<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, 2000 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 November 6, 2000: 6,666,233 shares
<PAGE> 2
ANDOVER BANCORP, INC.
AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1 Financial Statements Page
<S> <C>
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 8-19
Financial Condition and Results of Operations
For the Three Months Ended September 30, 2000
For the Nine Months Ended September 30, 2000
ITEM 3 Quantitative and Qualitative Disclosure About Market Risk 16
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings 20
ITEM 2 Changes in Securities 20
ITEM 3 Defaults upon Senior Securities 20
ITEM 4 Submission of Matters to a Vote of Security Holders 20
ITEM 5 Other Information 20
ITEM 6 Exhibits and Reports on Form 8-K 20
Signatures 21
</TABLE>
<PAGE> 3
ANDOVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
(In thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 41,395 $ 26,913
Short-term investments 1,100 1,600
----------- -----------
Cash and cash equivalents 42,495 28,513
----------- -----------
Assets held for sale, at lower of
cost or market 22,139 1,494
Investments available for sale (amortized
cost of $281,804 in 2000 and $226,332
in 1999) 281,205 221,370
Investments held to maturity (market value
of $51,622 in 2000 and $62,557 in 1999) 52,013 63,752
Loans 1,318,688 1,133,101
Allowance for loan losses (14,445) (11,384)
----------- -----------
Net loans 1,304,243 1,121,717
----------- -----------
Mortgage servicing assets, net 10,259 10,635
Premises and equipment, net 13,597 10,663
Accrued interest receivable 11,655 8,236
Stock in FHLBB, at cost 23,366 17,737
Net deferred income taxes receivable 3,815 5,259
Goodwill 8,799 --
Other assets 2,458 1,678
----------- -----------
Total assets $ 1,776,044 $ 1,491,054
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 1,214,148 $ 968,533
Borrowed funds 404,469 379,384
Mortgagors' escrow accounts 4,001 3,412
Income taxes payable 5 3,817
Accrued expenses and other liabilities 7,271 5,645
----------- -----------
Total liabilities 1,629,894 1,360,791
----------- -----------
Stockholders' equity:
Serial preferred stock, $0.10 par value per share;
3,000,000 shares authorized, none issued -- --
Common stock, $0.10 par value per share;
15,000,000 shares authorized; 6,837,133 shares issued in 2000 and 6,534,072
issued in 1999; shares outstanding 6,664,233 and 6,534,072 in 2000
and 1999, respectively 684 653
Additional paid-in capital 68,676 60,745
Retained earnings 81,827 71,924
Treasury stock (172,900 and -0- shares in 2000
and 1999, respectively, at cost) (4,585) --
Accumulated other comprehensive loss (452) (3,059)
----------- -----------
Total stockholders' equity 146,150 130,263
----------- -----------
Total liabilities and stockholders' equity $ 1,776,044 $ 1,491,054
=========== ===========
</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>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2000 1999 2000 1999
---- ---- ---- ----
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Interest and dividend income:
Loans $ 26,156 $ 20,260 $ 69,886 $ 59,673
Investment securities 4,062 2,703 10,981 7,258
Mortgage-backed securities 2,303 2,191 6,743 6,864
Short-term investments 9 200 83 401
----------- ----------- ----------- -----------
Total interest and dividend income 32,530 25,354 87,693 74,196
----------- ----------- ----------- -----------
Interest expense:
Deposits 11,355 8,472 29,070 25,744
Federal Home Loan Bank advances 5,454 4,479 14,400 11,971
Other borrowings 1,526 545 4,785 1,425
----------- ----------- ----------- -----------
Total interest expense 18,335 13,496 48,255 39,140
----------- ----------- ----------- -----------
Net interest and dividend income 14,195 11,858 39,438 35,056
Provision for loan losses 450 -- 1,050 --
----------- ----------- ----------- -----------
Net interest and dividend income
after provision for loan
losses 13,745 11,858 38,388 35,056
----------- ----------- ----------- -----------
Non-interest income (loss):
Net losses from sales of assets held
for sale and investments available for sale (2,060) (415) (2,036) (329)
Mortgage banking income, net 126 139 968 658
Other income 1,262 899 3,082 2,649
----------- ----------- ----------- -----------
Total non-interest income (loss) (672) 623 2,014 2,978
----------- ----------- ----------- -----------
Non-interest expense:
Salaries and employee benefits 4,491 3,138 11,462 8,422
Office occupancy and equipment 1,001 768 2,661 2,326
Data processing 826 608 2,161 1,709
Professional fees 299 254 808 962
Marketing 339 219 863 643
Amortization of goodwill 150 -- 150 --
Other operating expense 956 732 2,576 2,322
----------- ----------- ----------- -----------
Total non-interest expense 8,062 5,719 20,681 16,384
----------- ----------- ----------- -----------
Income before income tax expense (benefit) 5,011 6,762 19,721 21,650
Income tax expense (benefit) (215) 2,240 5,156 7,587
----------- ----------- ----------- -----------
Net income $ 5,226 $ 4,522 $ 14,565 $ 14,063
=========== =========== =========== ===========
Basic earnings per share $ 0.78 $ 0.69 $ 2.25 $ 2.16
=========== =========== =========== ===========
Diluted earnings per share $ 0.76 $ 0.67 $ 2.19 $ 2.10
=========== =========== =========== ===========
Weighted average shares outstanding - basic 6,661,570 6,528,611 6,484,681 6,525,237
Dilutive impact of stock options 177,325 185,453 170,153 183,151
----------- ----------- ----------- -----------
Weighted average shares outstanding - diluted 6,838,895 6,714,064 6,654,834 6,708,388
=========== =========== =========== ===========
</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, 1999 AND NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED TOTAL
ADDITIONAL OTHER STOCK-
COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE HOLDERS'
STOCK CAPITAL EARNINGS STOCK INCOME (LOSS) EQUITY
------ ---------- -------- -------- ------------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $ 652 $ 60,507 $ 58,716 $ -- $ 1,267 $ 121,142
Comprehensive income:
Net income -- -- 18,885 -- -- 18,885
Other comprehensive income (loss):
Unrealized holding gains arising
during the period, net of tax benefit
of $2,592 -- -- -- -- (4,077) (4,077)
Realized losses included in net
income, net of tax benefit of $136 -- -- -- -- (249) (249)
---------
Total comprehensive income 14,559
Dividends declared and
paid ($0.87 per share) -- -- (5,677) -- -- (5,677)
Stock options exercised 1 238 -- -- -- 239
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1999 653 60,745 71,924 -- (3,059) 130,263
Comprehensive income:
Net income -- -- 14,565 -- -- 14,565
Other comprehensive income (loss):
Unrealized holding gains arising
during the period, net of tax
expenses of $2,024 -- -- -- -- 3,062 3,062
Realized losses included in net
income, net of tax benefit of $249 -- -- -- -- (455) (455)
---------
Total comprehensive income 17,172
Dividends declared and
paid ($0.72 per share) -- -- (4,662) -- -- (4,662)
Purchase of treasury stock -- -- -- (4,718) -- (4,718)
Stock options exercised 1 54 -- 133 -- 188
Stock issued for acquired institution 30 7,877 -- -- -- 7,907
--------- --------- --------- --------- --------- ---------
Balance at September 30, 2000 $ 684 $ 68,676 $ 81,827 $ (4,585) $ (452) $ 146,150
========= ========= ========= ========= ========= =========
</TABLE>
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,
-------------------------------
2000 1999
-------- --------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 14,565 $ 14,063
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,050 --
Net gains on sales of other real estate owned (62) (7)
Net losses from sales of investments available
for sale 723 385
Net (gains) losses from sales of assets held for sale 1,313 (56)
Depreciation and amortization 1,217 1,090
Amortization of fees, discounts and premiums, net 670 571
Deferred income taxes receivable (1,248) 140
Amortization of goodwill 150 --
(Increase) decrease in:
Assets held for sale (21,958) 9,591
Mortgage servicing assets 1,415 1,689
Accrued interest receivable (2,733) (1,281)
Other assets 190 (100)
Increase (decrease) in:
Mortgagors' escrow accounts 589 790
Accrued income taxes payable (3,185) (1,163)
Accrued expenses and other liabilities 1,062 (921)
----------- -----------
Net cash provided (used) by operating activities (6,242) 24,791
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash of acquired institution 3,212 --
Investment and mortgage-backed securities available for sale:
Purchases (90,375) (119,032)
Proceeds from sales 47,907 28,615
Proceeds from maturities and redemptions 3,425 25,063
Principal repayments 7,477 17,637
Investment and mortgage-backed securities held to maturity:
Proceeds from maturities and redemptions 1,500 1,000
Principal repayments 10,210 30,387
Net increase in FHLB stock (3,843) (1,990)
Purchases of whole loans (47,902) (18,113)
Purchased and capitalized mortgage servicing assets (1,039) (2,460)
Net increase in loans (46,163) (34,017)
Capital expenditures on premises and equipment, net (1,574) (898)
Proceeds from sales of other real estate owned 262 406
----------- -----------
Net cash used by investing activities (116,903) (73,402)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 137,836 (16,344)
Net increase (decrease) in other borrowings (38,491) 20,909
Proceeds from issuance of FHLB advances 1,160,000 240,300
Principal repayments of FHLB advances (1,113,026) (188,050)
Purchases of treasury stock (4,718) --
Dividends paid (4,662) (4,109)
Stock options exercised 188 123
----------- -----------
Net cash provided by financing activities 137,127 52,829
----------- -----------
Net increase in cash and cash equivalents 13,982 4,218
Cash and cash equivalents, at beginning of period 28,513 45,437
----------- -----------
Cash and cash equivalents, at end of period $ 42,495 $ 49,655
=========== ===========
</TABLE>
Statement continued on next page.
4
<PAGE> 7
ANDOVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED,
SEPTEMBER 30,
---------------------
2000 1999
------ ------
(In thousands)
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $47,307 $38,848
Income taxes 7,919 8,611
Supplemental noncash investing and financing activities:
Conversion of real estate loans to mortgage-backed securities
held for sale or investments available for sale 32,644 28,136
Transfer of loans to other real estate owned 219 267
</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
Andover Bancorp, Inc.(the "Company" or "Andover") is the multi-bank holding
company parent of Andover Bank (the "Bank") and Gloucester Bank and Trust
Company ("Gloucester"). The unaudited consolidated financial statements of
Andover Bancorp, Inc. and its principal subsidiary, Andover Bank, presented
herein, should be read in conjunction with the consolidated financial
statements of the Company as of and for the year ended December 31, 1999.
Andover Bank is a state chartered savings bank with its headquarters
located in Andover, Massachusetts. Gloucester Bank and Trust Company is a
Massachusetts-chartered trust company with two banking offices located in
Gloucester, Massachusetts. 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) COMPLETED ACQUISITION
On July 1, 2000, the Company completed its acquisition of GBT Bancorp
("GBT") and its wholly-owned subsidiary, Gloucester Bank and Trust Company.
The transaction was accounted for as a purchase and resulted in goodwill
totaling $8.9 million. Under the terms of the merger agreement, Andover
issued 298,386 new shares of its common stock and $8.1 million in cash to
the GBT shareholders. As of June 30, 2000, GBT had $132.6 million in
assets, primarily commercial real estate loans and investment securities,
and deposits of $107.8 million.
The operating results of Gloucester Bank and Trust Company are reflected in
the consolidated Company's results after July 1, 2000.
6
<PAGE> 9
ANDOVER BANCORP, INC. AND SUBSIDIARIES
ANALYSIS OF NET YIELD ON EARNING ASSETS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
2000 1999
------------------------------------------- -----------------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/
BALANCE PAID RATE(4) BALANCE PAID RATE(4)
------- -------- -------- ------- -------- --------
ASSETS (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Short-term investments $ 527 $ 9 6.79% $ 15,356 $ 200 5.17%
Investment securities (1)(2) 234,555 4,062 6.89 169,804 2,703 6.32
Mortgage-backed securities (1) 125,888 2,303 7.28 136,277 2,191 6.38
----------- ----------- ----------- -----------
Total investments 360,970 6,374 7.02 321,437 5,094 6.29
----------- ----------- ----------- -----------
Residential loans 818,703 14,197 6.90 752,021 12,705 6.70
Commercial real estate loans 272,017 6,113 8.94 181,695 3,877 8.47
Construction and land loans 88,486 2,321 10.44 67,560 1,562 9.17
----------- ----------- ----------- -----------
Total real estate loans (1) (3) 1,179,206 22,631 7.63 1,001,276 18,144 7.19
----------- ----------- ----------- -----------
Consumer loans (3) 83,161 1,843 8.82 59,833 1,185 7.86
----------- ----------- ----------- -----------
Commercial and lease loans 46,072 1,120 9.67 26,273 563 8.50
Lease financing 30,997 562 7.21 19,673 368 7.42
----------- ----------- ----------- -----------
Total commercial loans (3) 77,069 1,682 8.68 45,946 931 8.04
----------- ----------- ----------- -----------
Total loans 1,339,436 26,156 7.77 1,107,055 20,260 7.26
----------- ----------- ----------- -----------
Total interest-earning assets 1,700,406 32,530 7.61% 1,428,492 25,354 7.04%
----------- -----------
Allowance for loan losses (13,955) (11,326)
Other assets 82,355 53,428
----------- -----------
Total assets $ 1,768,806 $ 1,470,594
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts $ 133,998 $ 476 1.41% $ 96,229 $ 197 0.81%
Money market deposit accounts 108,822 830 3.03 96,674 676 2.77
Savings accounts 242,235 2,170 3.56 213,588 1,727 3.21
Certificates of deposit 560,560 7,879 5.59 468,579 5,872 4.97
----------- ----------- ----------- -----------
Total interest-bearing deposits 1,045,615 11,355 4.32 875,070 8,472 3.84
----------- ----------- ----------- -----------
Borrowed funds:
Other borrowings 95,839 1,526 6.33 41,677 545 5.19
Federal Home Loan Bank advances 345,756 5,454 6.28 325,656 4,479 5.46
----------- ----------- ----------- -----------
Total borrowed funds 441,595 6,980 6.29 367,333 5,024 5.43
----------- ----------- ----------- -----------
Total interest-bearing liabilities 1,487,210 18,335 4.90% 1,242,403 13,496 4.31%
----------- -----------
Demand deposits 129,243 90,674
Other liabilities 11,954 9,691
----------- -----------
Total liabilities 1,628,407 1,342,768
Stockholders' equity 140,399 127,826
----------- -----------
Total liabilities and stock-
holders' equity $ 1,768,806 $ 1,470,594
=========== ===========
Net interest income $ 14,195 $ 11,858
=========== ===========
Interest rate spread 2.71% 2.73%
==== ====
Net yield on earning assets 3.32% 3.29%
==== ====
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
------------------------------------------- -----------------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/
BALANCE PAID RATE(4) BALANCE PAID RATE(4)
------- -------- -------- ------- -------- --------
ASSETS (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Short-term investments $ 1,831 $ 83 6.06% $ 10,809 $ 401 4.96%
Investment securities (1)(2) 216,167 10,981 6.79 153,011 7,258 6.34
Mortgage-backed securities (1) 128,171 6,743 7.03 141,740 6,864 6.47
----------- ----------- ----------- -----------
Total investments 346,169 17,807 6.87 305,560 14,523 6.35
----------- ----------- ----------- -----------
Residential loans 774,261 40,041 6.91 756,733 38,343 6.77
Commercial real estate loans 231,583 15,362 8.86 167,087 10,928 8.74
Construction and land loans 78,223 5,868 10.02 61,981 4,218 9.10
----------- ----------- ----------- -----------
Total real estate loans (1) (3) 1,084,067 61,271 7.55 985,801 53,489 7.25
----------- ----------- ----------- -----------
Consumer loans (3) 70,788 4,548 8.58 59,929 3,545 7.91
----------- ----------- ----------- -----------
Commercial and lease loans 34,269 2,409 9.39 28,833 1,817 8.43
Lease financing 30,421 1,658 7.28 14,854 822 7.40
----------- ----------- ----------- -----------
Total commercial loans (3) 64,690 4,067 8.40 43,687 2,639 8.08
----------- ----------- ----------- -----------
Total loans 1,219,545 69,886 7.65 1,089,417 59,673 7.32
----------- ----------- ----------- -----------
Total interest-earning assets 1,565,714 87,693 7.48% 1,394,977 74,196 7.11%
Allowance for loan losses (12,304) (11,186)
Other assets 66,914 51,677
----------- -----------
Total assets $ 1,620,324 $ 1,435,468
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts $ 112,114 $ 904 1.08% $ 95,012 $ 573 0.81%
Money market deposit accounts 99,282 2,175 2.93 96,356 1,993 2.77
Savings accounts 222,886 5,680 3.40 209,136 5,015 3.21
Certificates of deposit 509,981 20,311 5.32 472,692 18,163 5.14
----------- ----------- ----------- -----------
Total interest-bearing deposits 944,263 29,070 4.11 873,196 25,744 3.94
----------- ----------- ----------- -----------
Borrowed funds:
Other borrowings 104,780 4,785 6.10 40,509 1,425 4.70
Federal Home Loan Bank advances 321,174 14,400 5.99 293,761 11,971 5.45
----------- ----------- ----------- -----------
Total borrowed funds 425,954 19,185 6.02 334,270 13,396 5.36
----------- ----------- ----------- -----------
Total interest-bearing liabilities 1,370,217 48,255 4.70% 1,207,466 39,140 4.33%
----------- -----------
Demand deposits 105,447 93,322
Other liabilities 10,276 10,901
----------- -----------
Total liabilities 1,485,940 1,311,689
Stockholders' equity 134,384 123,779
----------- -----------
Total liabilities and stock-
holders' equity $ 1,620,324 $ 1,435,468
=========== ===========
Net interest income $ 39,438 $ 35,056
=========== ===========
Interest rate spread
2.78% 2.78%
==== ====
Net yield on earning assets
3.36% 3.36%
==== ====
</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 has been calculated using interest income divided by the average
balance of the amortized historical cost.
(2) Included in the average balance and interest earned amounts is the stock in
FHLB of Boston.
(3) 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 balance outstanding.
(4) The "Average Yield/Rate" calculation is based on an annualized basis
reflecting 92 days in the second quarter of both years and 274 days in the
year-to-date period of 2000 versus 273 days in the year to date period of
1999.
7
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
PRELIMINARY NOTE IN REGARD TO FORWARD-LOOKING STATEMENTS. This quarterly report
on Form 10-Q contains forward-looking statements. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes", "anticipates", "plans", "expects", "intends" and similar
expressions are intended to identify forward-looking statements. You should not
rely on forward-looking statements, because they involve known and unknown
risks, uncertainties and other factors, some of which are beyond the control of
the Company. These expressed or implied important risks, uncertainties and other
factors may cause the Company's actual results, performance or achievements to
differ materially from those expressed or implied by such forward-looking
statements. These factors include, without limitation, those set forth below
under the caption "Certain Factors That May Affect Future Results".
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS. The following important factors,
among others, could cause actual results, performance or achievements of the
Company to differ materially from those expressed or implied by forward-looking
statements made in this quarterly report on Form 10-Q or presented elsewhere by
management from time to time. Defined terms used elsewhere in this quarterly
report have the same meanings herein as therein. A number of uncertainties exist
that could affect the Company's future operating results, performance or
achievements including, without limitation, the Company's ability to integrate
systems and other back-office operations of GBT and Gloucester Bank and Trust
Company following the acquisition of GBT, unanticipated costs in connection with
the acquisition, the Banks' continued ability to originate quality loans,
fluctuations of interest rates, real estate market conditions in the Banks'
lending areas, general and local economic conditions, the Banks' continued
ability to attract and retain deposits, the Company's ability to control costs,
new accounting pronouncements, and changing regulatory requirements. You should
carefully review all of these factors, and you should be aware that there may be
other factors that could cause these differences. These forward-looking
statements were based on information, plans and estimates at the date of this
report and the Company does not promise to update any forward-looking statements
to reflect changes in underlying assumptions or factors, new information, future
events or other changes.
RESULTS OF OPERATIONS
GENERAL. Net income amounted to $5.2 million, or $0.76 per diluted share, for
the quarter ended September 30, 2000 as compared to net income of $4.5 million,
or $0.67 per diluted share, for the third quarter of 1999. On July 1, 2000, the
Company completed its acquisition of GBT Bancorp and its wholly-owned
subsidiary, Gloucester Bank and Trust Company. The transaction was accounted for
as a purchase. The Company's results through September 30, 2000, include
Gloucester's operating results from July 1, 2000. The acquisition of Gloucester
had a positive contribution to the Company's quarterly earnings.
The Company recorded several significant non-recurring items during the third
quarter of 2000. The largest item was due to a tax benefit recorded by the
Company in the amount of $2.2 million which was largely offset by losses caused
from a balance sheet restructuring. The losses from the restructuring (of loans
and investments) totaled $2.1 million. The intent of the restructuring is to
reduce interest rate risk and to improve the Company's net interest margin and
ultimately, to enhance earnings.
Andover's annualized return on average assets totaled 1.18% for the third
quarter of 2000 compared to 1.22% in the third quarter of 1999. The annualized
return on average stockholders' equity increased to 14.81% in the third quarter
of 2000 from 14.04% in the third quarter of 1999.
8
<PAGE> 11
NET INTEREST AND DIVIDEND INCOME. Net interest and dividend income totaled $14.2
million for the third quarter of 2000 as compared to $11.9 million for the same
period in 1999. The 20% increase resulted primarily from a 19% increase in
average earning assets as well as a higher net interest margin which was 3.32%
in the third quarter of 2000 versus 3.29% last year. Growth in net interest and
dividend income was enhanced in the third quarter of 2000 by the acquisition of
Gloucester.
PROVISION FOR LOAN LOSSES. The allowance for loan losses is established through
a provision for loan losses charged to the statement of operations. The
allowance is reduced by a credit for loan losses as well as loan charge-offs.
Assessing the adequacy of the allowance for loan losses involves substantial
uncertainties and is based upon management's evaluation of the amount required
to meet possible loan losses after weighing various factors. Among the factors
that management may consider are the quality of specific loans, risk
characteristics of the loan portfolio generally, the level of nonaccruing loans,
current economic conditions, trends in delinquencies, actual charge-off
experience, and collateral values of the underlying security. Because the
allowance for loan losses is based on various estimates, and includes a high
degree of judgment by management, subsequent changes in any of the factors
considered or 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.
As a result of purchase accounting rules arising from the acquisition of
Gloucester, the allowance increased $1.8 million. In addition, there was a
provision for loan losses totaling $450,000 in the third quarter of 2000 while a
provision was not taken in the comparable quarter in 1999. Management considered
several other factors in determining that a provision was needed in the third
quarter of 2000. These factors include, without limitation, the level and mix of
loan growth, the ratio of the allowance to total loans as well as charge-offs
and recoveries. The level of corporate loan outstanding balances, excluding the
addition of the Gloucester balances, increased 16% on an annualized basis during
the third quarter of 2000. The slight increase in nonaccruing loans during the
third quarter of 2000, particularly in the lease financings, contributed to the
need for a loan loss provision in the current quarter. Taking all of the factors
into consideration, management believes that the allowance for loan losses is
adequate as of September 30, 2000.
NON-INTEREST INCOME. Net losses from sales of loans, investments and
mortgage-backed securities held for sale and available for sale totaled $2.1
million in the third quarter of 2000 as compared to net losses of $415,000 in
the third quarter of 1999. The loss of $2.1 million in 2000 resulted from the
balance sheet restructuring and realization of pre-tax losses totaling $1.3
million from the sale of $46.0 million of residential loans and $718,000 from
the sale of $31.7 million of investments available for sale. The loss of
$415,000 in the third quarter of 1999 was mainly attributable to the sale of
$27.6 million of certain lower yielding investments.
Mortgage banking income totaled $126,000 in the third quarter of 2000 versus
$139,000 in the comparable quarter in 1999. The mortgage servicing assets are
assessed for impairment on a quarterly basis. During the third quarter of 2000,
mortgage interest rates remained fairly high, thereby increasing the value of
the servicing rights and eliminating the need for a valuation allowance. It
should be noted, however, that if mortgage interest rates decline from their
current levels, it is possible that future provisions to the valuation allowance
or servicing asset charge-offs may be necessary due to the mortgage prepayment
risk inherent in the servicing portfolio. This mortgage prepayment risk is the
result of loans repaying faster than expected, causing the fair value of the
mortgage servicing asset to decline. Amortization expense totaled $661,000 and
$595,000, respectively, for the quarters ended September 30, 2000 and 1999.
While there were no mortgage servicing asset charge-offs in the third quarter of
2000, charge-offs totaled $60,000 for the third quarter of 1999. Loans serviced
for investors totaled $957.1 million and $887.0 million, respectively, at
September 30, 2000 and 1999.
9
<PAGE> 12
The following table summarizes the activity in the valuation allowance for
mortgage servicing assets for the three months and nine months ended September
30, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2000 1999 2000 1999
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $ -- $ 560 $ 500 $ 1,125
Provision (credit) for valuation
allowance -- -- (500) (175)
Charge-offs -- (60) -- (450)
------ ------- ------- -------
Balance at end of period $ -- $ 500 $ -- $ 500
====== ======= ======= =======
</TABLE>
Other income totaled $1.3 million in the third quarter of 2000 as compared to
$899,000 in the third quarter of 1999 primarily due to a rise in deposit fee and
miscellaneous income. Deposit fee income attributed to Gloucester for the third
quarter of 2000 totaled $153,000. In addition, approximately $60,000 in
miscellaneous income is considered non-recurring income in the third quarter of
2000.
NON-INTEREST EXPENSE. Non-interest expenses increased by $2.3 million, or 41.0%,
to $8.1 million in the third quarter of 2000 from $5.7 million in the third
quarter of 1999. The efficiency ratio (a ratio that measures operating expenses
as a percentage of operating income) increased from 44.29% in the third quarter
of 1999 to 51.82% in the comparable period of 2000 primarily due to higher
general and administrative costs. The increase in non-interest expenses during
the third quarter of 2000 was attributable to a rise in both salaries and
employee benefits and data processing expenses.
Salaries and employee benefits, the largest component of non-interest expense,
increased $1.4 million, or 43.1%, in the third quarter of 2000 to $4.5 million.
The staffing costs attributable to Gloucester totaled $430,000 for the third
quarter of 2000. As the back-office processing functions are consolidated
further in the fourth quarter of 2000, additional costs savings are expected to
be achieved. In addition, due to achieving certain profitability objectives in
the third quarter of 2000, the Company accrued approximately $400,000 in
discretionary incentive programs. The introduction of a money purchase plan and
an increase in the corporate match to the existing 401(k) plan added
approximately $150,000 in benefit costs during the third quarter of 2000. In
addition, a higher level of employees due to the opening of our 15th branch
office in Derry, New Hampshire, contributed to the increased salaries and
benefits expense experienced in 2000.
Office occupancy and equipment expenses rose from $768,000 in the third quarter
of 1999 to $1.0 million for the three months ended September 30, 2000. The Bank
opened its 15th branch location in the latter part of the second quarter of 2000
and the addition of Gloucester's operations added another $183,000 in occupancy
and equipment costs with its main office, two branches, an operations building
and two remote ATMs.
Data processing expenses increased from the third quarter of 1999 to the
corresponding quarter in 2000 by 35.9% or $218,000, and totaled $826,000. This
was primarily due to an increase in the number of loans and deposits serviced by
the Banks as well as increased costs associated with alternative delivery
systems such as the internet, debit cards and automated services. Gloucester
added approximately $142,000 in data processing costs. It is anticipated that
the data processing costs associated with Gloucester will diminish as the
back-office functions of the Banks are streamlined and consolidated. However, as
the size and complexity of the Company continues to increase, the information
systems needed to support the Company will likely increase.
10
<PAGE> 13
Professional fees increased $45,000 to $299,000 in the third quarter of 2000
from $254,000 in the third quarter of 1999 due to corporate legal expenses and
consulting fees unrelated to the purchase of Gloucester.
Marketing expenses increased 54.8% to $339,000 for the third quarter of 2000
compared to 1999's third quarter due to increased advertising for the Banks'
deposit products in light of the large bank divestitures occurring in the
Company's market area. The Banks have also implemented a marketing plan for
increasing advertising funds towards increasing its corporate relationship
banking products. In addition, the marketing costs incurred by Gloucester
totaled $22,000. It is expected that the level of marketing expenditures will
remain higher than historical levels in the fourth quarter of 2000 while the
Company has not determined what the appropriate levels will be for the year
2001.
Amortization of goodwill amounted to $150,000 in the third quarter of 2000
resulting from the acquisition of Gloucester. This non-cash expense will be
incurred for the next 15 years.
Other operating expenses increased 30.1% from the third quarter of 1999 to
$956,000 in the corresponding quarter in 2000 due to the continued growth of the
Company which impacts office supplies, printing expense and other costs. In
addition Gloucester's operations added $120,000 in operating costs.
INCOME TAX EXPENSE. Due to the favorable resolution of several tax issues, the
Company recorded an income tax benefit of $2.2 million in the third quarter of
2000 which offset an income tax expense of $2.0 million for the quarter. By
comparison, income tax expense for the third quarter of 1999 totaled $2.2
million. The net effective tax rates for the third quarters of 2000 and 1999
were (4.3%) and 33.1%, respectively. In addition, based on intraperiod tax
accounting rules, the Company expects an additional tax benefit of $725,000 in
the fourth quarter of 2000. Notwithstanding the fourth quarter tax benefit, the
Company presently anticipates a normalized effective tax rate of approximately
37% to 38% in the first quarter of 2001 due to the nondeductibility of the
goodwill amortization and higher effective tax rates for Gloucester.
FINANCIAL CONDITION
Total assets increased from $1,491.1 million at December 31, 1999 to $1,776.0
million at September 30, 2000. Gloucester added $127.3 million in total assets
for the end of the third quarter. Increases in the investment and loan
portfolios were funded primarily by a significant increase in the total deposits
during the first nine months of 2000.
LOANS. The following table shows the composition of the Company's loan portfolio
at September 30, 2000 and December 31, 1999. The balances shown in the table are
net of unadvanced funds and deferred loan origination fees and costs.
<TABLE>
<CAPTION>
9/30/00 12/31/99
------- --------
(In thousands)
<S> <C> <C>
Real estate loans:
Residential $ 786,481 $ 743,747
Commercial 277,076 207,364
Construction and land 91,476 63,660
---------- ----------
Total real estate loans 1,155,033 1,014,771
---------- ----------
Consumer loans 84,380 61,831
---------- ----------
Commercial loans:
Commercial and lease loans 47,934 27,378
Lease financing 31,341 29,121
---------- ----------
Total commercial loans 79,275 56,499
---------- ----------
Total loans $1,318,688 $1,133,101
========== ==========
</TABLE>
11
<PAGE> 14
Total loans increased $185.6 million, of which the purchase of Gloucester
accounted for approximately half, or $91.7 million of the increase, during the
first nine months of 2000 to $1,318.7 million total outstandings at September
30, 2000. The loan growth experienced by the Company in the first nine months of
2000 was across all loan categories. The Company has been successful in its
efforts to reduce its reliance on residential loan volumes. This reduced
reliance has been encouraging to the Company since corporate loans, or
non-residential loans, generally earn a higher yield to compensate for the
higher risks involved.
Originations of all loan types are sensitive to a variety of factors including,
without limitation, the interest rate environment, the capacity for borrowing,
real estate values, current and anticipated economic conditions, and the
competitive landscape. Due to the favorable interest rate environment in the
first nine months of 1999, there was heavy mortgage refinancing volume which
resulted in residential loan originations totaling $154.4 million. Conversely in
2000, residential loan originations totaled only $97.3 million due to a decrease
in refinancing activity. Residential loan balances increased only $42.7 million
during the first nine months of 2000 primarily due to the sale of loans totaling
$46.0 million; the ongoing securitization of 30 year fixed rate loans; regular
amortization and loan prepayments. Furthermore, the purchase of Gloucester
accounted for $26.2 million of the residential balances outstanding at September
30, 2000.
Outstanding corporate loans, comprised of commercial real estate, commercial,
construction and land loans and leases, increased $120.3 million during the
first nine months of 2000. The addition of Gloucester accounted for $43.3
million in commercial real estate loans and $9.6 million in commercial loans at
September 30, 2000. The volume of corporate loan originations reflects the
Company's increased efforts with respect to originations of this type of loan,
however, real estate values, current and anticipated economic conditions and a
customer's capacity for borrowing play a more critical role in the level of loan
originations. Corporate loan originations totaled $171.8 million and $125.2
million, respectively, for the nine months ended September 30, 2000 and 1999.
The loan balances outstanding do not reflect the full impact of the total
originations due to loan prepayments and certain amounts that remain unadvanced
as of September 30, 2000.
Consumer loan balances increased $22.5 million to $84.4 million at September 30,
2000. The purchase of Gloucester accounted for $12.1 of the balances outstanding
at September 30, 2000 and strong levels of second mortgage loan activity
accounted for the balance of the growth.
RISK ELEMENTS. The following table shows the composition of non-performing
assets at September 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
9/30/00 12/31/99
------- --------
(Dollars in thousands)
<S> <C> <C>
Nonaccruing loans $2,666 $2,456
Other real estate owned 60 41
------ ------
Total non-performing assets $2,726 $2,497
====== ======
Total non-performing assets as a
percentage of total assets 0.15% 0.17%
</TABLE>
At September 30, 2000, total impaired loans were $2.6 million, of which $581,000
had related allowances for loan losses of $104,000 and $2.1 million which did
not require a related allowance. All of the $2.6 million in impaired loans have
been measured using the fair value of the collateral method. During the nine
months ended September 30, 2000, the average recorded value of impaired loans
was $2.6 million.
12
<PAGE> 15
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 as to the ultimate collectibility of the loan. Nonaccrual loans
are generally not returned to performing status until the obligation is brought
current and when concern no longer exists as to the collectibility of principal
or interest.
The following table shows the composition of nonaccruing loans at September 30,
2000 and December 31, 1999:
<TABLE>
<CAPTION>
9/30/00 12/31/99
------- --------
(Dollars in thousands)
<S> <C> <C>
Residential real estate $ 339 $ 588
Commercial real estate 1,193 1,308
Construction and land 209 --
Commercial and lease loans 461 101
Lease financing 444 435
Consumer 20 24
------- -------
Total nonaccrual loans outstanding $ 2,666 $ 2,456
======= =======
Allowance for loan losses $14,445 $11,384
======= =======
Allowance for loan losses as a
percentage of total loans 1.1% 1.0%
</TABLE>
ALLOWANCE FOR LOAN LOSSES. The following table summarizes the activity in the
Company's allowance for loan losses for the three months and nine months ended
September 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2000 1999 2000 1999
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $ 11,917 $ 11,274 $ 11,384 $ 10,486
Allowance on acquired loans 1,826 -- 1,826 --
Provision for loan losses 450 -- 1,050 --
Charge-offs:
Residential real estate (15) -- (17) (97)
Commercial real estate -- -- -- (20)
Construction and land -- -- -- --
Commercial and lease loans -- -- (75) (15)
Lease financings -- -- (342) --
Consumer (1) (2) (2) (5)
-------- -------- -------- --------
Total charge-offs (16) (2) (436) (137)
-------- -------- -------- --------
Recoveries:
Residential real estate 6 3 14 14
Commercial real estate 196 75 244 690
Construction and land -- 19 -- 19
Commercial and lease loans 65 48 170 199
Lease financings -- -- 187 130
Consumer 1 4 6 20
-------- -------- -------- --------
Total recoveries 268 149 621 1,072
-------- -------- -------- --------
Net recoveries 252 147 185 935
-------- -------- -------- --------
Balance at end of period $ 14,445 $ 11,421 $ 14,445 $ 11,421
======== ======== ======== ========
Ratio of annualized net
recoveries to average
loans outstanding 0.03% 0.02% 0.02% 0.12%
</TABLE>
13
<PAGE> 16
Management analyzes the adequacy of the allowance for loan losses on a quarterly
basis. See "Results of Operations - Provision for Loan Losses".
INVESTMENTS. As of September 30, 2000, the Company's total investment portfolio
amounted to $334.3 million, an increase of $47.6 million from December 31, 1999.
The increase in the first nine months of 2000 was primarily due to the
acquisition of $24.6 million in securities through the purchase of Gloucester
and purchases totaling $90.4 million. In addition, during the third quarter of
2000, the Company sold $31.7 million in low yielding investment securities which
were immediately replaced with higher yielding purchases.
Management continually evaluates its investment alternatives in order to
properly manage the overall balance sheet mix. The timing of purchases, sales
and reinvestment, if any, will be based on various factors including expectation
of movements in market interest rates and loan demand. Notwithstanding these
events, it is the intent of management to grow the earning asset base through
loan originations, loan purchases or investment acquisitions while funding this
growth through a mix of retail deposits, FHLB advances and other borrowings.
The following table presents the composition and carrying values of the
investment portfolio at September 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
9/30/00 12/31/99
------- --------
(In thousands)
<S> <C> <C>
SHORT-TERM INVESTMENTS $ 1,100 $ 1,600
======== ========
INVESTMENTS AVAILABLE FOR SALE (AT MARKET):
Common stocks $ 3,034 $ 1,248
-------- --------
U.S. government and federal agency obligations 72,321 65,191
Other bonds and obligations 132,656 84,336
-------- --------
Total bonds and obligations 204,977 149,527
-------- --------
GNMA mortgage-backed securities 30,298 27,381
FHLMC participation certificates 18,903 19,118
FNMA pass-through certificates 12,286 11,433
Collateralized mortgage obligations 11,707 12,663
-------- --------
Total mortgage-backed securities 73,194 70,595
-------- --------
Total investments available for sale $281,205 $221,370
======== ========
INVESTMENTS HELD TO MATURITY (AT AMORTIZED COST):
U.S. government and federal agency obligations $ 8,500 $ 8,507
Other bonds and obligations 1,006 2,514
-------- --------
Total bonds and obligations 9,506 11,021
-------- --------
FNMA pass-through certificates 19,822 24,082
FHLMC participation certificates 13,398 18,073
GNMA mortgage-backed securities 1,642 1,923
Collateralized mortgage obligations 7,334 8,268
Other asset-backed securities 311 385
-------- --------
Total mortgage-backed securities 42,507 52,731
-------- --------
Total investments held to maturity $ 52,013 $ 63,752
======== ========
Total investments $334,318 $286,722
======== ========
</TABLE>
14
<PAGE> 17
The following table shows the gross unrealized gains and losses by major
categories of securities as of September, 2000:
<TABLE>
<CAPTION>
Unrealized Unrealized
Gains Losses
(In thousands)
<S> <C> <C>
INVESTMENTS AVAILABLE FOR SALE:
Common stocks $ 403 $ --
U.S. government and federal agency obligations 440 (268)
Other bonds and obligations 368 (1,781)
Mortgage-backed securities 523 (284)
------- -------
Total investments available for sale $ 1,734 $(2,333)
======= =======
INVESTMENTS HELD TO MATURITY:
U.S. government and federal agency obligations $ -- $ (39)
Other bonds and obligations 15 --
Mortgage-backed securities 160 (527)
------- -------
Total investments held to maturity $ 175 $ (566)
======= =======
Total unrealized gains and losses $ 1,909 $(2,899)
======= =======
</TABLE>
At September 30, 2000, the Company's net unrealized loss on investments
available for sale amounted to $599,000, a fair value rise of $4.4 million from
a $5.0 million net unrealized loss at December 31, 1999. At September 30, 2000,
the Company's net unrealized loss on investments held to maturity totaled
$391,000, for a fair value rise of $804,000 from a $1.2 million net unrealized
loss at December 31, 1999. The changes in the net unrealized loss on the total
investment portfolio from year-end 1999 were primarily due to a decline in
market interest rates during the first nine months of 2000 as well as the
realization of $723,000 of investment losses in the third quarter of 2000.
DEPOSITS AND BORROWED FUNDS. Total deposits increased $245.6 million to $1,214.1
million at September 30, 2000 from $968.5 million at December 31, 1999. The
Gloucester purchase added $107.8 million in total deposits. Aided by the
disruption caused by large bank acquisitions and divestitures, the Company has
been successful in attracting new deposit relationships. Included in the
certificate of deposits shown below were $45.0 million of brokered certificates
of deposit. At September 30, 2000, the balances attributed to Gloucester are
broken down by deposit category: demand deposits and NOW accounts $47.9 million,
money market accounts $15.2 million, savings accounts $9.3 million and
certificates of deposits $35.1 million.
The following table shows the composition of the Company's deposits at September
30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
9/30/00 12/31/99
------- --------
(In thousands)
<S> <C> <C>
Demand deposit accounts $ 138,289 $ 86,871
NOW accounts 146,404 99,040
Money market accounts 109,676 95,291
Savings accounts 245,272 213,286
Certificates of deposit 574,507 474,045
---------- ----------
Total deposits $1,214,148 $ 968,533
========== ==========
</TABLE>
To help fund the growth in total assets experienced during the first nine months
of 2000, the Company increased its borrowed funds position. Federal Home Loan
Bank advances increased $63.6 million from December 31, 1999 to $369.3 million
at September 30, 2000. Other borrowings decreased $38.5 million to $35.2 million
at September 30, 2000. This
15
<PAGE> 18
net increase of $25.1 million augmented the deposit growth for the first nine
months of 2000 and enabled the Company to grow total assets by 19% during the
same period.
The following table shows the composition of the Company's borrowed funds at
September 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
9/30/00 12/31/99
------- --------
(In thousands)
<S> <C> <C>
Cash management accounts $ 17,787 $ 9,315
Federal funds purchased 1,884 3,822
Securities sold under agreements to repurchase -- 25,525
FHLB overnight 15,500 35,000
FHLB advances 369,298 305,722
-------- --------
$404,469 $379,384
======== ========
</TABLE>
LIQUIDITY. The goal of the Company's liquidity management process is to assess
its funding requirements so as to efficiently meet the cash needs of borrowers
and depositors, while also providing funds for attractive investment
opportunities. Liquidity involves the Company's ability to raise or gain access
to funds in order to fulfill its existing and anticipated financial obligations.
The Company's primary source of funds is dividends from its bank subsidiaries.
Dividends from the Bank to the Company totaled $14.0 million in the first nine
months of 2000. The Company paid $8.1 million in cash to the GBT shareholders as
a result of the Gloucester acquisition. The Company made payments of dividends
to stockholders in the amount of $4.7 million in the first nine months of 2000.
In October, 2000, the Company declared a dividend in the amount of $1.8 million,
payable in the fourth quarter of 2000.
The Banks have a diverse base of funding. Sources of liquidity include
increasing customer deposits, borrowed funds, repayments, prepayments and
amortization of the investment and loan portfolios as well as sales of
securities in the investments available for sale portfolio. Sources of borrowed
funds include funds purchased from other banks, customer repurchase agreements,
the sale of securities under repurchase agreements and borrowings from the FHLB,
of which both Banks are voluntary members. The Banks may also obtain funds from
the discount window of the Federal Reserve Bank of Boston by pledging certain
assets.
Cash flows used by operations decreased $31.0 million to $6.2 million in the
first nine months of 2000, as compared to cash flows provided of $24.8 million
in the corresponding period of 1999 primarily due to an increase in assets held
for sale. Cash flows used by investing activities increased by $43.5 million to
$116.9 million for the nine months ended September 30, 2000, as compared to
$73.4 million during the equivalent period last year. This increase was mainly
attributable to an increase in the loan portfolio as well as a higher level of
purchases of whole loans. Cash flows provided by financing activities increased
$84.3 million for the nine months ended September 30, 2000 to $137.1 million, as
compared to $52.8 million in the equivalent period in 1999. The financing
activity increase was due to a change in the mix of financing sources, with a
significant rise in deposits and FHLB advances offset by a decrease in other
borrowings.
During the first quarter of 2000, the Company repurchased 177,900 common shares
in connection with its previously announced stock repurchase plan at a cost of
$4.7 million. No shares were repurchased during the second or third quarters of
2000. Approximately 146,000 shares remain eligible for repurchase under the 5%
program limitation.
At September 30, 2000, the Company had home equity, reserve credit and
commercial unadvanced lines of credit totaling $125.0 million. Outstanding
commitments to originate loans totaled $71.8 million. Unadvanced portions of
construction and land
16
<PAGE> 19
loans amounted to $51.0 million. Standby letters of credit were $3.8 million.
Loans sold with recourse totaled $843,000. 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 regulatory and risk-based capital requirements as of September 30, 2000:
<TABLE>
<CAPTION>
Regulatory Andover Andover Gloucester Bank
Minimum Bancorp, Inc. Bank and Trust Company
---------- ------------- ------- -----------------
<S> <C> <C> <C> <C>
Tier 1 Leverage Capital Ratio 4.00% 7.83% 7.49% 7.30%
Risk Based Capital Ratio:
Tier 1 4.00 11.58 11.24 9.87
Total 8.00 12.80 12.39 11.12
</TABLE>
As of September 30, 2000, the most recent notification from the FDIC categorized
the Banks as well capitalized under the prompt corrective action provisions.
Therefore, the Banks are entitled to pay the lowest deposit premium possible.
ASSET AND LIABILITY MANAGEMENT AND MARKET RISK. The Banks' primary source of
revenue is net interest income, which is the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities. The
Company seeks to manage its exposure to interest rate risk or market risk,
through active monitoring and management of its interest rate risk exposure,
which is inherent in its lending and deposit taking activities. The policies and
procedures for managing both on and off balance sheet activities are established
by Andover's Asset/Liability Management Committee (ALCO), who reports its
findings to the Board of Directors on a quarterly basis.
The main objective in managing interest rate risk is to minimize the adverse
impact of changes in interest rates on the Company's net interest income and to
preserve capital, while adjusting the Company's asset/liability structure to
obtain the maximum yield-cost spread on that structure. However, a sudden and
substantial increase in interest rates may adversely impact earnings to the
extent that the interest rates borne by assets and liabilities do not change at
the same speed, to the same extent, or on the same basis.
For further information regarding quantitative and qualitative disclosures about
market risk, please refer to the Company's Annual Report on Form 10-K as of and
for the year ended December 31, 1999 (the "1999 Annual Report"). There have been
no material changes in the quantitative disclosures about market risk from those
presented in the Company's 1999 Annual Report.
RECENT ACCOUNTING DEVELOPMENTS. In June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS 133"), which
establishes new accounting and reporting standards for derivative instruments.
SFAS 133 requires that an entity recognize all derivatives as either assets or
liabilities and measure those instruments at fair value. This statement, as
amended by SFAS 137 and SFAS 138, is effective for financial statements issued
for all fiscal quarters of fiscal years beginning after June 15, 2000. Early
application is encouraged but restatement of prior periods is prohibited. SFAS
133 is not expected to have a material impact on the consolidated financial
statements of the Company.
17
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
RESULTS OF OPERATIONS
GENERAL. Net income amounted to $14.6 million, $2.19 per diluted share, for the
nine months ended September 30, 2000, compared to net income of $14.1 million,
$2.10 per diluted share, in the corresponding period of 1999.
The financial performance in the first nine months of 2000 was positively
impacted by an increase in the net interest and dividend income, offset by an
increase in non-interest expenses. The Company recorded several significant
non-recurring items in the first nine months of 2000. The first significant item
was a tax benefit of $2.2 million. The Company also incurred pre-tax losses of
$2.0 million on its balance sheet restructuring whereby lower yielding loans and
investments were sold and replaced with higher yielding assets. In addition, the
acquisition of Gloucester contributed to the results during the third quarter of
2000. The first nine months results for 1999 were positively impacted by a $1.1
million pre-tax gain due to the curtailment of the defined benefit pension plan.
The annualized return on average assets was 1.20% for the first nine months of
2000 as compared to 1.31% in the comparable period of 1999. The annualized
return on average stockholders' equity was 14.48% in the first nine months of
2000, for a decline from 15.19% in the comparable period of 1999.
NET INTEREST AND DIVIDEND INCOME. Net interest and dividend income was $39.4
million for the nine months of 2000, as compared to $35.1 million for the same
period in 1999, an increase of 12.5%. The net yield on earning assets remained
constant for the first nine months of 2000 and 1999 at 3.36%. This stable net
interest margin was achieved in spite of a 37 basis point increase in the rates
paid on interest-bearing liabilities. Mitigating the funding increase was a
similar 37 basis point rise in the rate earned on interest-earning assets. Total
earning assets increased $170.7 million for the first nine months of 2000 over
1999's level, in part due to the acquisition of Gloucester.
PROVISION FOR LOAN LOSSES. There was a provision for loan losses of $1.1 million
in the first nine months of 2000 and no provision in the comparable period of
1999. Several factors were used to determine that a provision was necessary in
2000. Among them were the level of charge-offs and recoveries and the mix and
level of loan growth. Nonaccruing loans increased by 8.6% during the first nine
months of 2000 while overdue loans increased 8.0% for the same period. In
addition, net loan recoveries totaled $185,000 in the first nine months of 2000
compared to net recoveries totaling $935,000 in the first nine months of 1999.
In addition, the loan growth of $185.6 million, primarily experienced in the
corporate lending areas during the first nine months of 2000, contributed to the
need for a loan loss provision.
NON-INTEREST INCOME. Andover recorded gains from non-interest sources of $2.0
million for the first nine months of 2000, as compared to $3.0 million in the
corresponding period of 1999. Net losses from the balance sheet restructuring
totaled $2.0 million in 2000 as compared to net losses of $329,000 on the sales
of assets and investments for the same period of 1999.
Mortgage banking income totaled $968,000 during the first nine months of 2000 as
compared to income of $658,000 in the corresponding period of 1999 due to
partial reversals of the valuation allowance on mortgage servicing assets
totaling $500,000 in 2000 and $175,000 in 1999's first nine months. Total
amortization amounted to $1.9 million for the first nine months of both 2000 and
1999, respectively. There were no charge-offs on mortgage servicing assets in
the first nine months of 2000 versus charge-offs totaling $450,000 for the nine
month period ending September 30, 1999.
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Other income totaled at $3.1 million and $2.7 million in the first nine months
of 2000 and 1999, respectively, primarily due to increased deposit fee income.
NON-INTEREST EXPENSE. Non-interest expenses increased 26.2% to $20.7 million in
the first nine months of 2000 primarily due to an increase in salaries and
employee benefits and data processing costs.
Salaries and benefits increased $3.0 million or 36.1% to $11.5 million as of
September 30, 2000. The increase resulted primarily from a reduction in salaries
and benefit expenses in 1999 resulting from a pre-tax gain of $1.1 million on
the curtailment of the defined benefit pension plan in the first quarter of
1999. The purchase of Gloucester in the third quarter of 2000 added $430,000 in
increased salaries and benefits. In addition, increased costs incurred from the
enhanced benefit plans in 2000 totaled $450,000 while discretionary incentive
programs added another $400,000 in increased costs in 2000.
Office occupancy and equipment increased 14.4% to $2.7 million in 2000 primarily
resulting from the acquisition of Gloucester and the new branch opened in Derry,
New Hampshire.
Data processing expenses increased 26.4% to $2.2 million resulting from the
Company's loan and deposit growth, the acquisition of Gloucester and increased
expenses relating to the newer delivery channels.
Professional fees decreased 16.0% to $808,000 in 2000 from $962,000 in 1999 due
to increased legal and corporate consulting fees incurred in the early part of
1999 in curtailing the pension plan and consolidating Andover Bank NH into
Andover.
Marketing expenses increased 34.2% to $863,000 primarily due to increased
advertising for discretionary promotions and direct mail solicitations.
Amortization of goodwill was $150,000 for the first nine months of 2000 and
resulted from the acquisition of Gloucester in the third quarter of 2000.
Other operating expenses increased 10.9% to $2.6 million primarily due to the
acquisition of Gloucester as well as increased costs of running a larger, more
geographically diverse company.
INCOME TAX EXPENSE. The Company recorded an income tax benefit of $2.2 million
in the third quarter of 2000 based on the favorable resolution of several tax
issues and an income tax expense of $7.3 million for the first nine months of
2000. By comparison, income tax expense for the first nine months of 1999
totaled $7.6 million. This corresponds to an effective tax rate of 26.1% and
35.0%, respectively, for the first nine months of 2000 and 1999.
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PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings
Not Applicable
ITEM 2 Changes in Securities and Use of Proceeds
Not Applicable
ITEM 3 Defaults Upon Senior Securities
Not Applicable
ITEM 4 Submission of Matters to a Vote of Security Holders
Not applicable
ITEM 5 Other Information
None
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
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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 13, 2000 /s/ Gerald T. Mulligan
----------------------
Gerald T. Mulligan
President and
Chief Executive Officer
November 13, 2000 /s/ Joseph F. Casey
-------------------
Joseph F. Casey
Chief Financial Officer
and Treasurer
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