<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 SEPTEMBER 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)
(978) 749-2000
----------------------------------------------------
(Registrant's telephone number, including area code)
Former name, former address and former 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 October 29, 1997: 5,152,658 shares
<PAGE> 2
ANDOVER BANCORP, INC.
AND SUBSIDIARIES
----------------
Index
PART I - FINANCIAL INFORMATION
ITEM 1 Financial Statements Page
Consolidated Balance Sheets 1
Consolidated Statements of Operations 2
Consolidated Statements of Changes in
Stockholders' Equity 3
Consolidated Statements of Cash Flows 4-5
Notes to Consolidated Financial Statements 6
Analysis of Net Yield on Earning Assets 7
ITEM 2 Management's Discussion and Analysis of 8-18
Financial Condition and Results of Operations
For the Quarter Ended September 30, 1997
For the Nine Months Ended September 30, 1997
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings 19
ITEM 2 Changes in Securities 19
ITEM 3 Defaults upon Senior Securities 19
ITEM 4 Submission of Matters to a Vote of Security Holders 19
ITEM 5 Other Information 19
ITEM 6 Exhibits and Reports on Form 8-K 19
Signatures 20
<PAGE> 3
ANDOVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DEC. 31, 1996
------------------ -------------
(In thousands)
ASSETS
<S> <C> <C>
Cash and due from banks $ 20,432 $ 20,489
Short-term investments 12,900 25,600
---------- ----------
Cash and cash equivalents 33,332 46,089
---------- ----------
Assets held for sale (Market value of $3,432
in 1997 and $2,220 in 1996) 3,393 2,220
Investments available for sale (Amortized
cost of $147,157 in 1997 and $113,623 in 1996) 148,799 114,125
Investments held to maturity (Market value
of $123,357 in 1997 and $137,007 in 1996) 122,187 136,926
Loans 936,976 870,035
Allowance for loan losses (12,533) (12,229)
---------- ----------
Net loans 924,443 857,806
---------- ----------
Other real estate owned, net 1,067 1,683
Premises and equipment, net 9,756 10,194
Accrued interest receivable 7,781 7,164
Stock in FHLBB, at cost 15,747 15,747
Deferred income taxes receivable 1,974 1,374
Income taxes receivable -- 478
Mortgage servicing assets 9,928 8,006
Other assets 2,194 3,001
---------- ----------
Total assets $1,280,601 $1,204,813
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 923,556 $ 824,311
Securities sold under agreements to repurchase 21,752 2,833
Federal Home Loan Bank advances 221,878 271,585
Mortgagors' escrow accounts 2,824 2,294
Income taxes payable 2,097 2,570
Accrued expenses and other liabilities 4,506 5,374
---------- ----------
Total liabilities 1,176,613 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 43,325 36,109
Treasury stock, at cost (6,134 shares in 1997 and
20,862 shares in 1996) (89) (301)
Unrealized gains on investments available for sale, net 982 301
---------- ----------
Total stockholders' equity 103,988 95,846
---------- ----------
Total liabilities and stockholders' equity $1,280,601 $1,204,813
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
- 1 -
<PAGE> 4
ANDOVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
QUARTERS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------- ------- ------- -------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Interest and dividend income:
Loans $17,663 $16,585 $52,050 $47,688
Mortgage-backed securities 3,194 3,297 9,314 10,061
Investment securities 1,730 1,369 5,069 4,115
Short-term investments 172 139 574 310
------- ------- ------- -------
Total interest and dividend income 22,759 21,390 67,007 62,174
------- ------- ------- -------
Interest expense:
Deposits 9,940 8,001 28,209 23,251
Federal Home Loan Bank advances 2,993 4,334 9,866 11,986
Securities sold under agreements to repurchase 174 161 316 742
------- ------- ------- -------
Total interest expense 13,107 12,496 38,391 35,979
------- ------- ------- -------
Net interest and dividend income 9,652 8,894 28,616 26,195
Provision for loan losses 130 1,305 683 2,060
------- ------- ------- -------
Net interest and dividend income
after provision for loan losses 9,522 7,589 27,933 24,135
------- ------- ------- -------
Non-interest income:
Net gains from sales of assets held for sale 75 32 158 197
Net gains (losses) from sales and redemptions
of investments available for sale 3 (795) 90 (702)
Losses on real estate operations, net (235) (371) (820) (1,239)
Mortgage banking income 520 510 1,706 1,510
Other income 905 550 2,403 1,926
------- ------- ------- -------
Total non-interest income 1,268 (74) 3,537 1,692
------- ------- ------- -------
Non-interest expense:
Salaries and employee benefits 3,027 2,662 8,901 7,780
Office occupancy and equipment 701 656 2,140 2,034
Data processing 557 414 1,416 1,233
Marketing 248 232 743 688
Professional fees 194 656 607 1,043
Merger recovery -- -- -- (225)
Other operating expense 793 816 2,437 2,272
------- ------- ------- -------
Total non-interest expense 5,520 5,436 16,244 14,825
------- ------- ------- -------
Income before income tax expense (benefit)
and extraordinary item 5,270 2,079 15,226 11,002
Income tax expense (benefit) 1,922 (1,743) 5,488 1,528
------- ------- ------- -------
Income before extraordinary item 3,348 3,822 9,738 9,474
Extraordinary item, net of taxes (note 2) -- (173) -- (173)
------- ------- ------- -------
Net income $ 3,348 $ 3,649 $ 9,738 $ 9,301
======= ======= ======= =======
Earnings per share - primary:
Income per share before extraordinary item $ 0.63 $ 0.73 $ 1.84 $ 1.82
Extraordinary item per share, net of taxes -- (0.03) -- (0.03)
------- ------- ------- -------
Net income per share $ 0.63 $ 0.70 $ 1.84 $ 1.79
======= ======= ======= =======
Earnings per share - fully diluted:
Income per share before extraordinary item $ 0.63 $ 0.73 $ 1.83 $ 1.82
Extraordinary item per share, net of taxes -- (0.03) -- (0.03)
------- ------- ------- -------
Net income per share $ 0.63 $ 0.70 $ 1.83 $ 1.79
======= ======= ======= =======
Weighted average shares outstanding - primary 5,304 5,237 5,290 5,186
Weighted average shares outstanding - fully diluted 5,326 5,241 5,324 5,200
</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 Nine Months Ended September 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 -- -- 9,738 -- -- 9,738
Dividends declared and
paid ($0.49 per share) -- -- (2,522) -- -- (2,522)
Stock options exercised -- 33 -- 212 -- 245
Change in unrealized
gains (losses) on
investments available
for sale -- -- -- -- 681 681
---- ------- ------- -------- ------- --------
Balance at September 30, 1997 $515 $59,255 $43,325 $ (89) $ 982 $103,988
==== ======= ======= ======== ======= ========
</TABLE>
- -----------
(1) Net of related tax effect.
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>
NINE MONTHS ENDED,
SEPTEMBER 30,
----------------------
1997 1996
-------- --------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,738 $ 9,301
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 683 2,060
Net losses on sales and provisions
for other real estate owned 236 342
Net (gains) losses from sales and redemptions of
investments available for sale (90) 702
Net gains from sales of assets held for sale (158) (197)
Depreciation and amortization 1,062 1,036
Amortization of fees, discounts and premiums, net 372 337
(Increase) decrease in:
Assets held for sale (1,015) 3,228
Accrued interest receivable (617) (33)
Income taxes (582) (1,435)
Mortgage servicing assets 1,048 749
Other assets 807 (45)
Increase (decrease) in:
Mortgagors' escrow accounts 530 (526)
Accrued income taxes payable (473) (531)
Accrued expenses and other liabilities (868) 73
-------- --------
Net cash provided by operating activities 10,673 15,061
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment and mortgage-backed securities available for sale:
Purchases (50,979) (77,535)
Proceeds from sales 9,089 74,768
Proceeds from maturities and redemptions 2,000 6,023
Principal repayments 6,403 6,755
Investment and mortgage-backed securities held to maturity:
Purchases (3,511) (1,544)
Proceeds from maturities and redemptions 2,500 4,000
Principal repayments 15,605 21,284
Net change in FHLB Stock --- (2,576)
Purchases of whole loans (39,795) (30,721)
Purchases of mortgage servicing rights (2,970) (2,336)
Net increase in loans (29,506) (65,537)
Capital expenditures on premises and equipment, net (624) (1,415)
Proceeds from disposition of other real estate owned 2,232 2,881
Capital expenditures on other real estate owned (54) (29)
--------- --------
Net cash used by investing activities (89,610) (65,982)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 99,245 44,535
Net increase (decrease) in securities sold
under agreements to repurchase 18,919 (5,633)
Proceeds from issuance of FHLB advances 199,500 399,469
Principal repayments of FHLB advances (249,207) (356,897)
Dividends paid (2,522) (1,784)
Stock options exercised 245 377
--------- --------
Net cash provided by financing activities 66,180 80,067
--------- --------
Net increase (decrease) in cash and cash equivalents (12,757) 29,146
Cash and cash equivalents, at beginning of period 46,089 28,236
--------- --------
Cash and cash equivalents, at end of period $ 33,332 $ 57,382
========= ========
</TABLE>
- 4 -
<PAGE> 7
ANDOVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED,
SEPTEMBER 30,
---------------------
1997 1996
------- -------
(In thousands)
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $38,658 $36,193
Income taxes 6,451 3,333
Supplemental noncash investing and financing activities:
Conversion of real estate loans to mortgage-backed
securities held for sale 17,048 27,169
Conversion of real estate loans to mortgage-
backed securities available for sale --- 2,199
Transfer of mortgage-backed securities held for
sale to investments available for sale --- 2,131
Transfer of loans to other real estate owned 1,798 1,446
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
- 5 -
<PAGE> 8
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) BASIS OF PRESENTATION
The unaudited consolidated financial statements of Andover Bancorp, Inc.
("Andover" or the "Company") and its subsidiaries, including its
principal subsidiaries, Andover Bank and Andover Bank NH (collectively
the "Banks"), presented herein, should be read in conjunction with the
consolidated financial statements of the Company as of and for the year
ended December 31, 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) EARLY EXTINGUISHMENT OF DEBT
During the third quarter of 1996, the Company refinanced approximately
$19.1 million of Federal Home Loan Bank (FHLB) advances which had a
weighted average cost of 7.88%, incurring a prepayment fee of $298,000
or $173,000 net of taxes. The source of funds used were new FHLB
advances with a weighted average rate of 5.72%.
3) STOCK DIVIDEND
Average shares outstanding and per share data for the first nine months
of 1996 were restated to reflect a 20% stock dividend distributed on
November 13, 1996.
4) RECENT ACCOUNTING DEVELOPMENTS
In February, 1997, the FASB issued SFAS No. 128, "Earnings per Share,"
which will be effective for financial statements for both interim and
annual periods ending December 31, 1997. Primary EPS will be replaced
with basic EPS and fully diluted EPS will be replaced with diluted EPS.
Primary EPS includes the dilutive effect of common stock equivalents;
basic EPS will exclude all common stock equivalents. Diluted EPS is very
similar to fully diluted EPS. The statement also requires a
reconciliation of basic EPS to diluted EPS. Also in February 1997, the
FASB issued SFAS No. 129, "Disclosures of Information about Capital
Structure," which will be effective for 1997 financial statements. The
corporation's disclosures currently comply with the provisions of this
statement.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS 130 establishes standards for reporting and displaying
comprehensive income, which is defined as all changes to equity except
investments by and distributions to shareholders. Net income is a
component of comprehensive income, with all other components referred to
in the aggregate as other comprehensive income. This statement is
effective for 1998 financial statements. Also in June 1997, the FASB
issued SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," which establishes standards for reporting
information about operating segments. An operating segment is defined as
a component of a business for which separate financial information is
available that is evaluated regularly by the chief operating decision
maker in deciding how to allocate resources and evaluate performance.
This statement requires a company to disclose certain income statement
and balance sheet information by operating segment, as well as provide a
reconciliation of operating segment information to the company's
consolidated balances. This statement is effective for 1998 annual
financial statements.
- 6 -
<PAGE> 9
ANDOVER BANCORP, INC. AND SUBSIDIARIES
ANALYSIS OF NET YIELD ON EARNING ASSETS
(Unaudited)
<TABLE>
<CAPTION>
Quarters Ended September 30,
------------------------------------------------------------------
1997 1996
------------------------------ --------------------------------
Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate(3) Balance Paid Rate(3)
------- -------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS (Dollars in thousands)
Interest-earning assets:
Short-term investments $ 12,577 $ 172 5.43% $ 10,751 $ 139 5.14%
Investment securities (1) 102,771 1,730 6.68 92,274 1,369 5.90
Mortgage-backed securities (1) 186,394 3,194 6.80 192,551 3,297 6.81
---------- ------- ---------- -------
Total investments 301,742 5,096 6.70 295,576 4,805 6.47
---------- ------- ---------- -------
Residential loans (1) (2) 644,300 11,962 7.37 610,892 11,295 7.36
Commercial loans (2) 137,779 3,095 8.91 131,474 2,951 8.93
Construction and land loans 28,212 738 10.38 26,831 694 10.29
---------- ------ ---------- ------
Total real estate loans 810,291 15,795 7.73 769,197 14,940 7.73
Consumer loans (2) 66,889 1,359 8.06 56,088 1,180 8.37
Commercial loans (2) 21,507 509 9.39 20,027 465 9.24
---------- ------- ---------- -------
Total loans 898,687 17,663 7.80 845,312 16,585 7.81
---------- ------- ---------- -------
Total interest-earning assets 1,200,429 22,759 7.52% 1,140,888 21,390 7.46%
------- -------
Allowance for loan losses (12,535) (11,875)
Other real estate owned 1,365 2,538
Other assets 58,858 52,420
---------- ----------
Total assets $1,248,117 $1,183,971
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts $ 76,022 $ 189 0.99% $ 68,308 $ 171 1.00%
Regular savings accounts 131,654 1,128 3.40 73,517 415 2.25
Money market deposit accounts 108,457 800 2.93 127,167 928 2.90
Certificates of deposit 532,934 7,823 5.82 451,429 6,487 5.72
---------- ------- ---------- -------
Total interest-bearing deposits 849,067 9,940 4.29 720,421 8,001 4.08
---------- ------- ---------- -------
Borrowed funds:
Reverse repurchase agreements 13,436 174 5.14 12,218 161 5.24
Federal Home Loan Bank advances 203,439 2,993 5.84 291,467 4,334 5.92
---------- ------- ---------- -------
Total borrowed funds 216,875 3,167 5.79 303,685 4,495 5.89
---------- ------- ---------- -------
Total interest-bearing
liabilities 1,065,942 13,107 4.88% 1,024,106 12,496 4.85%
------- -------
Demand deposits 70,867 60,474
Other liabilities 10,674 8,542
---------- ----------
Total liabilities 1,147,483 1,093,122
Stockholders' equity 100,634 90,849
---------- ----------
Total liabilities and stock-
holders' equity $1,248,117 $1,183,971
========== ==========
Net interest income $ 9,652 $ 8,894
======= =======
Interest rate spread 2.64% 2.61%
==== ====
Net yield on earning assets 3.19% 3.10%
==== ====
<CAPTION>
Nine Months Ended September 30,
----------------------------------------------------------------
1997 1996
---------------------------- -----------------------------
Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate(3) Balance Paid Rate(3)
------- -------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS (Dollars in thousands)
Interest-earning assets:
Short-term investments $ 14,139 $ 574 5.43% $ 7,898 $ 310 5.24%
Investment securities (1) 101,024 5,069 6.71 92,661 4,115 5.93
Mortgage-backed securities (1) 181,333 9,314 6.87 197,117 10,061 6.82
---------- ------- ---------- -------
Total investments 296,496 14,957 6.74 297,676 14,486 6.50
---------- ------- ---------- -------
Residential loans (1) (2) 634,246 35,161 7.41 584,312 32,245 7.37
Commercial loans (2) 134,774 9,025 8.95 128,216 8,651 9.01
Construction and land loans 32,720 2,461 10.06 23,588 1,871 10.60
---------- ------- ---------- -------
Total real estate loans 801,740 46,647 7.78 736,116 42,767 7.76
Consumer loans (2) 64,030 3,910 8.16 54,210 3,506 8.64
Commercial loans (2) 20,980 1,493 9.51 19,357 1,415 9.76
---------- ------- ---------- -------
Total loans 886,750 52,050 7.85 809,683 47,688 7.87
---------- ------- ---------- -------
Total interest-earning assets 1,183,246 67,007 7.57% 1,107,359 62,174 7.50%
------- -------
Allowance for loan losses (12,400) (11,760)
Other real estate owned 1,596 3,046
Other assets 57,082 49,332
---------- ----------
Total assets $1,229,524 $1,147,977
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts $ 71,923 $ 539 1.00% $ 66,430 $ 491 0.99%
Regular savings accounts 117,635 2,871 3.26 72,135 1,196 2.21
Money market deposit accounts 112,604 2,490 2.96 128,138 2,767 2.88
Certificates of deposit 515,098 22,309 5.79 437,157 18,797 5.74
---------- ------- ---------- -------
Total interest-bearing deposits 817,260 28,209 4.61 703,860 23,251 4.41
---------- ------- ---------- -------
Borrowed funds:
Reverse repurchase agreements 8,612 316 4.91 18,963 742 5.23
Federal Home Loan Bank advances 227,415 9,866 5.80 270,696 11,986 5.91
---------- ------- ---------- -------
Total borrowed funds 236,027 10,182 5.77 289,659 12,728 5.87
---------- ------- ---------- -------
Total interest-bearing
liabilities 1,053,287 38,391 4.87% 993,519 35,979 4.84%
------- -------
Demand deposits 67,185 57,568
Other liabilities 10,619 8,619
---------- ----------
Total liabilities 1,131,091 1,059,706
Stockholders' equity 98,433 88,271
---------- ----------
Total liabilities and stock-
holders' equity $1,229,524 $1,147,977
========== ==========
Net interest income $28,616 $26,195
======= =======
Interest rate spread 2.70% 2.66%
==== ====
Net yield on earning assets 3.23% 3.16%
==== ====
</TABLE>
(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 92 days in the third quarter of both years and 273 days in the
year-to-date period for 1997 and 274 days in the year-to-date period for
1996.
- 7 -
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE QUARTER ENDED SEPTEMBER 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 $3.3 million, or $0.63 per share, for the
quarter ended September 30, 1997 as compared to net income of $3.6 million, or
$0.70 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. Last year's quarter included a gain of $2.5 million in
the form of a tax benefit in connection with the Small Business Job Protection
Act of 1996, as well as a pre-tax loss of $1.1 million resulting from a
restructuring of the balance sheet in the third quarter of 1996. As a result of
the non-recurring gain recorded in 1996, Andover's annualized return on average
assets decreased to 1.06% for the third quarter of 1997 compared to 1.23% in the
third quarter of 1996. The annualized return on average stockholders' equity
decreased to 13.20% in the third quarter of 1997 from 15.98% in the third
quarter of 1996.
NET INTEREST AND DIVIDEND INCOME. Net interest and dividend income was $9.7
million for the third quarter of 1997 as compared to $8.9 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 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 $170,000 in the third quarter of 1997, versus $190,000 in the
comparable quarter of 1996. The increase in the net yield on earning assets of
3.19% for the third quarter of 1997, compared to 3.10% in 1996, was due
primarily to a higher yield on investments.
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 that 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 by management, 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 third quarter of 1997 was $130,000 versus
$1.3 million in the comparable period in 1996. Management considered several
contributing factors in determining that a lower provision for loan losses was
appropriate in the third 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. During the third quarter of 1997, the increase in total loans was
due to a 7% growth in residential and consumer loans while there was a slight
decline in the corporate loan balances. In addition, non-performing assets
declined over 8% during the third quarter of 1997. Charge-offs in the third
- 8 -
<PAGE> 11
quarter of 1997 totalled $382,000 versus $1.5 million in the corresponding
quarter last year, while recoveries totalled $254,000 and $405,000,
respectively, for 1997 and 1996. The majority of the third quarter 1996
charge-offs resulted from the restructuring of a previously reported potential
problem loan. Lastly, the reserve coverage as a percentage of nonaccruing loans
totalled 135.8% at September 30, 1997, an increase from the 1996 year-end
reserve coverage.
NON-INTEREST INCOME. Net gains from sales and redemptions of loans, investments
and mortgage-backed securities held for sale and available for sale totalled
$78,000 in the third quarter of 1997 as compared to net losses of $763,000 in
the third quarter of 1996. Included in the net loss for the third quarter of
1996 was a net loss of $822,000 resulting from the sale of low yielding
securities.
Losses of $235,000 on real estate operations were recognized in the third
quarter of 1997 as compared to $371,000 in the third quarter of 1996. A
significant portion of the losses on real estate operations during the third
quarters of both 1997 and 1996 were operating costs associated with acquiring,
maintaining and disposing of other real estate owned totalling $190,000 and
$272,000, respectively. Provisions for losses on other real estate owned added
another $75,000 to the loss on real estate operations during the third quarter
of 1997, as compared to $174,000 in the third quarter of 1996. In the third
quarter of 1997, sales of other real estate owned totalled $564,000 as compared
to $509,000 in the corresponding quarter of 1996.
Mortgage banking income totalled $520,000 in the third quarter of 1997 versus
$510,000 in the comparable quarter in 1996 due to an increase in the Company's
servicing portfolio offset by increased amortization expense of the purchased
servicing rights. Loans serviced for investors totalled $1,002.4 million and
$889.5 million, respectively, at September 30, 1997 and 1996.
Other income totalled $905,000 in the third quarter of 1997 as compared to
$550,000 in the third quarter of 1996. The current quarter includes a gain of
$100,000 resulting from the liquidation of an ownership interest in a state
mandated loan program due to higher proceeds received than anticipated. The
third quarter of 1996 included a writedown on the same program in the amount of
$170,000. In addition, deposit fee income has increased during the third quarter
of 1997 resulting from higher deposit accounts outstanding.
NON-INTEREST EXPENSE. Non-interest expenses increased slightly by $84,000, or
1.5%, to $5.5 million in the third quarter of 1997 from the third quarter of
1996.
Salaries and employee benefits, the largest component of non-interest expense,
increased $365,000 or 13.7% from $2.7 million for the third quarter of 1996 to
$3.0 million in the current year's corresponding quarter primarily due to an
increase in the number of employees and salary increases and the related taxes
thereon.
Office occupancy and equipment expenses increased $45,000, or 6.9%, to $701,000
in the third quarter of 1997 from $656,000 in the comparable period of 1996 due
to increased depreciation expense related to technology investments throughout
the Company and increased branch expenses related to the addition of the
Londonderry branch which were incurred in the third quarter of 1997.
Data processing expenses increased $143,000, or 34.5%, from the third quarter of
1996 to the third quarter of 1997 to $557,000. This is due to an increase in the
number of loans and deposits serviced by the Company. In addition, the cost
incurred by the Company to conduct business in alternative delivery systems (via
the telephone or personal computer) continues to increase.
Marketing expenses increased modestly to $248,000 for the quarter ended
September 30, 1997 from $232,000 for the third quarter of 1996 due to ongoing
discretionary promotions, primarily for home equity loans and deposits.
Professional fees decreased 70.4%, or $462,000, to $194,000 from $656,000 for
the quarters ended September 30, 1997 and 1996, respectively, due to a
significant charge taken in the third quarter of 1996 for undertaking various
tax planning strategies and the resulting consulting and legal fees incurred.
- 9 -
<PAGE> 12
Other operating expenses decreased slightly from $816,000 for the quarter ended
September 30, 1996 to $793,000 in the third quarter of 1997 due mainly to a
non-recurring charge of $155,000 taken in the third quarter of 1996 for an
insurance related adjustment offset by higher expenses incurred in 1997 due to
running a larger institution and more branches.
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 of $125,000 for the third quarter of 1997 and 1996.
Offsetting the income tax benefit in 1997, the Company recorded an income tax
expense of $2.0 million on its financial statement earnings for the third
quarter of 1997 as compared to $882,000, before extraordinary item, for the
third quarter of 1996. During the third quarter of 1996, the Company recorded a
gain of $2.5 million in the form of a tax benefit in connection with the
enactment of the Small Business Job Protection Act of 1996 (SBA). This
legislation resulted in the repeal of the thrift tax bad debt method of
accounting for tax purposes and, therefore, a portion of the deferred tax
liability related to the bad debt reserves was eliminated.
FINANCIAL CONDITION
Total assets increased 6.3% from $1,204.8 million at December 31, 1996 to
$1,280.6 million at September 30, 1997. Increases in both the loan and
investment portfolios were funded by the growth experienced in the deposit
balances during the first nine months of 1997.
LOANS. The following table shows the composition of the Company's loan portfolio
at September 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>
9/30/97 12/31/96
------- --------
(In thousands)
<S> <C> <C>
Real estate loans:
Residential $680,988 $619,955
Commercial 137,597 136,454
Construction and land 29,140 35,001
-------- --------
Total real estate loans 847,725 791,410
-------- --------
Consumer loans 68,064 59,224
Commercial loans 21,187 19,401
-------- --------
Total loans $936,976 $870,035
======== ========
</TABLE>
Total loans increased $66.9 million during the first nine months of 1997 to
$937.0 million at September 30, 1997 primarily due to increases in residential
real estate and consumer loans. The increase in the residential loan portfolio
was aided by the purchase of $37.5 million in whole loans during the third
quarter.
Interest rates affect both the residential mortgage refinance and home purchase
markets and were at fairly stable levels in the first nine months of 1997.
Residential loan balances increased $61.0 million, or approximately 13% on an
annualized basis, to $681.0 million at September 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 $187.9 million at September 30, 1997.
Consumer loan balances increased by approximately 15% on an annualized basis, to
$68.1 million at September 30, 1997, primarily due to an increase in home equity
balances and second mortgage loans as a result of promotional offers undertaken
by the Banks.
- 10 -
<PAGE> 13
RISK ELEMENTS. The following table shows the composition of non-performing
assets at September 30, 1997 and December 31, 1996:
<TABLE>
<CAPTION>
9/30/97 12/31/96
------- --------
(Dollars in thousands)
<S> <C> <C>
Nonaccruing loans $ 9,226 $10,699
Other real estate owned 1,067 1,683
------- -------
Total non-performing assets $10,293 $12,382
======= =======
Total non-performing assets as a
percentage of total assets 0.8% 1.0%
</TABLE>
Total non-performing assets decreased 16.9% in the first nine 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 nine months of 1997,
$1.8 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 $899,000 would have been recorded in the first nine
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 $106,000.
Additionally, another $261,000 in interest payments were applied as a reduction
of the nonaccruing loan balances instead of as interest income during the first
nine months of 1997.
A significant portion of the non-performing assets are secured by multi-family
dwellings or commercial mixed-use properties located in Lawrence, Massachusetts.
This city had been especially hard hit with declines in real estate values due
to increased vacancies and rapid turnover in the multi-family investor-owned
properties. These multi-family investor owned properties represent the majority
of the Bank's collateral on troubled loans and other real estate owned in
Lawrence. Further deterioration in this market area will adversely impact the
collectibility of certain real estate loans and may result in a continued level
of non-performing assets above peer levels. At September 30, 1997, approximately
$4.3 million, or 42%, of nonaccrual loans and $977,000, or 92%, 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 September 30, 1997, total impaired loans were $6.8 million, of which $2.3
million had related allowances of $0.3 million and $4.5 million which did not
require a related allowance. During the nine months ended September 30, 1997,
the average recorded value of impaired loans was $7.6 million and the related
amount of interest income recognized was approximately $45,000.
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.
- 11 -
<PAGE> 14
The following table shows the composition of nonaccruing loans at September 30,
1997 and December 31, 1996:
<TABLE>
<CAPTION>
9/30/97 12/31/96
------- --------
(Dollars in thousands)
<S> <C> <C>
Residential real estate $ 2,797 $ 2,838
Commercial real estate 5,845 6,901
Construction and land -- 79
Commercial 549 727
Consumer 35 154
------- -------
Total loans on nonaccrual $ 9,226 $10,699
======= =======
Allowance for loan losses $12,533 $12,229
======= =======
Allowance for loan losses as a
percentage of nonaccruing loans 135.8% 114.3%
Allowance for loan losses as a
percentage of total loans 1.3% 1.4%
</TABLE>
Of the $9.2 million in nonaccruing loans at September 30, 1997, $3.4 million, or
37.3%, 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
$683,000, or 20%, 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 the sufficient sustained performance
required by management to remove these loans from their nonaccrual status.
While stabilization and even progress in regaining lost jobs and housing prices
have appeared in certain sectors of the economy and real estate market, if the
regional economy were to deteriorate, 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 loan to provide a temporary reduction in the rate of interest or terms due
to the deterioration in the financial position of the borrower. Restructured
loans are classified as such until the obligation has performed for a sustained
period of time at a market rate of interest and its ultimate collectibility is
no longer in doubt. At September 30, 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 September 30, 1997 was approximately
7.7%.
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
September 30, 1997 and December 31, 1996:
<TABLE>
<CAPTION>
9/30/97 12/31/96
------- --------
(In thousands)
<S> <C> <C>
Residential real estate $ 213 $ 456
Commercial real estate 214 544
Multi-family real estate 804 658
Construction and land -- 201
------- -------
1,231 1,859
Valuation allowance (164) (176)
------- -------
Total other real estate owned $ 1,067 $ 1,683
======= =======
</TABLE>
- 12 -
<PAGE> 15
The following table shows changes in the valuation allowance for other real
estate owned for the quarters and nine months ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
September 30, September 30,
---------------- -----------------
1997 1996 1997 1996
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Balance, beginning of period $ 135 $ 286 $ 176 $ 413
Provision 75 174 275 479
Charge-offs (46) (196) (287) (628)
----- ------ ------ ------
Balance, end of period $ 164 $ 264 $ 164 $ 264
===== ====== ====== ======
</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 $275,000 for the first nine
months of 1997 as compared to $479,000 in the same period in 1996.
During the first nine months of 1997, sales of other real estate owned totalled
$2.2 million, as compared to $2.9 million in the first nine months of 1996. In
the first nine months of 1997, net gains of $61,000 on sales of other real
estate owned were recognized as compared to net gains of $137,000 in the
corresponding period in 1996. There were no commitments for capital expenditures
on real estate acquired by foreclosure at September 30, 1997.
ALLOWANCE FOR LOAN LOSSES. The following table summarizes the activity in the
Company's allowance for loan losses for the quarters and nine months ended
September 30, 1997 and 1996:
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
September 30, September 30,
-------------------- ------------------
1997 1996 1997 1996
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $12,531 $11,802 $12,229 $11,665
Provision 130 1,305 683 2,060
Charge-offs:
Residential real estate (164) (232) (615) (529)
Commercial real estate (203) (1,150) (684) (1,836)
Construction and land --- --- --- ---
Commercial (15) (49) (70) (100)
Consumer --- (46) (21) (148)
------- ------- ------- -------
Total charge-offs (382) (1,477) (1,390) (2,613)
------- ------- ------- -------
Recoveries:
Residential real estate 7 14 6 37
Commercial real estate 21 80 124 152
Construction and land 156 210 323 389
Commercial 60 98 539 329
Consumer 10 3 19 16
------- ------- ------- -------
Total recoveries 254 405 1,011 923
------- ------- ------- -------
Net charge-offs (128) (1,072) (379) (1,690)
------- ------- ------- -------
Balance at end of period $12,533 $12,035 $12,533 $12,035
======= ======= ======= =======
Ratio of annualized net
charge-offs to average
loans outstanding 0.06% 0.51% 0.17% 0.28%
</TABLE>
Charge-offs totalled $382,000 during the third quarter of 1997 and were spread
out among 20 loans; the largest charge-off during the quarter was $80,000.
Management periodically analyzes the adequacy of the allowance for loan losses.
See "Results of Operations - Provision for Loan Losses."
- 13 -
<PAGE> 16
INVESTMENTS. As of September 30, 1997, the Company's total investment portfolio
amounted to $283.9 million, for an increase of $7.2 million from December 31,
1996. The purchase of $51.0 million in investments available for sale, split
between U.S. government and federal agency obligations and mortgage-backed
securities, was partially offset by the decline of $12.7 million in short-term
investments, as well as principal repayments of $22.0 million in mortgage-backed
securities.
Management continually 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 purchases, acquisitions of investment and mortgage-backed
securities while funding this growth through retail deposits, FHLB advances, and
reverse repurchase agreements.
The following table presents the carrying values of the investment portfolio at
September 30, 1997 and December 31, 1996:
<TABLE>
<CAPTION>
9/30/97 12/31/96
------- --------
(In thousands)
<S> <C> <C>
SHORT-TERM INVESTMENTS $ 12,900 $ 25,600
======== ========
INVESTMENTS AVAILABLE FOR SALE (AT FAIR VALUE):
U.S. government and federal agency obligations $ 61,100 $ 41,740
Other bonds and obligations 15,572 14,993
-------- --------
Total bonds and obligations 76,672 56,733
-------- --------
GNMA mortgage-backed securities 29,716 27,526
FHLMC participation certificates 38,068 25,103
FNMA pass-through certificates 4,343 4,763
-------- --------
Total mortgage-backed securities 72,127 57,392
-------- --------
Total investments available for sale $148,799 $114,125
======== ========
INVESTMENTS HELD TO MATURITY (AT AMORTIZED COST):
U.S. government and federal agency obligations $ 4,963 $ 1,448
Other bonds and obligations 7,125 9,686
-------- --------
Total bonds and obligations 12,088 11,134
-------- --------
FHLMC participation certificates 54,220 63,639
FNMA pass-through certificates 51,508 57,192
GNMA mortgage-backed securities 3,507 3,899
Other asset-backed securities 864 1,062
-------- --------
Total mortgage-backed securities 110,099 125,792
-------- --------
Total investments held to maturity $122,187 $136,926
======== ========
Total investments $283,886 $276,651
======== ========
</TABLE>
The following table presents the gross unrealized gains and losses by major
categories of securities as of September 30, 1997:
<TABLE>
<CAPTION>
Unrealized Unrealized
Gains Losses
----------- ----------
(In thousands)
<S> <C> <C>
INVESTMENTS AVAILABLE FOR SALE:
U.S. government and federal agency obligations $ 806 $ (12)
Other bonds and obligations 157 ---
Mortgage-backed securities 691 ---
------- --------
Total investments available for sale 1,654 (12)
------- --------
INVESTMENTS HELD TO MATURITY:
U.S. government and federal agency obligations $ 20 $ ---
Other bonds and obligations 81 (6)
Mortgage-backed securities 1,441 (366)
------- --------
Total investments held to maturity 1,542 (372)
------- --------
Total unrealized gains and losses $ 3,196 $ (384)
======= ========
</TABLE>
- 14 -
<PAGE> 17
At September 30, 1997, the Company's net unrealized gain on investments
available for sale amounted to $1.6 million, a fair value increase of $1.1
million from a net unrealized gain of $502,000 at December 31, 1996. At
September 30, 1997, the Company's net unrealized gain on investments held to
maturity totalled $1.2 million, a change of $1.1 million from a net unrealized
gain of $81,000 at December 31, 1996. The change in the net unrealized gain on
the total investment portfolio from the end of 1996 was primarily due to
decreased market interest rates.
DEPOSITS AND BORROWED FUNDS. Total deposits increased 12.0% to $923.6 million at
September 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 nine months
of 1997. However, during the third quarter of 1997, balances held in
certificates of deposit declined by $14.9 million, which was primarily offset by
increases in the regular savings accounts of $11.2 million.
The following table shows the composition of the Company's deposits at September
30, 1997 and December 31, 1996:
<TABLE>
<CAPTION>
9/30/97 12/31/96
------- --------
(In thousands)
<S> <C> <C>
Demand deposit accounts $ 80,904 $ 60,245
Regular savings accounts 134,620 96,690
NOW accounts 76,951 75,297
Money market deposit accounts 108,388 116,019
Certificates of deposit 522,693 476,060
-------- --------
Total deposits $923,556 $824,311
======== ========
</TABLE>
Federal Home Loan Bank advances decreased $49.7 million from December 31, 1996,
to $221.9 million at September 30, 1997. The funds used to pay down these
advances resulted from the growth experienced in total deposits as well as
increases in securities sold under agreements to repurchase. Securities sold
under agreements to repurchase increased $18.9 million to $21.8 million at
September 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 $3.0 million to
ABNH in the first nine months of 1997 to maintain its required capital ratios in
light of its balance sheet growth. In the third quarter of 1997, the Company
paid dividends to its stockholders in the amount of $875,000. In October, 1997,
the Company declared a dividend in the amount of $1.0 million, payable in the
fourth 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 $4.4 million to $10.6 million in the
first nine months of 1997 as compared to cash flows provided by operations of
$15.1 million in the corresponding period of 1996 due primarily to an increase
in assets held for sale as well as a decrease in the provision for loan losses.
Cash flows used by investing activities increased by $23.6 million to $89.6
million for the nine months ended September 30, 1997, as compared to cash flows
used by investing activities of $66.0 million during the equivalent period last
year. This was mainly attributable to fewer sales of investments available for
sale offset by a smaller increase in total loans in 1997 versus 1996. Cash flows
- 15 -
<PAGE> 18
provided by financing activities decreased $13.9 million for the period ended
September 30, 1997 to $66.2 million, as compared to $80.1 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 September 30, 1997, the Company had home equity, reserve credit and
commercial unused lines of credit totalling $87.5 million. Outstanding
commitments to originate real estate loans totalled $44.6 million. Unadvanced
portions of real estate loans amounted to $18.8 million. Standby letters of
credit were $1.7 million. Loans sold with recourse totalled $3.5 million.
Management believes that its sources of liquidity are sufficient to meet these
commitments if and as called upon.
CAPITAL RESOURCES. The following table presents regulatory capital ratios under
current leverage and risk-based capital requirements as of September 30, 1997:
<TABLE>
<CAPTION>
Risk-based Capital Ratio
Leverage ------------------------
Ratio Tier 1 Total
----- ------ -----
<S> <C> <C> <C>
Andover Bancorp, Inc. 8.3% 13.6% 14.8%
Andover Bank 8.0 13.3 14.6
Andover Bank NH 9.2 15.5 16.1
</TABLE>
Current minimum regulatory requirements for the Bank and the Company as of
September 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.
- 16 -
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 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 $9.7 million, $1.84 per share, for the nine
months ended September 30, 1997, compared to net income of $9.3 million, $1.79
per share, in the corresponding period of 1996.
The financial performance in the first nine 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, offset by an increase in
non-interest expenses. Notwithstanding the positive performance in 1997, the
year-to-date results for 1996 included a gain of $2.5 million in the form of a
tax benefit. This combination led to a decline on Andover's annualized return on
average assets to 1.06% for the first nine months of 1997 as compared to 1.08%
in the comparable period of 1996. The annualized return on average stockholders'
equity decreased to 13.23% in the first nine months of 1997 from 14.07% in the
comparable period of 1996.
NET INTEREST AND DIVIDEND INCOME. Net interest and dividend income was $28.6
million for the first nine months of 1997, as compared to $26.2 million for the
same period in 1996, an increase of 9.2%. The amount of interest income excluded
from earnings on non-accruing loans amounted to $532,000 in the first nine
months of 1997 compared to $666,000 in the comparable period of 1996. Growth in
earning assets, as well as a shift in the mix from investments to loans and
increased yields on the earning assets has offset a rise in the Company's cost
of funds. This resulted in a higher net yield on earning assets of 3.23% for the
first nine months of 1997 as compared to 3.16% in 1996.
PROVISION FOR LOAN LOSSES. The provision for loan losses for the first nine
months of 1997 and 1996 was $683,000 and $2.1 million, 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 $379,000 in the first
nine months of 1997 versus $1.7 million in the corresponding period last year.
Approximately 45% of the 1996 net charge-offs resulted from the restructuring of
a previously reported problem loan.
NON-INTEREST INCOME. Andover recorded gains from non-interest sources of $3.5
million for the first nine months of 1997, as compared to $1.7 million in the
corresponding period of 1996. Net gains from sales and redemptions of loans and
the investment portfolio totalled $248,000 in 1997, as compared to losses of
$505,000 in the same period of 1996. The results in 1996 include a net loss of
$822,000 resulting from the sale of low-yielding securities.
Losses on real estate operations totalled $820,000 during the first nine months
of 1997 as compared to $1.2 million in the corresponding period of 1996. A large
component of the loss on real estate operations during the first nine months of
both 1997 and 1996 was comprised of operating costs associated with acquiring,
maintaining and disposing of other real estate owned and totalled $605,000 and
$897,000, respectively. Provisions for losses on other real estate owned for the
nine months of 1997 and 1996 totalled $275,000 and $479,000, respectively.
- 17 -
<PAGE> 20
Mortgage banking income totalled $1.7 million during the first nine months of
1997 as compared to $1.5 million in the corresponding period of 1996 due to an
increase in the Company's servicing portfolio offset by an increase in
amortization expense.
Other income totalled $2.4 million in the first nine months of 1997, for an
increase of $477,000, or 24.8%, from $1.9 million recorded in the first nine
months of 1996. The majority of the increase is due to a gain of $100,000
recorded in 1997 resulting from the liquidation of an ownership interest in a
state mandated loan program as compared to writedowns of $208,000 taken during
1996.
NON-INTEREST EXPENSE. Non-interest expenses increased 9.6% to $16.2 million in
the first nine 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 14.4% to $8.9 million in 1997 due to increased personnel and salary
merit increases, as well as overtime, temporary help and medical insurance.
Office occupancy and equipment increased 5.2% to $2.1 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 14.8%
to $1.4 million as a result of a higher loan and deposit base resulting from the
Company's growth, as well as from the purchase of mortgage loan servicing.
Marketing expenses increased 8.0% to $743,000 primarily due to an increased
number of discretionary promotions. Professional fees decreased 41.8% due to
costs incurred in 1996 relative to implementing various tax planning strategies.
Other operating expenses increased 7.3% to $2.4 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 $375,000 in the first nine months
of 1997, as well as $375,000 for the same period in 1996. During the third
quarter of 1996, the Company recorded a one-time gain of $2.5 million in the
form of a tax benefit in connection with the enactment of the SBA. More than
offsetting the income tax benefit recorded in 1997, the Company incurred an
income tax expense of $5.9 million on its financial statement earnings as
compared to $4.4 million for the equivalent period in 1996.
- 18 -
<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
- 19 -
<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.
November 10, 1997 /s/ GERALD T. MULLIGAN
-----------------------------------
Gerald T. Mulligan
President and
Chief Executive Officer
November 10, 1997 /s/ JOSEPH F. CASEY
-----------------------------------
Joseph F. Casey
Chief Financial Officer
and Treasurer
- 20 -
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS DATED SEPTEMBER 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 20,432
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 12,900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,393
<INVESTMENTS-CARRYING> 122,187
<INVESTMENTS-MARKET> 123,357
<LOANS> 936,976
<ALLOWANCE> 12,533
<TOTAL-ASSETS> 1,280,601
<DEPOSITS> 923,556
<SHORT-TERM> 21,752
<LIABILITIES-OTHER> 9,427
<LONG-TERM> 221,878
0
0
<COMMON> 515
<OTHER-SE> 103,473
<TOTAL-LIABILITIES-AND-EQUITY> 1,280,601
<INTEREST-LOAN> 520,050
<INTEREST-INVEST> 14,957
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<INTEREST-TOTAL> 67,007
<INTEREST-DEPOSIT> 28,209
<INTEREST-EXPENSE> 38,391
<INTEREST-INCOME-NET> 28,616
<LOAN-LOSSES> 683
<SECURITIES-GAINS> 248
<EXPENSE-OTHER> 16,244
<INCOME-PRETAX> 15,226
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,738
<EPS-PRIMARY> 1.84
<EPS-DILUTED> 1.83
<YIELD-ACTUAL> 3.23
<LOANS-NON> 9,226
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,395
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