized net
charge-offs to average
loans outstanding 0.03% 0.06% 0.06% 0.16%
</TABLE>
Charge-offs totalled $379,000 during the second quarter of 1997 and were spread
out among 18 loans; the largest charge-off during the quarter was $55,000.
Management periodically analyzes the adequacy of the allowance for loan losses.
See "Results of Operations - Provision for Loan Losses."
INVESTMENTS. As of June 30, 1997, the Company's total investment portfolio
amounted to $296.3 million, for an increase of $19.7 million from December 31,
1996. The purchase of $51.0 million in investments available for sale, primarily
U.S. government and federal agency obligations, was partially offset by the
decline of $5.7 million in short-term investments as well as principal
repayments of $9.9 million in mortgage-backed securities held to maturity.
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> 16
The following table presents the carrying values of the investment portfolio at
June 30, 1997 and December 31, 1996:
<TABLE>
<CAPTION>
6/30/97 12/31/96
------- --------
(In thousands)
<S> <C> <C>
SHORT-TERM INVESTMENTS $ 19,900 $ 25,600
======== ========
INVESTMENTS AVAILABLE FOR SALE (AT FAIR VALUE):
U.S. government and federal agency obligations $ 61,544 $ 41,740
Other bonds and obligations 15,453 14,993
-------- --------
Total bonds and obligations 76,997 56,733
-------- --------
GNMA mortgage-backed securities 31,190 27,526
FHLMC participation certificates 38,854 25,103
FNMA pass-through certificates 4,451 4,763
-------- --------
Total mortgage-backed securities 74,495 57,392
-------- --------
Total investments available for sale $151,492 $114,125
======== ========
INVESTMENTS HELD TO MATURITY (AMORTIZED COST):
U.S. government and federal agency obligations $ 1,452 $ 1,448
Other bonds and obligations 7,643 9,686
-------- --------
Total bonds and obligations 9,095 11,134
-------- --------
FHLMC participation certificates 57,839 63,639
FNMA pass-through certificates 53,373 57,192
GNMA mortgage-backed securities 3,693 3,899
Other asset-backed securities 930 1,062
-------- --------
Total mortgage-backed securities 115,835 125,792
-------- --------
Total investments held to maturity $124,930 $136,926
======== ========
Total investments $296,322 $276,651
======== ========
</TABLE>
The following table presents the gross unrealized gains and losses by major
categories of securities as of June 30, 1997:
<TABLE>
<CAPTION>
Unrealized Unrealized
Gains Losses
---------- ----------
(In thousands)
<S> <C> <C>
INVESTMENTS AVAILABLE FOR SALE:
U.S. government and federal agency obligations $ 323 $ (72)
Other bonds and obligations 82 (55)
Mortgage-backed securities 344 (154)
------- -------
Total investments available for sale 749 (281)
------- -------
INVESTMENTS HELD TO MATURITY:
U.S. government and federal agency obligations $ -- $ (21)
Other bonds and obligations 70 (34)
Mortgage-backed securities 1,003 (1,027)
------- -------
Total investments held to maturity 1,073 (1,082)
------- -------
Total unrealized gains and losses $ 1,822 $(1,363)
======= =======
</TABLE>
At June 30, 1997, the Company's net unrealized gain on investments available for
sale amounted to $468,000, a fair value decline of $34,000 from a net unrealized
gain of $502,000 at December 31, 1996. At June 30, 1997, the Company's net
unrealized loss on investments held to maturity totalled $9,000, a change of
$90,000 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> 17
DEPOSITS AND BORROWED FUNDS. Total deposits increased 11.6% to $920.2 million at
June 30, 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 money
market accounts, also experienced an increase during the first six months of
1997.
The following table shows the composition of the Company's deposits at June 30,
1997 and December 31, 1996:
<TABLE>
<CAPTION>
6/30/97 12/31/96
------- --------
(In thousands)
<S> <C> <C>
Demand deposit accounts $ 73,173 $ 60,245
Regular savings accounts 123,431 96,690
NOW accounts 77,929 75,297
Money market deposit accounts 108,057 116,019
Certificates of deposit 537,601 476,060
-------- --------
Total deposits $920,191 $824,311
======== ========
</TABLE>
Federal Home Loan Bank advances decreased $56.8 million from December 31, 1996,
to $214.8 million at June 30, 1997. The funds used to pay down these advances
resulted from the growth experienced in total deposits. Securities sold under
agreements to repurchase increased $3.6 million to $6.4 million at June 30,
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. The Company made additional capital contributions of $2.0 million to
ABNH in the first six months of 1997 to maintain its required capital ratios in
light of its balance sheet growth. In the second quarter of 1997, the Company
paid dividends to its stockholders in the amount of $875,000. In July, 1997, the
Company declared a dividend in the amount of $875,000, payable in the third
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, in the case of Andover Bank,
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 decreased $2.4 million to $7.1 million in the
first six months of 1997 as compared to cash flows provided by operations of
$9.4 million in the corresponding period of 1996 due primarily to a decrease in
assets held for sale. Cash flows used by investing activities decreased by $15.3
million to $47.7 million for the six months ended June 30, 1997, as compared to
cash flows used by investing activities of $62.9 million during the equivalent
period last year. This was mainly attributable to fewer purchases of whole loans
coupled with a reduction in both proceeds from sales of investments available
for sale and principal repayments of investments held to maturity. Cash flows
provided by financing activities decreased $20.1 million for the period ended
June 30, 1997 to $41.3 million, as compared to $61.4 million in the equivalent
period in 1996 due to a significant increase in deposit inflows, offset by a
reduction in the FHLB advance balances.
At June 30, 1997, the Company had home equity, reserve credit and commercial
unused lines of credit totalling $86.9 million. Outstanding commitments to
originate real estate loans totalled $37.0 million. Unadvanced portions of real
estate loans amounted to $17.7 million. Standby letters of credit were $1.9
million. Loans sold with recourse totalled $3.9 million. Management believes
that its sources of liquidity are sufficient to meet these commitments if and as
called upon.
- 14 -
<PAGE> 18
CAPITAL RESOURCES. The following table presents regulatory capital ratios under
current leverage and risk-based capital requirements as of June 30, 1997:
<TABLE>
<CAPTION>
Risk-Based Capital Ratio
Leverage ------------------------
Ratio Tier 1 Total
----- ------ -----
<S> <C> <C> <C>
Andover Bancorp, Inc. 8.2% 13.8% 15.0%
Andover Bank 7.8 13.2 14.5
Andover Bank NH 9.1 16.9 17.6
</TABLE>
Current minimum regulatory requirements for the Bank and the Company as of June
30, 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> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 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 $6.4 million, $1.24 per share, for the six
months ended June 30, 1997, compared to net income of $5.7 million, $1.11 per
share, in the corresponding period of 1996.
The financial performance in the first six months of 1997 was positively
impacted by an increase in the net interest margin, non-interest income and
reductions in the provision for loan losses and in the effective income tax
rate. Andover's annualized return on average assets increased to 1.06% for the
first six months of 1997 compared to 1.01% in the comparable period of 1996. The
annualized return on average stockholders' equity increased to 13.24% in the
first six months of 1997 from 13.07% in the comparable period of 1996.
NET INTEREST AND DIVIDEND INCOME. Net interest and dividend income was $19.0
million for the first six months of 1997, as compared to $17.3 million for the
same period in 1996, an increase of 9.6%. The amount of interest income excluded
from earnings on non-accruing loans amounted to $362,000 in the first six months
of 1997 compared to $476,000 in the comparable period of 1996. Growth in earning
assets as well as a shift in the mix from investments to loans has offset a rise
in the Company's cost of funds. This resulted in a higher net yield on earning
assets of 3.25% for the first six months of 1997 as compared to 3.13% in 1996.
PROVISION FOR LOAN LOSSES. The provision for loan losses for the first six
months of 1997 and 1996 was $553,000 and $755,000, 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,
charge-offs and recoveries. Net charge-offs amounted to $251,000 in the first
six months of 1997 versus $618,000 in the corresponding period last year.
NON-INTEREST INCOME. Andover recorded gains from non-interest sources of $2.3
million for the first six months of 1997, as compared to $1.8 million in the
corresponding period of 1996. Net gains from sales and redemptions of loans and
the investment portfolio totalled $170,000 in 1997, as compared to gains of
$258,000 in the same period of 1996.
Losses on real estate operations totalled $585,000 during the first six months
of 1997 as compared to $868,000 in the corresponding period of 1996. A large
component of the loss on real estate operations during the first six months of
both 1997 and 1996 was comprised of operating costs associated with acquiring,
maintaining and disposing other real estate owned and totalled $416,000 and
$625,000, respectively.
Mortgage banking income totalled $1.2 million during the first six months of
1997 as compared to $1.0 million in the corresponding period of 1996 due to an
increase in the Company's servicing portfolio.
- 16 -
<PAGE> 20
Other income totalled $1.5 million in the first six months of 1997, for a slight
increase from the $1.4 million recorded in the first six months of 1996.
NON-INTEREST EXPENSE. Non-interest expenses increased 14.2% to $10.7 million in
the first six months of 1997 primarily due to an increase in salaries and
employee benefits as well as a merger recovery credit of $225,000 recorded in
1996 from the execution of a merger termination agreement. Salaries and benefits
increased 14.8% to $5.9 million in 1997 due to increased personnel and salary
merit increases as well as overtime, temporary help and other employee benefits.
Office occupancy and equipment increased 4.4% to $1.4 million due to increased
investments in computers and related costs for depreciation as well as costs
associated with an additional branch. Data processing expenses increased 4.9% to
$859,000 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.
Marketing expenses increased 8.6% to $495,000 primarily due to an increased
number of discretionary promotions. Professional fees increased slightly to
$413,000 as a result of increased consulting projects as well as legal fees.
Other operating expenses increased 12.9% to $1.6 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
1997 as well as $250,000 for the same period in 1996. More than offsetting the
income tax benefit recorded in 1997, the Company incurred an income tax expense
of $3.8 million on its financial statement earnings.
- 17 -
<PAGE> 21
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings
Not Applicable
ITEM 2 Changes in Securities
Not Applicable
ITEM 3 Defaults Upon Senior Securities
Not Applicable
ITEM 4 Submission of Matters to a Vote of Security Holders
None
ITEM 5 Other Information
None
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
- 18 -
<PAGE> 22
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 12, 1997 /s/Gerald T. Mulligan
-----------------------
Gerald T. Mulligan
President and
Chief Executive Officer
August 12, 1997 /s/Joseph F. Casey
------------------------
Joseph F. Casey
Chief Financial Officer
and Treasurer
- 19 -
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS DATED JUNE 30, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 26,857
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 19,900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,142
<INVESTMENTS-CARRYING> 124,930
<INVESTMENTS-MARKET> 151,492
<LOANS> 888,904
<ALLOWANCE> 12,531
<TOTAL-ASSETS> 1,250,943
<DEPOSITS> 920,191
<SHORT-TERM> 6,412
<LIABILITIES-OTHER> 8,714
<LONG-TERM> 214,797
0
0
<COMMON> 515
<OTHER-SE> 100,314
<TOTAL-LIABILITIES-AND-EQUITY> 1,250,943
<INTEREST-LOAN> 34,387
<INTEREST-INVEST> 9,861
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 44,248
<INTEREST-DEPOSIT> 18,269
<INTEREST-EXPENSE> 25,284
<INTEREST-INCOME-NET> 18,964
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<EXPENSE-OTHER> 10,724
<INCOME-PRETAX> 9,956
<INCOME-PRE-EXTRAORDINARY> 0
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<NET-INCOME> 6,390
<EPS-PRIMARY> 1.24
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<YIELD-ACTUAL> 3.25
<LOANS-NON> 9,814
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<ALLOWANCE-CLOSE> 12,531
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
