<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarterly period ended June 30, 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 August 7, 2000: 6,654,639 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 June 30, 2000
For the Six Months Ended June 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
Exhibit Index 21
Signatures 29
</TABLE>
<PAGE> 3
ANDOVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
(Unaudited)
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
(In thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 41,181 $ 26,913
Short-term investments -- 1,600
----------- -----------
Cash and cash equivalents 41,181 28,513
----------- -----------
Assets held for sale, at lower of
cost or market 3,391 1,494
Investments available for sale (amortized
cost of $267,386 in 2000 and $226,332
in 1999) 261,734 221,370
Investments held to maturity (market value
of $54,253 in 2000 and $62,557 in 1999) 55,520 63,752
Loans 1,219,110 1,133,101
Allowance for loan losses (11,917) (11,384)
----------- -----------
Net loans 1,207,193 1,121,717
----------- -----------
Mortgage servicing assets, net 10,492 10,635
Premises and equipment, net 10,974 10,663
Accrued interest receivable 9,740 8,236
Stock in FHLBB, at cost 21,580 17,737
Net deferred income taxes receivable 4,828 5,259
Other assets 10,494 1,678
----------- -----------
Total assets $ 1,637,127 $ 1,491,054
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 1,071,969 $ 968,533
Other borrowings 74,788 73,662
Federal Home Loan Bank advances 347,217 305,722
Mortgagors' escrow accounts 2,928 3,412
Income taxes payable 4,150 3,817
Accrued expenses and other liabilities 4,715 5,645
----------- -----------
Total liabilities 1,505,767 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; 6,534,072
shares issued in 2000 and 1999; shares outstanding
6,356,172 and 6,534,072 in 2000 and 1999, respectively 653 653
Additional paid-in capital 60,745 60,745
Retained earnings 78,191 71,924
Treasury stock (177,900 and -0- shares in 2000
and 1999, respectively, at cost) (4,718) --
Accumulated other comprehensive loss (3,511) (3,059)
----------- -----------
Total stockholders' equity 131,360 130,263
----------- -----------
Total liabilities and stockholders' equity $ 1,637,127 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Interest and dividend income:
Loans $ 22,470 $ 19,865 $ 43,779 $ 39,413
Investment securities 3,639 2,418 6,919 4,555
Mortgage-backed securities 2,258 2,225 4,440 4,673
Short-term investments 63 69 74 201
----------- ----------- ----------- -----------
Total interest and dividend income 28,430 24,577 55,212 48,842
----------- ----------- ----------- -----------
Interest expense:
Deposits 9,052 8,478 17,715 17,272
Federal Home Loan Bank advances 4,590 3,795 8,946 7,491
Other borrowings 2,009 543 3,259 881
----------- ----------- ----------- -----------
Total interest expense 15,651 12,816 29,920 25,644
----------- ----------- ----------- -----------
Net interest and dividend income 12,779 11,761 25,292 23,198
Provision for loan losses 400 -- 600 --
----------- ----------- ----------- -----------
Net interest and dividend income
after provision for loan
losses 12,379 11,761 24,692 23,198
----------- ----------- ----------- -----------
Non-interest income:
Net gains (losses) from sales of assets held
for sale and investments available for sale 17 (7) 24 86
Mortgage banking income, net 418 302 842 519
Other income 962 864 1,820 1,750
----------- ----------- ----------- -----------
Total non-interest income 1,397 1,159 2,686 2,355
----------- ----------- ----------- -----------
Non-interest expense:
Salaries and employee benefits 3,275 2,957 6,971 5,284
Office occupancy and equipment 810 811 1,660 1,558
Data processing 687 575 1,335 1,101
Professional fees 322 225 509 708
Marketing 280 212 524 424
Mortgage banking expense 25 59 48 185
Other operating expense 843 605 1,621 1,405
----------- ----------- ----------- -----------
Total non-interest expense 6,242 5,444 12,668 10,665
----------- ----------- ----------- -----------
Income before income tax expense 7,534 7,476 14,710 14,888
Income tax expense 2,751 2,727 5,371 5,347
----------- ----------- ----------- -----------
Net income $ 4,783 $ 4,749 $ 9,339 $ 9,541
=========== =========== =========== ===========
Basic earnings per share $ 0.75 $ 0.73 $ 1.46 $ 1.46
=========== =========== =========== ===========
Diluted earnings per share $ 0.73 $ 0.71 $ 1.42 $ 1.42
=========== =========== =========== ===========
Weighted average shares outstanding - basic 6,356,172 6,525,061 6,395,264 6,523,523
Dilutive impact of stock options 171,822 180,602 168,156 181,877
----------- ----------- ----------- -----------
Weighted average shares outstanding - diluted 6,527,994 6,705,663 6,563,420 6,705,400
=========== =========== =========== ===========
</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 SIX MONTHS ENDED JUNE 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 losses 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 -- -- 9,339 -- -- 9,339
Other comprehensive income (loss):
---------
Unrealized holding losses arising
during the period, net of tax
benefit of $236 -- -- -- -- (449) (449)
Realized losses included in net
income, net of tax benefit of $2 -- -- -- -- (3) (3)
---------
Total comprehensive income -- -- -- -- -- 8,887
Dividends declared and
paid ($0.48 per share) -- -- (3,072) -- -- (3,072)
Purchase of treasury stock -- -- -- (4,718) -- (4,718)
-------- --------- --------- --------- --------- ---------
Balance at June 30, 2000 $ 653 $ 60,745 $ 78,191 $ (4,718) $ (3,511) $ 131,360
======== ========= ========= ========= ========= =========
</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>
SIX MONTHS ENDED,
JUNE 30,
-----------------
2000 1999
---- ----
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,339 $ 9,541
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 600 --
Net gains on sales of other real estate owned (14) (5)
Net losses from sales of investments available
for sale 5 --
Net gains from sales of assets held for sale (29) (86)
Depreciation and amortization 741 730
Amortization of fees, discounts and premiums, net 116 336
Deferred income taxes receivable 669 (318)
(Increase) decrease in:
Assets held for sale (1,868) 9,088
Mortgage servicing assets 754 1,094
Accrued interest receivable (1,504) (1,012)
Other assets (8,713) (271)
Increase (decrease) in:
Mortgagors' escrow accounts (484) (277)
Accrued income taxes payable 333 (1,728)
Accrued expenses and other liabilities (930) (1,160)
--------- ---------
Net cash provided (used) by operating activities (985) 15,932
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment and mortgage-backed securities available for sale:
Purchases (55,241) (76,776)
Proceeds from sales 7,507 --
Proceeds from maturities and redemptions 2,125 7,063
Principal repayments 4,509 12,806
Investment and mortgage-backed securities held to maturity:
Proceeds from maturities and redemptions 1,500 1,000
Principal repayments 6,711 22,032
Net increase in FHLB stock (3,843) (881)
Purchases of whole loans (21,079) (15,708)
Purchased and capitalized mortgage servicing assets (611) (873)
Net increase in loans (65,251) (36,062)
Capital expenditures on premises and equipment, net (1,052) (612)
Proceeds from sales of other real estate owned 111 369
--------- ---------
Net cash used by investing activities (124,614) (87,642)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 103,436 (15,368)
Net increase in other borrowings 1,126 90,349
Proceeds from issuance of FHLB advances 870,000 165,000
Principal repayments of FHLB advances (828,505) (180,428)
Purchases of treasury stock (4,718) --
Dividends paid (3,072) (2,739)
Stock options exercised -- 66
--------- ---------
Net cash provided by financing activities 138,267 56,880
--------- ---------
Net increase (decrease) in cash and cash equivalents 12,668 (14,830)
Cash and cash equivalents, at beginning of period 28,513 45,437
--------- ---------
Cash and cash equivalents, at end of period $ 41,181 $ 30,607
========= =========
</TABLE>
Statement continued on next page.
4
<PAGE> 7
ANDOVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
-------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED,
JUNE 30,
-----------------
2000 1999
---- ----
(In thousands)
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $30,234 $25,757
Income taxes 4,368 7,393
Supplemental noncash investing and financing activities:
Conversion of real estate loans to mortgage-backed securities
held for sale or investments available for sale 4,017 23,108
Transfer of loans to other real estate owned 200 206
</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.
(the "Company") and its principal subsidiary, Andover Bank (the "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. 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) SUBSEQUENT EVENT
On July 1, 2000, the Company completed its acquisition of GBT Bancorp
("GBT") and its wholly-owned subsidiary, Gloucester Bank and Trust Company.
Gloucester Bank and Trust Company is a Massachusetts-chartered trust
company with two banking offices located in Gloucester, Massachusetts. The
transaction will be accounted for as a purchase. Under the terms of the
merger agreement, Andover will issue approximately 300,000 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
goodwill attributed to this transaction is not expected to exceed $11.0
million.
6
<PAGE> 9
ANDOVER BANCORP, INC. AND SUBSIDIARIES
ANALYSIS OF NET YIELD ON EARNING ASSETS
---------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 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)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Short-term investments $ 4,199 $ 63 6.03% $ 5,949 $ 69 4.65%
Investment securities (1)(2) 214,981 3,639 6.81 148,482 2,418 6.53
Mortgage-backed securities (1) 131,095 2,258 6.93 138,559 2,225 6.44
----------- ----------- ----------- -----------
Total investments 350,275 5,960 6.84 292,990 4,712 6.45
----------- ----------- ----------- -----------
Residential loans 756,094 13,017 6.92 762,398 12,861 6.77
Commercial real estate loans 214,525 4,736 8.88 164,493 3,593 8.76
Construction and land loans 80,989 1,995 9.91 62,536 1,396 8.95
----------- ----------- ----------- -----------
Total real estate loans (1) (3) 1,051,608 19,748 7.55 989,427 17,850 7.24
----------- ----------- ----------- -----------
Consumer loans (3) 66,387 1,420 8.60 59,056 1,164 7.91
----------- ----------- ----------- -----------
Commercial and lease loans 30,561 749 9.86 28,443 582 8.21
Lease financing 30,261 553 7.35 14,583 269 7.30
----------- ----------- ----------- -----------
Total commercial loans (3) 60,822 1,302 8.61 43,026 851 7.93
----------- ----------- ----------- -----------
Total loans 1,178,817 22,470 7.67 1,091,509 19,865 7.30
----------- ----------- ----------- -----------
Total interest-earning assets 1,529,092 28,430 7.48% 1,384,499 24,577 7.12%
----------- -----------
Allowance for loan losses (11,539) (11,187)
Other assets 61,623 59,143
----------- -----------
Total assets $ 1,579,176 $ 1,432,455
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts $ 105,933 $ 232 0.88% $ 101,244 $ 195 0.77%
Money market deposit accounts 92,080 665 2.90 96,412 661 2.75
Savings accounts 212,730 1,764 3.34 211,675 1,691 3.20
Certificates of deposit 488,632 6,391 5.26 468,342 5,931 5.08
----------- ----------- ----------- -----------
Total interest-bearing deposits 899,375 9,052 4.05 877,673 8,478 3.87
----------- ----------- ----------- -----------
Borrowed funds:
Other borrowings 130,087 2,009 6.21 52,417 543 4.16
Federal Home Loan Bank advances 308,380 4,590 5.99 274,019 3,795 5.55
----------- ----------- ----------- -----------
Total borrowed funds 438,467 6,599 6.05 326,436 4,338 5.33
----------- ----------- ----------- -----------
Total interest-bearing liabilities 1,337,842 15,651 4.71% 1,204,109 12,816 4.27%
----------- -----------
Demand deposits 99,910 94,754
Other liabilities 9,621 10,263
----------- -----------
Total liabilities 1,447,373 1,309,126
Stockholders' equity 131,803 123,329
----------- -----------
Total liabilities and stock-
holders' equity $ 1,579,176 $ 1,432,455
=========== ===========
Net interest income $ 12,779 $ 11,761
=========== ===========
Interest rate spread 2.77% 2.85%
==== ====
Net yield on earning assets 3.36% 3.41%
==== ====
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
2000 1999
--------------------------------------- --------------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/
BALANCE PAID RATE(4) BALANCE PAID RATE(4)
------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS (DOLLARS IN THOUSANDS)
Interest-earning assets:
Short-term investments $ 2,491 $ 74 5.97% $ 8,594 $ 201 4.72%
Investment securities (1)(2) 206,872 6,919 6.73 142,526 4,555 6.44
Mortgage-backed securities (1) 129,325 4,440 6.90 144,371 4,673 6.53
----------- ----------- ----------- -----------
Total investments 338,688 11,433 6.79 295,491 9,429 6.43
----------- ----------- ----------- -----------
Residential loans 751,797 25,844 6.91 759,294 25,637 6.81
Commercial real estate loans 211,143 9,249 8.81 159,128 7,052 8.94
Construction and land loans 73,036 3,547 9.77 59,013 2,656 9.08
----------- ----------- ----------- -----------
Total real estate loans (1) (3) 1,035,976 38,640 7.50 977,435 35,345 7.29
----------- ----------- ----------- -----------
Consumer loans (3) 64,533 2,705 8.43 59,987 2,360 7.93
----------- ----------- ----------- -----------
Commercial and lease loans 28,302 1,338 9.51 30,094 1,254 8.40
Lease financing 30,129 1,096 7.32 12,363 454 7.41
----------- ----------- ----------- -----------
Total commercial loans (3) 58,431 2,434 8.38 42,457 1,708 8.11
----------- ----------- ----------- -----------
Total loans 1,158,940 43,779 7.60 1,079,879 39,413 7.36
----------- ----------- ----------- -----------
Total interest-earning assets 1,497,628 55,212 7.41% 1,375,370 48,842 7.16%
----------- -----------
Allowance for loan losses (11,469) (11,119)
Other assets 58,998 54,261
----------- -----------
Total assets $ 1,545,157 $ 1,418,512
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts $ 101,052 $ 428 0.85% $ 96,688 $ 376 0.78%
Money market deposit accounts 94,459 1,345 2.86 96,251 1,317 2.76
Savings accounts 213,105 3,511 3.31 206,794 3,288 3.21
Certificates of deposit 484,414 12,431 5.16 475,057 12,291 5.22
----------- ----------- ----------- -----------
Total interest-bearing deposits 893,030 17,715 3.99 874,790 17,272 3.98
----------- ----------- ----------- -----------
Borrowed funds:
Other borrowings 109,190 3,259 6.00 41,071 881 4.33
Federal Home Loan Bank advances 308,748 8,946 5.83 274,357 7,491 5.51
----------- ----------- ----------- -----------
Total borrowed funds 417,938 12,205 5.87 315,428 8,372 5.35
----------- ----------- ----------- -----------
Total interest-bearing liabilities 1,310,968 29,920 4.59% 1,190,218 25,644 4.34%
----------- -----------
Demand deposits 93,418 95,024
Other liabilities 9,428 11,657
----------- -----------
Total liabilities 1,413,814 1,296,899
Stockholders' equity 131,343 121,613
----------- -----------
Total liabilities and stock-
holders' equity $ 1,545,157 $ 1,418,512
=========== ===========
Net interest income $ 25,292 $ 23,198
=========== ===========
Interest rate spread 2.82% 2.82%
==== ====
Net yield on earning assets 3.40% 3.40%
==== ====
</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 91 days in the second quarter of both years and 182 days in the
year-to-date period of 2000 versus 181 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 JUNE 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 proposed acquisition, the Bank's continued ability to originate quality
loans, fluctuations of interest rates, real estate market conditions in the
Bank's lending area, general and local economic conditions, the Bank's 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 $4.8 million, or $0.73 per diluted share, for
the quarter ended June 30, 2000 as compared to net income of $4.7 million, or
$0.71 per diluted share, for the second quarter of 1999. The Company's results
through June 30, 2000, do not reflect the operations of Gloucester Bank and
Trust Company which was acquired by the Company on July 1, 2000. Andover's
annualized return on average assets totaled 1.22% for the second quarter of 2000
compared to 1.33% in the second quarter of 1999. The annualized return on
average stockholders' equity decreased to 14.60% in the second quarter of 2000
from 15.45% in the second quarter of 1999.
NET INTEREST AND DIVIDEND INCOME. Net interest and dividend income totaled $12.8
million for the second quarter of 2000 as compared to $11.8 million for the same
period in 1999. This increase resulted primarily from a 10.4% increase in
average earning assets. The 5 basis point decrease in the net yield on earning
assets to 3.36% for the second quarter of 2000, as compared to 3.41% in the
corresponding quarter of 1999, was due primarily to a 44 basis point increase in
the rate on interest bearing liabilities, partially offset by a 36 basis point
rise in the yields earned on the interest-earning assets.
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
8
<PAGE> 11
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 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 Bank's
allowance and may require the Bank to provide additions to the allowance based
on their assessment, which may differ from management's assessment.
There was a provision for loan losses of $400,000 for the second quarter of 2000
and no provision taken in the comparative quarter in 1999. In addition to the
factors mentioned above, management considered several other factors in
determining that a provision was needed in the second 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. Net
recoveries totaled $114,000 for the second quarter of 2000 as compared to
$120,000 in 1999. Based on this analysis, management believes that the allowance
for loan losses is adequate as of June 30, 2000.
NON-INTEREST INCOME. Net gains from sales of loans, investments and
mortgage-backed securities held for sale and available for sale totaled $17,000
in the second quarter of 2000 as compared to net losses of $7,000 in the second
quarter of 1999.
Mortgage banking income totaled $418,000 in the second quarter of 2000 versus
$302,000 in the comparable quarter in 1999. In both years, there was a credit
taken to reduce the mortgage servicing asset valuation allowance, thereby
increasing mortgage banking income. This credit to the valuation allowance
totaled $250,000 and $175,000, respectively for the second quarter of 2000 and
1999. The mortgage servicing assets are assessed for impairment on a quarterly
basis. During the second quarter of 2000, mortgage interest rates continued to
rise, thereby increasing the value of the servicing rights and reducing the need
for the same level of valuation allowance. Amortization expense totaled $628,000
and $623,000, respectively, for the quarters ended June 30, 2000 and 1999. While
there were no mortgage servicing asset charge-offs in the second quarter of
2000, charge-offs totaled $100,000 for the second quarter of 1999. 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. Loans serviced for investors totaled $954.2 million
and $813.8 million, respectively, at June 30, 2000 and 1999.
The following table summarizes the activity in the valuation allowance for
mortgage servicing assets for the three months and quarters ended June 30, 2000
and 1999:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $ 250 $ 835 $ 500 $ 1,125
Provision (credit) for valuation
allowance (250) (175) (500) (175)
Charge-offs -- (100) -- (390)
------- ------- ------- -------
Balance at end of period $ -- $ 560 $ -- $ 560
======= ======= ======= =======
</TABLE>
9
<PAGE> 12
Other income totaled $962,000 in the second quarter of 2000 as compared to
$864,000 in the second quarter of 1999 primarily due to a rise in deposit fee
and miscellaneous income, partially offset by lower loan fees due to a lower
level of delinquent loans.
NON-INTEREST EXPENSE. Non-interest expenses increased by $798,000, or 14.7%, to
$6.2 million in the second quarter of 2000 from $5.4 million in the second
quarter of 1999. The efficiency ratio (a ratio that measures operating expenses
as a percentage of operating income) increased from 42.1% in the second quarter
of 1999 to 44.1% in the comparable period of 2000 primarily due to higher
general and administrative costs. The increase in non-interest expense during
the second quarter of 2000 was attributable to a rise in both salaries and
employee benefits and data processing expenses, partially offset by a decrease
in mortgage banking expenses.
Salaries and employee benefits, the largest component of non-interest expense,
increased $318,000, or 10.8%, in the second quarter of 2000 to $3.3 million
primarily due to the introduction of a money purchase plan and an increase in
the corporate match to the existing 401(k) plan. These enhanced benefits added
approximately $130,000 in benefit costs during the second quarter of 2000. In
addition, a higher level of employees contributed to the increased salaries and
benefits expense in 2000.
Office occupancy and equipment expenses remained flat from the second quarter of
1999 to $810,000 for the three months ended June 30, 2000. This trend is not
anticipated to continue as the Bank opened its 13th branch location in the
latter part of the second quarter of 2000.
Data processing expenses increased from the second quarter of 1999 to the
corresponding quarter in 2000 by 19.5% or $112,000. This was primarily due to an
increase in the number of loans serviced by the Company as well as increased
costs associated with alternative delivery systems such as the internet, debit
cards and automated services. In addition, as the size and complexity of the
Company increases, information systems needed to support the decisions and the
costs related thereto will increase.
Professional fees increased $97,000 to $322,000 in the second quarter of 2000
from $225,000 in the second quarter of 1999 due to corporate legal expenses and
consulting fees unrelated to the merger of GBT.
Marketing expenses increased 32.1% to $280,000 for the second quarter of 2000
compared to 1999's second quarter due to increased advertising for the Bank's
deposit products in light of the large bank divestitures occurring in the
Company's market area.
Mortgage banking expenses decreased 57.6% or $34,000 in the second quarter of
2000 versus 1999's second quarter due to reduced costs incurred in conjunction
with the serviced loan portfolio as well as a significant reduction in the costs
incurred by the Bank resulting from higher refinancing activity experienced in
1999.
Other operating expenses increased 39.3% from the second quarter of 1999 to
$843,000 in the corresponding quarter in 2000 due to a rise in miscellaneous
loan charges, postage, office supplies and telephone costs along with various
other sundry costs.
INCOME TAX EXPENSE. The Company recorded an income tax expense of $2.8 million
and $2.7 million on its financial statement earnings for the second quarters of
2000 and 1999, respectively. The effective tax rate for the second quarters of
both 2000 and 1999 was 36.5%.
FINANCIAL CONDITION
Total assets increased from $1,491.1 million at December 31, 1999 to $1,637.1
million at June 30, 2000. Increases in the investment and loan portfolios were
funded primarily by the significant increase in the total deposits during the
first half of 2000.
10
<PAGE> 13
LOANS. The following table shows the composition of the Company's loan portfolio
at June 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>
6/30/00 12/31/99
------- --------
(In thousands)
<S> <C> <C>
Real estate loans:
Residential $ 771,936 $ 743,747
Commercial 222,934 207,364
Construction and land 88,293 63,660
---------- ----------
Total real estate loans 1,083,163 1,014,771
---------- ----------
Consumer loans 69,328 61,831
---------- ----------
Commercial loans:
Commercial and lease loans 35,996 27,378
Lease financing 30,623 29,121
---------- ----------
Total commercial loans 66,619 56,499
---------- ----------
Total loans $1,219,110 $1,133,101
========== ==========
</TABLE>
Total loans increased $86.0 million during the first half of 2000 to $1,219.1
million at June 30, 2000, primarily due to an increase in the residential real
estate and construction and land portfolios as a result of continued demand for
new housing. However, each loan category experienced growth in the first six
months of 2000.
Originations of all loan types are sensitive to the interest rate environment,
the capacity for borrowing and real estate values, current and anticipated
economic conditions as well as the competitive landscape. Due to the favorable
interest rates experienced in the first six months of 1999, mortgage refinancing
volume was very heavy and resulted in residential loan originations totaling
$125.7 million. Conversely in 2000, residential loan originations totaled only
$59.2 million due to a decrease in refinancing activity caused by a rise in
interest rates. Residential loan balances increased only $28.2 million during
the first six months of 2000 primarily due to the securitization of certain
fixed-rate loans as well as regular amortization and loan prepayments.
Outstanding corporate loans, comprised of commercial real estate, commercial,
construction and land loans and leases, increased $50.3 million during the first
half of 2000. The volume of corporate loan originations reflects the Company's
increased interest for this type of loan, however, real estate values, current
and anticipated economic conditions and a customer's capacity for borrowing have
a more critical role. Corporate loan originations totaled $119.3 million and
$92.1 million, respectively, for the six months ended June 30, 2000 and 1999.
The loan balances do not reflect the full impact of the total originations due
to loan prepayments and certain amounts that remain unadvanced as of June 30,
2000.
Consumer loan balances increased by approximately 12.1% on an annualized basis,
to $69.3 million at June 30, 2000, primarily due to an increase in the second
mortgage portfolio.
RISK ELEMENTS. The following table shows the composition of non-performing
assets at June 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
6/30/00 12/31/99
------- --------
(Dollars in thousands)
<S> <C> <C>
Nonaccruing loans $1,971 $2,456
Other real estate owned 144 41
------ ------
Total non-performing assets $2,115 $2,497
====== ======
Total non-performing assets as a
percentage of total assets 0.13% 0.17%
</TABLE>
11
<PAGE> 14
At June 30, 2000, total impaired loans were $1.9 million, of which $553,000 had
related allowances of $28,000 and $1.3 million which did not require a related
allowance. All of the $1.9 million in impaired loans have been measured using
the fair value of the collateral method. During the six months ended June 30,
2000, the average recorded value of impaired loans was $2.2 million.
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 June 30, 2000,
and December 31, 1999:
<TABLE>
<CAPTION>
6/30/00 12/31/99
------- --------
(Dollars in thousands)
<S> <C> <C>
Residential real estate $ 393 $ 588
Commercial real estate 1,290 1,308
Construction and land 209 --
Commercial and lease loans 8 101
Lease financing 60 435
Consumer 11 24
------- -------
Total nonaccrual loans $ 1,971 $ 2,456
======= =======
Allowance for loan losses $11,917 $11,384
======= =======
Allowance for loan losses as a
percentage of total loans 1.0% 1.0%
</TABLE>
12
<PAGE> 15
ALLOWANCE FOR LOAN LOSSES. The following table summarizes the activity in the
Company's allowance for loan losses for the three months and six months ended
June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $ 11,403 $ 11,154 $ 11,384 $ 10,486
Provision for loan losses 400 -- 600 --
Charge-offs:
Residential real estate (2) (10) (2) (98)
Commercial real estate -- -- -- (20)
Construction and land -- -- -- --
Commercial and lease loans -- -- (75) (15)
Lease financings (176) -- (342) --
Consumer -- (2) (1) (3)
-------- -------- -------- --------
Total charge-offs (178) (12) (420) (136)
-------- -------- -------- --------
Recoveries:
Residential real estate 4 7 8 11
Commercial real estate 14 76 48 615
Construction and land -- -- -- --
Commercial and lease loans 86 46 105 152
Lease financings 187 -- 187 130
Consumer 1 3 5 16
-------- -------- -------- --------
Total recoveries 292 132 353 924
-------- -------- -------- --------
Net (charge-offs) recoveries 114 120 (67) 788
-------- -------- -------- --------
Balance at end of period $ 11,917 $ 11,274 $ 11,917 $ 11,274
======== ======== ======== ========
Ratio of annualized net
(charge-offs) recoveries to average
loans outstanding 0.04% 0.04% (0.01)% 0.15%
</TABLE>
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 June 30, 2000, the Company's total investment portfolio
amounted to $317.3 million, an increase of $30.5 million from December 31, 1999.
The increase in the first half of 2000 was primarily due to purchases of various
investments available for sale, including mortgage-backed securities, corporate
bonds, U.S. government and federal agency obligations. However, these purchases
were partially offset by principal repayments in the mortgage-backed portfolio.
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.
13
<PAGE> 16
The following table presents the composition and carrying values of the
investment portfolio at June 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
6/30/00 12/31/99
------- --------
(In thousands)
<S> <C> <C>
SHORT-TERM INVESTMENTS $ -- $ 1,600
======== ========
INVESTMENTS AVAILABLE FOR SALE (AT MARKET):
Common stocks $ 2,511 $ 1,248
-------- --------
U.S. government and federal agency obligations 77,375 65,191
Other bonds and obligations 101,463 84,336
-------- --------
Total bonds and obligations 178,838 149,527
-------- --------
GNMA mortgage-backed securities 31,025 27,381
FHLMC participation certificates 21,727 19,118
FNMA pass-through certificates 15,639 11,433
Collateralized mortgage obligations 11,994 12,663
-------- --------
Total mortgage-backed securities 80,385 70,595
-------- --------
Total investments available for sale $261,734 $221,370
======== ========
INVESTMENTS HELD TO MATURITY (AT AMORTIZED COST):
U.S. government and federal agency obligations $ 8,500 $ 8,507
Other bonds and obligations 1,008 2,514
-------- --------
Total bonds and obligations 9,508 11,021
-------- --------
FNMA pass-through certificates 21,520 24,082
FHLMC participation certificates 14,751 18,073
GNMA mortgage-backed securities 1,745 1,923
Collateralized mortgage obligations 7,663 8,268
Other asset-backed securities 333 385
-------- --------
Total mortgage-backed securities 46,012 52,731
-------- --------
Total investments held to maturity $ 55,520 $ 63,752
======== ========
Total investments $317,254 $286,722
======== ========
</TABLE>
The following table shows the gross unrealized gains and losses by major
categories of securities as of June 30, 2000:
<TABLE>
<CAPTION>
Unrealized Unrealized
Gains Losses
---------- ----------
(In thousands)
<S> <C> <C>
INVESTMENTS AVAILABLE FOR SALE:
Common stocks $ 88 $ (157)
U.S. government and federal agency obligations 39 (1,529)
Other bonds and obligations 76 (2,984)
Mortgage-backed securities 189 (1,374)
------- -------
Total investments available for sale $ 392 $(6,044)
======= =======
INVESTMENTS HELD TO MATURITY:
U.S. government and federal agency obligations $ -- $ (106)
Other bonds and obligations 20 --
Mortgage-backed securities 69 (1,250)
------- -------
Total investments held to maturity $ 89 $(1,356)
======= =======
Total unrealized gains and losses $ 481 $(7,400)
======= =======
</TABLE>
At June 30, 2000, the Company's net unrealized loss on investments available for
sale amounted to $5.7 million, a fair value decline of $690,000 from $5.0
million at December
14
<PAGE> 17
31, 1999. At June 30, 2000, the Company's net unrealized loss on investments
held to maturity totaled $1.3 million, for a fair value decline of $72,000 from
$1.2 million at December 31, 1999. The changes in the net unrealized loss on the
total investment portfolio from year-end 1999 were primarily due to an increase
in market interest rates during the first six months of 2000.
DEPOSITS AND BORROWED FUNDS. Total deposits increased $103.4 million to $1,072.0
million at June 30, 2000 from $968.5 million at December 31, 1999. This increase
was most pronounced in certificates of deposit accounts which increased by $41.1
million during the first six months of 2000. In addition, NOW accounts rose by
$29.0 million, demand deposits increased $20.9 million and savings deposits rose
$15.4 million during this period. Partially offsetting this increase, however,
was a modest decline of $2.9 million in money market deposit accounts during the
first half of 2000. Included in the certificate of deposits shown below were $30
million of brokered certificates opened in the second quarter of 2000.
The following table shows the composition of the Company's deposits at June 30,
2000 and December 31, 1999:
<TABLE>
<CAPTION>
6/30/00 12/31/99
------- --------
(In thousands)
<S> <C> <C>
Demand deposit accounts $ 107,737 $ 86,871
NOW accounts 128,020 99,040
Money market deposit accounts 92,378 95,291
Savings accounts 228,670 213,286
Certificates of deposit 515,164 474,045
---------- ----------
Total deposits $1,071,969 $ 968,533
========== ==========
</TABLE>
To help fund the growth in total assets experienced during the first six months
of 2000, the Bank increased its borrowed funds position. Federal Home Loan Bank
advances increased $41.5 million from December 31, 1999 to $347.2 million at
June 30 2000. Other borrowings increased $1.1 million to $74.8 million at June
30, 2000. These increases fueled the rise in total assets for the first half of
2000.
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 subsidiary.
Dividends from the Bank to the Company totaled $10.0 million in the second
quarter of 2000. The Company made payments of dividends to stockholders in the
amount of $1.5 million in the second quarter of 2000. In July, 2000, the Company
declared a dividend in the amount of $1.6 million, payable in the third quarter
of 2000.
The Bank has 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
the Bank is a voluntary member. The Bank 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 $16.9 million to $985,000 in the first
six months of 2000, as compared to cash flows provided of $15.9 million in the
corresponding period of 1999 primarily due to an increase in other assets and
assets held for sale. Cash flows used by investing activities increased by $37.0
million to $124.6 million for
15
<PAGE> 18
the six months ended June 30, 2000, as compared to $87.6 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 $81.4 million for
the six months ended June 30, 2000 to $138.3 million, as compared to $56.9
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. No shares
were repurchased during the second quarter of 2000. Approximately 146,000 shares
remain eligible for repurchase under the 5% program limitation.
At June 30, 2000, the Company had home equity, reserve credit and commercial
unadvanced lines of credit totaling $105.0 million. Outstanding commitments to
originate loans totaled $116.9 million. Unadvanced portions of construction and
land loans amounted to $49.6 million. Standby letters of credit were $4.3
million. Loans sold with recourse totaled $918,000. 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 June 30, 2000:
<TABLE>
<CAPTION>
Regulatory Andover Andover
Minimum Bancorp, Inc. Bank
---------- ------------- -------
<S> <C> <C> <C>
Leverage Capital Ratio Tier 1 4.00% 8.54% 7.47%
Risk Based Capital Ratio:
Tier 1 4.00 12.12 10.69
Total 8.00 13.19 11.77
</TABLE>
As of June 30, 2000, the most recent notification from the FDIC categorized the
Bank as well capitalized under the prompt corrective action provisions.
Therefore, the Bank is entitled to pay the lowest deposit premium possible.
ASSET AND LIABILITY MANAGEMENT AND MARKET RISK. The Bank's 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 regular 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 Form 10-K as of and for the year
ended December 31, 1999.
16
<PAGE> 19
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, 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 SIX MONTHS ENDED JUNE 30, 2000
RESULTS OF OPERATIONS
GENERAL. Net income amounted to $9.3 million, $1.42 per diluted share, for the
six months ended June 30, 2000, compared to net income of $9.5 million, $1.42
per diluted share, in the corresponding period of 1999.
The financial performance in the first six months of 2000 was positively
impacted by an increase in net interest and dividend income, offset by an
increase in non-interest expenses. The first six months results for 1999 were
positively impacted by a $1.1 pre-tax gain due to the curtailment of the defined
benefit pension plan. The annualized return on average assets was 1.22% for the
first six months of 2000 as compared to 1.36% in the comparable period of 1999.
The annualized return on average stockholders' equity was 14.30% in the first
six months of 2000, for a decline from 15.82% in the comparable period of 1999.
NET INTEREST AND DIVIDEND INCOME. Net interest and dividend income was $25.3
million for the six months of 2000, as compared to $23.2 million for the same
period in 1999, an increase of 9.0%. The net yield on earning assets remained
constant for the first six months of 2000 and 1999 at 3.40%. This was in spite
of an increase of 25 basis points in the rates paid on interest-bearing
liabilities, offset by a 25 basis point rise in the rate earned on
interest-earning assets. Total earning assets increased $122.3 million for the
first six months of 2000 over 1999's level.
PROVISION FOR LOAN LOSSES. There was a provision for loan losses of $600,000 in
the first six 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 decreased by 19.7% during the first six months of
2000 while overdue loans remained stable. In addition, net loan charge-offs
totaled $67,000 in the first half of 2000 compared to net recoveries totaling
$788,000 in the first six months of 1999. In addition, the loan growth of $86.0
million, primarily experienced in the corporate lending areas during the first
six months of 2000, contributed to the need for a loan loss provision.
NON-INTEREST INCOME. Andover recorded gains from non-interest sources of $2.7
million for the first six months of 2000, as compared to $2.4 million in the
corresponding period of 1999. Net gains from sales of assets held for sale and
investments available for sale totaled $24,000 in 2000 as compared to $86,000 in
the same period of 1999.
Mortgage banking income totaled $842,000 during the first six months of 2000 as
compared to income of $519,000 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 half. Total amortization
amounted to $1.3 million for the first six months of both 2000 and 1999. There
were no charge-offs on mortgage servicing assets in the first half of 2000
versus charge-offs totaling $390,000 for the six month period ending June 30,
1999.
Other income remained relatively stable at $1.8 million in the first six months
of 2000 and 1999.
NON-INTEREST EXPENSE. Non-interest expenses increased 18.8% to $12.7 million in
the first six months of 2000 primarily due to an increase in salaries and
employee benefits and data processing costs.
18
<PAGE> 21
Salaries and benefits increased $1.7 million or 31.9% to $7.0 million as of June
30, 2000. The increase resulted primarily from the curtailment of the defined
benefit pension plan in the first half of 1999 resulting in a pre-tax gain of
$1.1 million. In addition, increased costs incurred from the enhanced benefit
plans in 2000 totaled another $300,000.
Office occupancy and equipment increased 6.5% to $1.7 million in 2000 primarily
resulting from the addition of two new branches becoming operational in the
first half of 2000 and the related costs for operating them.
Data processing expenses increased 21.3% to $1.3 million resulting from the
Company's loan and deposit growth as well as expenses relating to the newer
delivery channels.
Professional fees decreased 28.1% to $509,000 in 2000 from $708,000 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 23.6% to $524,000 primarily due to increased
advertising for discretionary promotions and direct mail solicitations.
Mortgage banking expenses decreased 74.1% due to a lower level of residential
mortgage loan originations and refinances experienced in the first six months of
2000 over 1999's levels.
Other operating expenses increased 15.4% to $1.6 million primarily due to
increased deposit insurance, telephone costs, printing expenses and other
miscellaneous costs in running a larger, more geographically diverse company.
INCOME TAX EXPENSE. The Company recorded an income tax expense of $5.4 million
and $5.3 million on its financial statement earnings for the first six months of
2000 and 1999, respectively. This corresponds to an effective tax rate of 36.5%
and 35.9%, respectively, for the first six months of 2000 and 1999.
19
<PAGE> 22
PART II - OTHER INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
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
Exhibit Index 21
(b) Reports on Form 8-K
Form 8-K was filed with the Securities and Exchange Commission on July 10,
2000. Information contained in the Form 8-K included the text of the
Press Release issued by Andover Bancorp, Inc. on July 3, 2000 announcing
the completion of its acquisition of GBT Bancorp on July 1, 2000.
</TABLE>
20
<PAGE> 23
EXHIBITS TO FORM 10-Q
ANDOVER BANCORP, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Form
10-Q
EXHIBIT NO. DESCRIPTION OF EXHIBIT Page No.
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10.1 Employment Agreement between 22
Gloucester Bank and Trust and
David L. Marsh, dated July 1, 2000.
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21
