<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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, MA 01810
(Address of principal executive office) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (978)749-2000
------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.10 PAR VALUE
(Title of Class)
PREFERRED STOCK PURCHASED RIGHTS
(Title of Class)
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 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___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based on the closing sale price for the Registrant's Common
Stock on March 1, 2000, as reported by Nasdaq, was $167,683,066.75.
The number of shares outstanding of each of the Registrant's classes of
Common Stock, as of the latest practicable date, is:
Class: Common Stock, par value $0.10 per share
Outstanding as of March 1, 2000: 6,403,172 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Andover Bancorp, Inc. Definitive Notice of Annual Meeting
and Proxy Statement for the 2000 Annual Meeting of Shareholders are incorporated
by reference into Part III of Form 10-K.
This document contains 106 pages. The exhibit index is on pages 5-7.
-1-
<PAGE> 2
FORM 10-K
CROSS REFERENCE INDEX
PART 1
<TABLE>
<CAPTION>
Annual Form
Report 10-K
Page Page
------ ----
<S> <C> <C> <C>
Item 1 Business.................................................................. 3 34
Item 2 Properties................................................................ 10 41
Item 3 Legal Proceedings......................................................... 11 42
Item 4 Submission of Matters to a Vote of Security Holders....................... 11 42
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters.... 11 42
Item 6 Selected Consolidated Financial Data..................................... 12 43
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 13 44
Item 7A Quantitative and Qualitative Disclosures About Market Risk............... 30 61
Item 8 Financial Statements and Supplementary Data............................ (See Item
........................................................................14 below)
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................... Non-Applicable
</TABLE>
PART III
The information called for by Part III (Items 10 through 13) is incorporated
herein by reference from Andover's Definitive Notice of Annual Meeting and Proxy
Statement for the 2000 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission.
PART IV
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements-
Independent Auditors' Report.......................................... 37 68
Consolidated Balance Sheets as of December 31, 1999 and 1998.......... 38 69
Consolidated Statements of Operations for each of the years ended
December 31, 1999, 1998 and 1997...................................... 39 70
Consolidated Statements of Changes in Stockholders' Equity
for each of the years ended December 31, 1999, 1998 and 1997.......... 40 71
</TABLE>
-2-
<PAGE> 3
<TABLE>
<CAPTION>
Annual Form
Report 10-K
Page Page
------ ----
<S> <C> <C> <C>
Consolidated Statements of Cash Flows for each of the years ended
December 31, 1999, 1998 and 1997........................................ 41-42 72-73
Notes to Consolidated Financial Statements.............................. 43-68 74-99
(2) All financial statement schedules are omitted because they are
not applicable, the data is not significant, or the required
information is shown elsewhere in this report.
(b) Reports on Form 8-K. There were no reports filed on Form 8-K
during the three months ended December 31, 1999. However,
there were two current reports on Form 8-K filed subsequent to
December 31, 1999; one was filed on February 9, 2000 and
another filed on March 1, 2000.
(c) List of Exhibits - See Exhibit Index......................................................5-7
</TABLE>
-3-
<PAGE> 4
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Company has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
ANDOVER BANCORP, INC.
March 17, 2000 By: /s/Gerald T. Mulligan
--------------------------
Gerald T. Mulligan, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/Gerald T. Mulligan President, Chief March 17, 2000
- ------------------------ Executive Officer and
Gerald T. Mulligan Director (Principal
Executive Officer)
/s/Joseph F. Casey Chief Financial Officer March 17, 2000
- ------------------------ and Treasurer (Principal
Joseph F. Casey Financial and Accounting
Officer)
/s/Thomas F. Caffrey Director March 17, 2000
- ------------------------
Thomas F. Caffrey
/s/Paul J. Donahue, Sr. Director March 17, 2000
- ------------------------
Paul J. Donahue, Sr.
/s/Clifford E. Elias Director March 17, 2000
- ------------------------
Clifford E. Elias
/s/John E. Fenton, Jr. Director March 17, 2000
- ------------------------
John E. Fenton, Jr.
/s/Naomi A. Gardner Director March 17, 2000
- ------------------------
Naomi A. Gardner
/s/Frank D. Goldstein Director March 17, 2000
- ------------------------
Frank D. Goldstein
/s/Cornelius J. McCarthy Director March 17, 2000
- ------------------------
Cornelius J. McCarthy
/s/Irving E. Rogers, III Director March 17, 2000
- ------------------------
Irving E. Rogers
/s/Robert J. Scribner Director March 17, 2000
- ------------------------
Robert J. Scribner
/s/Fred P. Shaheen Director March 17, 2000
- ------------------------
Fred P. Shaheen
</TABLE>
-4-
<PAGE> 5
EXHIBITS TO FORM 10-K
Andover Bancorp, Inc.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Form
- ----------- ---------------------- 10-K
Page No.
--------
<S> <C> <C>
2.1 Agreement and Plan of Merger by and between Andover Bancorp,
Inc. and GBT Bancorp, dated January 26, 2000 (incorporated
herein by reference to Exhibit 2.1 to Andover's Current Report
on Form 8-K filed February 9, 2000). --
3.1 Restated Certificate of Incorporation of Andover (incorporated herein
by reference to Exhibit 3.1 to Post-Effective Amendment No. 1 to
Andover's Registration Statement on Form S-4, No. 33-11891 filed
on March 5, 1987). --
3.2 By-laws of Andover, as amended and restated, January 23, 1997
(incorporated herein by reference to Exhibit 3.2 to Andover's Form
10-K for the fiscal year ended December 31, 1996). --
4.1 Specimen of Andover Bancorp, Inc. common stock certificate
(incorporated herein by reference to Exhibit 4 to Andover's
Registration Statement on Form S-4, Registration No. 33-11891,
filed on February 11, 1987). --
4.2 Shareholder Rights Agreement between Andover Bancorp, Inc.
and BankBoston (incorporated herein by reference to an
Exhibit to Andover's Current Report on Form 8-K filed
January 22, 1999). --
10.1 Employment Agreement between Andover, Andover Bank
and Gerald T. Mulligan, dated May 16, 1991. 8
10.2 Special Termination Agreement between Andover, Andover Bank
and Gerald T. Mulligan, dated May 16, 1991, as amended and
restated through January 23, 1997 (incorporated herein by
reference to Exhibit 10.2 to Andover's Form 10-K for the
fiscal year ended December 31, 1996). --
10.3 Special Termination Agreement between Andover, Andover Bank
and Joseph F. Casey, dated December 17, 1992, as amended and
restated through January 23, 1997 (incorporated herein by
reference to Exhibit 10.3 to Andover's Form 10-K for the
fiscal year ended December 31, 1996). --
</TABLE>
-5-
<PAGE> 6
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Form
- ----------- ---------------------- 10-K
Page No.
--------
<S> <C> <C>
10.4 Special Termination Agreement between Andover, Andover Bank and
Michael J. Ecker, dated December 17, 1992, as amended and restated
through January 23, 1997 (incorporated herein by reference to Exhibit
10.4 to Andover's Form 10-K for the fiscal year ended December 31,
1996). --
10.5 Special Termination Agreement between Andover, Andover Bank and John
R. Heerwagen, dated December 17, 1992, as amended and restated
through January 23, 1997 (incorporated herein by reference to Exhibit
10.5 to Andover's Form 10-K for the fiscal year ended December 31,
1996). --
10.6 Special Termination Agreement between Andover, Andover Bank and
Octavio C. Bolivar, dated January 24, 1994 as amended and restated,
January 23, 1997 (incorporated herein by reference to Exhibit 10.6 to
Andover's Form 10-K for the fiscal year ended December 31, 1996). --
10.7 Andover Savings Bank Employees' Stock Ownership Plan and Trust
Agreement and Amendment No. 1 (incorporated herein by
reference to Exhibit 10(c) to Andover's Annual Report on Form
10-K for the fiscal year ended December 31, 1987). --
10.8 Andover Bancorp, Inc. Stock Option Plan dated May 8, 1986, as amended
May 22, 1986, January 29, 1987 and November 2, 1987. 18
10.9 Special Termination Agreement between Andover, Andover Bank and
Raymond P. Smith, dated December 12, 1995, as amended and restated,
January 23, 1997 (incorporated herein by reference to Exhibit 10.9 to
Andover's Form 10-K for the fiscal year ended December 31, 1996). --
10.10 Andover Bancorp, Inc. 1995 Stock Incentive Plan, dated February 16,
1995 (incorporated herein by reference to Exhibit 10.11 to Andover's
Annual Report on Form 10-K for the fiscal year ended December 31,
1995). --
10.11 Deferred Compensation Plan for Directors of Andover Bancorp, Inc. and
its Subsidiaries, effective July 1, 1993, as amended and restated,
February 22, 1996 (incorporated herein by reference to Exhibit 10.12
to Andover's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995). --
10.12 Andover Bancorp, Inc. Special Termination Plan, effective January 23,
1997 (incorporated herein by reference to Exhibit 10.12
to Andover's Form 10-K for the fiscal year ended December 31, 1996). --
</TABLE>
-6-
<PAGE> 7
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Form
- ----------- ---------------------- 10-K
Page No.
--------
<S> <C> <C>
10.13 Stock Option Agreement, dated January 26, 2000 by and between Andover
Bancorp, Inc. and GBT Bancorp (incorporated herein by reference to
Exhibit 10.1 to Andover's Current Report on Form 8-K filed
February 9, 2000). --
11 The computation of per share earnings can be readily determined from
the material contained in the Annual Report on Form 10-K for the
fiscal year ended December 31, 1999. --
12 As the Company does not have any debt securities registered
under Section 12 of the Securities Act of 1933, no ratio of
earnings to fixed charges appears in this Annual Report on Form 10-K. --
13 Andover Bancorp, Inc. 1999 Annual Report, which, except for those
portions expressly incorporated herein by reference, is furnished
only for the information of the Securities and Exchange Commission
and is not deemed to be filed. 26
21 The Company's sole subsidiary is Andover Bank, a Massachusetts
savings bank in stock form, which is included in the
Consolidated Financial Statements filed in the Annual Report
on Form 10-K for the fiscal year ended December 31, 1999. --
23.1 Consent of KPMG Peat Marwick LLP. 106
</TABLE>
-7-
<PAGE> 1
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
AGREEMENT dated as of May 16, 1991, by and among ANDOVER BANCORP, INC., a
Delaware corporation (the "Company") and its subsidiary, ANDOVER SAVINGS BANK, a
Massachusetts savings bank with its main office in Andover, Massachusetts (the
"Bank") (the Bank and the Company shall be hereinafter sometimes collectively
referred to as the "Employers") and GERALD T. MULLIGAN, currently of West
Roxbury, Massachusetts (the "Executive").
WITNESSETH
WHEREAS, the parties hereto desire to provide for the Executive's
employment by the Employers;
NOW THEREFORE, in consideration of the mutual covenants contained herein,
the Employers and the Executive agree as follows:
1. EMPLOYMENT. The Employers agree to employ the Executive and the
Executive agrees to continue in the employ of the Employers on the terms and
conditions hereinafter set forth.
2. CAPACITY. The Executive shall serve the Company and the Bank as
President and Chief Executive Officer, subject to his election by the respective
Boards of Directors of the Company and the Bank.
3. EFFECTIVE DATE AND TERM. The commencement date (the "Commencement
Date") of this Agreement shall be the date first above written. Subject to the
provisions of Section 7, the term of the Executive's employment hereunder shall
be for three years from the Commencement Date; provided, however, that the term
hereof shall automatically extend for periods of one year commencing on the
third anniversary of the Commencement Date and on each subsequent anniversary
date thereafter unless the Company or the Bank, as the case may be, gives
written notice to the Executive at least six months prior to such anniversary
date that such term is not being extended. The last day of such term, as may be
so extended from time to time, is herein sometimes referred to as the
"Expiration Date."
4. COMPENSATION AND BENEFITS. The compensation and benefits payable to
the Executive under this Agreement shall be as follows:
(a) SALARY. For all services rendered by the Executive under this
Agreement, the Employers shall pay the Executive a total salary at the rate
of $190,000 per year.
The Executive's salary shall be payable in periodic installments in accordance
with the Employers' usual practices for their senior executives.
<PAGE> 2
(b) REGULAR BENEFITS. The Executive shall also be entitled to
participate in any and all bonus incentive plans, stock option plans,
employee stock ownership plans, employee benefit plans, medical insurance
plans, life insurance plans, disability income plans, retirement plans, and
other benefit plans from time to time in effect for senior executives of
the Employers. Such participation shall be subject to (i) the terms of the
applicable plan documents and applicable federal and state laws, (ii)
generally applicable policies of the Employers, and (iii) the discretion of
the respective Boards of Directors or of the Company and the Bank or any
administrative or other committee provided for in or contemplated by such
plan.
(c) OTHER BENEFITS. The Employers shall also provide the Executive
with the use of an American-model automobile having a listed purchase price
not in excess of $25,000, and payment of the initial registration and
annual membership fees in the Lanam Club.
(d) BUSINESS EXPENSES. The Employers shall reimburse the Executive
for all reasonable travel and other business expenses incurred by him in
the performance of his duties and responsibilities, subject to such
reasonable requirements with respect to substantiation and documentation as
may be specified by the Employers.
(e) VACATION. The Executive shall be entitled to four weeks of
vacation per year, to be taken at such times and intervals as shall be
determined by the Executive with the approval of the Employers, which
approval shall not be unreasonably withheld.
(f) STOCK OPTIONS. In addition to the regular stock options
contemplated by Section 4(b) above, following execution of this agreement,
and subject to approval by the Board of Directors of the Company, the
Company shall grant to the Executive stock options evidencing the right to
purchase 20,000 shares of the Common Stock of the Company at a purchase
price per share equal to the fair market value of a share of the Company's
Common Stock as of the grant date, which options shall vest as follows:
10,000 on May 16, 1991, 5,000 on May 16, 1992, and 5,000 on May 16, 1993.
5. EXTENT OF SERVICE. During his employment hereunder, the Executive
shall, subject to the direction and supervision of the respective Boards of
Directors of the Company and the Bank, devote his full business time, best
efforts and business judgment, skill and knowledge to the advancement of the
Employers' interests and to the discharge of his duties and responsibilities
hereunder. He shall not engage in any other business activity, except as any be
approved by their respective Boards of Directors; PROVIDED, HOWEVER, that
nothing herein shall be construed as preventing the Executive from:
<PAGE> 3
(a) investing his assets in a manner not prohibited by Section 9(a)
hereof, and in such from or manner as shall not require any material
services on his part in the operations or affairs of the companies or other
entities in which such investments are made;
(b) serving on the board of directors of any company subject to the
prohibition set forth in Section 9(a) and provided that he shall not be
required to render any material services with respect to the operations or
affairs of any such company; or
(c) engaging in religious, charitable or other community or
non-profit activities which do not impair his ability to fulfill his duties
and responsibilities under this Agreement.
5. Relocation and Residence.
(a) The Executive agrees to relocate and established his principal
resident and domicile within the Towns of Andover, North Andover or
Boxford, Massachusetts on or before September 1, 1991. The Executive
further agrees to maintain his principal residence and domicile with in the
Towns of Andover, North Andover or Boxford, Massachusetts for the term of
this Agreement. The Executive hereby acknowledges that the Employers have
relied upon the Executive's covenant in this Section 6 in executing this
Agreement and have conditioned his continued employment with them on the
Executive's continued compliance with said covenant.
(b) The employers shall reimburse the Executive for all reasonable
moving expenses incurred by the Executive in transporting the personal
property of the Executive and his family to the Towns of Andover, North
Andover or Boxford, Massachusetts, subject to such reasonable and
documentation as may be specified by the Employers. In the event that such
moving expenses are deemed not deductible by the Executive for federal
income tax purposes, the Employers shall pay the Executive an additional
sum sufficient to cover the Executive" federal income taxes on any such
taxable moving expenses.
(c) Upon written request by the Executive given at any time during
the six months following the execution of this Agreement, the Employers
shall purchase the Executive's present residence located within West
Roxbury, Massachusetts (the "Residence") in accordance with the terms and
conditions set forth below. Following receipt by the Employers of written
notice from the Executive requesting their purchase of the residence, the
executive and the Employers shall each select a professional real estate
appraiser who shall render an opinion as to the fair market value of the
Residence. If the lower of the two appraised values is more than or equal
to 90% of the higher
<PAGE> 4
appraised value, the Employers shall purchase the Residence from the
Executive at a purchase price equal to one-half of the sum of the two
appraised values. If the lower of the two appraised values is less than 90%
of the higher appraised value, the Executive and the Employers (or the two
appraisers, if the Executive and the Employers cannot agree) shall select a
third professional appraiser who shall render an opinion as to the fair
market value of the Residence. Thereupon, the Employers shall purchase the
Residence from the Executive at a purchase price equal to one-third of the
sum of the three appraised values. The reasonable fees and disbursements of
the appraisers shall be borne by the Employers.
7. TERMINATION AND TERMINATION BENEFITS.
Notwithstanding the provisions of Section 3, the Executive's employment
hereunder shall terminate under the following circumstances:
(a) DEATH. In the event of the Executive's death during the
Executive's employment hereunder, the Executive's employment shall
terminate on the date of his death; provided, however, that the Executive's
beneficiary or estate, as the case may be, shall be entitled to any unpaid
amounts of compensation accrued to the date of death, plus the following
benefits:
(i) For a period of six months subsequent to the date of the
Executive's death, the Employers shall continue to pay an amount
equal to the Executive's salary to the Executive's beneficiary
designated in writing to the Employers prior to his death (or to
his estate, if he fails to make such designation) at the salary
rate in effect on the date of his death (unless an increased rate
shall previously have been authorized to take effect as of a
later date, in which case such increased rate shall apply), said
payments to be made on the same periodic dates as salary payments
would have been made to the Executive had he not died.
(ii) For a period of six months subsequent to the date of the
Executive's death, the Executive's beneficiary designated in
writing to the Employers prior to his death (or to his estate, if
he fails to make such designation) shall continue to receive all
benefits described in Section 4(b) above existing on the date of
death (except for any cash bonus plans which shall be pro-rated
through the date of death). For purposes of application of such
benefits, the Executive shall be treated as if he had remained in
the employ of the Employers, with an annual total salary at the
rate in effect on the date of death (unless an increased rate
shall previously have been authorized to take effect as of a
later date, in which case such increased rate shall
<PAGE> 5
apply), and service credits will continue to accrue during such
period as if the Executive has remained in the employ of the
Employers.
(iii) If, in spite of the provisions of Section 7(a)(ii) above,
benefits or service credits under any benefit plan shall not be
payable or accrued under any such plan to the Executive, or to
the Executive's beneficiary or estate, because the Executive is
no longer deemed to be an employee of the employers, the
Employers themselves shall pay or provide for payment of such
benefits (calculated as if all such service credits had been
accrued) to or for the benefit of the Executive, or to the
Executive's beneficiary or estate.
(b) TERMINATION BY THE EMPLOYERS FOR CAUSE. The Executive's
employment hereunder may be terminated without further liability on the
part of the Employers effective immediately by a resolution of the Board of
Directors of the Company or the Bank, as the case may be, for cause by
written notice to the Executive setting forth in reasonable detail the
nature of such cause. Only the following shall constitute "cause" for such
termination:
(i) Deliberate dishonesty of the Executive with respect to the
Employers or any subsidiary or affiliate thereof.
(ii) Conviction of the Executive of a crime involving moral
turpitude.
Gross and willful failure to perform a substantial portion of his duties and
responsibilities hereunder.
(a) TERMINATION BY THE EXECUTIVE. The Executive's employment
hereunder may be terminated effective immediately by the Executive by
written notice to the Board immediately by the Executive by written notice
to the Board of Directors of the Company or the Bank, as the case may be,
in the event of material breach by either of the Employers of this
Agreement. From and after the effective date of any termination by the
Executive of his employment hereunder, in the absence of such a breach by
the Company or the Bank, as the case may be, the Employers will have no
further liability to the Executive for salary or other compensation or
benefits, except as provided pursuant to compensation or benefits, except
as provided pursuant to any other agreement to which the Executive and the
Employers are parties or any compensation or benefit plan of the Employers
in which the Executive is a participant.
(b) TERMINATION BY THE EMPLOYERS WITHOUT CAUSE. The Executive's
employment with the Company or the Bank, as the case may be, may be
terminated without cause by a resolution of the
<PAGE> 6
Board of Directors of the Company or the Bank, respectively, on written
notice to the Executive.
(c) CERTAIN TERMINATION BENEFITS. In the event of termination
pursuant to the first sentence of Section 7(c) or pursuant to Section 7(d),
the Executive shall be entitled to the following benefits:
(i) For the period subsequent to the date of termination until
the Expiration Date, the Employers shall continue to pay the
Executive a total salary at the rate in effect on the date of
termination (unless an increased rate shall previously have been
authorized to take effect as of a later date, in which case such
increased rate shall apply).
(ii) For the period subsequent to the date of termination until
the Expiration Date, the Executive shall continue to receive all
benefits described in Section 4(b) above existing on the date of
termination (except for any cash bonus plans, which shall be
pro-rated through the date of termination). For purposes of
application of such benefits, the Executive shall be treated as
if he had remained in the employ of the employers, with an annual
total salary at the rate in effect on the date of termination
(unless an increased rate shall previously have been authorized
to take effect as of a later date, in which case such increased
rate shall apply) and service credits will continue to accrue
during such period as if the Executive had remained in the employ
of the Employers.
(iii) If, in spite of the provisions of Section 7(e)(ii) above,
benefits or service credits under any benefit plan shall not be
payable or accrued under any such plan to the Executive, or to
the Executive's dependents, beneficiaries or estate, because the
Executive is no longer deemed to be an employee of the Employers,
the Employers themselves shall pay or provide for payment of such
benefits (calculated as if all such service credits had been
accrued) to or for the benefit of the Executive or the
Executive's dependents, beneficiaries or estate.
(a) SET-OFF. The Employers shall be entitled to set off against
any cash compensation to be provided to the Executive under Section
7(e)(i) above, one-half of the amount of any cash compensation
received by the Executive from other employment during the period in
which the Executive receives cash compensation under Section 7(e)(i).
The Executive shall inform the Employers of any such amounts of cash
compensation and shall refund to the Employers any amounts which the
Employers have paid which exceed the amounts due from the employers
after application of the set-off provided for in this paragraph.
Notwithstanding the foregoing and any other provision of this
Agreement, the Executive shall be under no obligation to seek or
accept any employment after termination of employment with the
Employers for any reason.
<PAGE> 7
8. DISABILITY. If, due to physical or mental illness, the Executive shall
be disabled so as to be unable to perform substantially all of his duties and
responsibilities hereunder, the Board of Directors of the Company or the Bank,
as the case may be, may designate another executive to act in his place during
the period of such disability. Notwithstanding any such designation, the
Executive shall continue to receive his full salary and benefits under Section 4
of this Agreement until he becomes eligible for disability income under the
employers' disability income plan. While receiving disability income payments
under such plan, the Executive shall not receive any salary under Section 4(a),
but shall continue to participate in the Employers' benefit plans and to receive
other benefits as specified in Section 4 until the Expiration Date. In the
absence of a disability income plan at the time of such disability, the
Employers shall pay the Executive benefits equal to those the Executive would
have received if the Employers' current disability income plan were in effect at
such time. If any question shall arise as to whether during any period the
Executive was disabled so as to be unable to perform substantially all of his
duties and responsibilities and at the request of the Employers will, submit to
the Employers a certification in reasonable detail by a physician selected by
the Executive or his guardian to whom the employers have no reasonable objection
as to whether the Executive was so disabled and such certification shall for the
purposes of this Agreement be conclusive of the issue. If such question shall
arise and the Executive shall fail to submit such certification, the Employer's
determination of such issue shall be binding on the Executive.
9. NONCOMPETITION AND CONFIDENTIAL INFORMATION.
(a) NONCOMPETITION. During the term of the Executive's employment
hereunder, and either (i) a period of one year following the date of
termination of the Executive's employment with either the Company or the
Bank by the Executive or by either of the Employers for cause pursuant to
Section 7(b) hereof, or (ii) the period during which the Employers continue
to provide benefits to the Executive pursuant to Sections 7(e)(i) - (iii)
hereof in the event of termination pursuant to the first sentence of
Section 7(c) or pursuant to Section 7(d), the Executive shall not directly
or indirectly, whether as owner, partner, shareholder (other than as the
owner of less than 2% of the outstanding capital stock of a publicly-traded
corporation), consultant, agent, employee, co-venturer or otherwise, of or
through any Person (as defined in Section 11) having its main office in the
Employers' market area (defined as the Massachusetts municipalities of
Andover, North Andover, Lawrence, Methuen and Tewksbury) compete in said
market area with the banking or any other business conducted by either of
the Employers during the period of his employment hereunder, nor will he
attempt to hire any employee of either of the Employers, assist in such
hiring by any other Person, encourage any such
<PAGE> 8
employee to terminate his or her relationship with either of the Employers,
or solicit or encourage any customer of either of the Employers to
terminate its relationship with such Employer or to conduct with any other
Person any business or activity which such customer conducts or could
conduct with such Employer.
(b) CONFIDENTIAL INFORMATION. The Executive will not disclose to any
other Person (except as required by applicable law or in connection with
the performance of his duties and responsibilities hereunder), or use for
his own benefit or gain, any confidential information of either of the
Employers obtained by him incident to his employment with the Employers.
The term "confidential information" includes, without limitation, financial
information, business plans, prospects and opportunities (such as lending
relationships, financial product developments, or facilities) which have
been discussed or considered by the management of the Employers but does
not include any information which has become part of the public domain by
means other than the Executive's non-observance of his obligations
hereunder. Notwithstanding anything to the contrary herein, this provision
shall survive any termination of this Agreement.
(c) RELIEF; INTERPRETATION. The Executive agrees that the Employers
shall be entitled to injunctive relief for any breach by him of the
covenants contained in Sections 9(a) or 9(b). In the event that any
provision of this Section 9 shall be determined by any court of competent
jurisdiction to be unenforceable by reason of its being extended over too
great a period of time, too large a geographic area, or too great a range
of activities, it shall be interpreted to extend only over the maximum
period of time, geographic area, or range of activities as to which it may
be enforceable. For purposes of this Section 9, the term "Employers" shall
mean the Company, the Bank and any of their respective subsidiaries or
affiliates.
10. CONFLICTING AGREEMENTS. The Executive hereby represents and warrants
that the execution of this Agreement and the performance of hi obligations
hereunder will not breach or be in conflict with any other agreement to which he
is a party or is bound, and that he is not now subject to any covenants against
competition or similar convenants which would affect the performance of his
obligations hereunder.
11. DEFINITION OF "PERSON". For purposes of this Agreement, the term
"Person" shall mean an individual, a corporation, an association, a partnership,
an estate, a trust and any other entity or organization.
12. WITHHOLDING. All payments made by the Employers under this Agreement
shall be net of any tax or other amounts required to be withheld by the
Employers under applicable law.
<PAGE> 9
13. Arbitration of Disputes. Any controversy or claim arising out of or
relating to this Agreement or the breach thereof shall be settled by arbitration
in accordance with the laws of the Commonwealth of Massachusetts by three
arbitrators, one of whom shall be appointed by the Employers, one by the
Executive and the third by the first two arbitrators. If the first two
arbitrators cannot agree on the appointment of a third arbitrator, then the
third arbitrator shall be appointed by the American Arbitration Association in
the City of Boston. Such arbitration shall be conducted in the City of Boston in
accordance with the rules of the American Arbitration Association, except with
respect to the selection of arbitrators which shall be as provided in this
Section 13. Judgment upon the award rendered by the arbitrators may be entered
in any court having jurisdiction thereof. In the event that it shall be
necessary or desirable for the Executive to retain legal counsel and/or incur
other costs and expenses in connection with the enforcement of any or all of the
Executive's rights under this Agreement, the Employers shall pay (or the
Executive shall be entitled to recover from the Employers, as the case may be)
the Executive's reasonable attorneys' fees and other reasonable costa and
expenses in connection the enforcement of said rights (including the enforcement
of any arbitration award in court) regardless of the final outcome, unless and
to the extent the arbitrators shall determine that under the circumstances
recovery by the Executive of all or a part of any such fees and costs and
expenses would be unjust.
14. Assignment; Successors and Assigns, etc. Neither the Employers nor the
Executive may make any assignment of this Agreement or any interest herein, by
operation of law or otherwise, without the prior written consent of the other
party; provided, however, that the Employers may assign its rights under this
Agreement without the consent of the Executive in the event either of the
Employers shall hereafter effect a reorganization, consolidate with or merge
into any other Person, or transfer all or substantially all of its properties or
assets to any other Person. This Agreement shall inure to the benefit of and be
binding upon the Employers and the Executive, their respective successors,
executors, administrators, heirs and permitted assigns. In the event of the
Executive's death prior to the completion by the employers of all payments due
him under this Agreement, the Employers shall continue such payments to the
Executive's beneficiary designated in writing to the Employers prior to his
death (or to his estate, if he fails to make such designation).
15. Enforceability. If any portion or provision of this Agreement shall to
any extent be declared illegal or unenforceable by a court of competent
jurisdiction, then the remainder of this Agreement, or the application of such
portion or provision in circumstances other than those as to which it is so
declared illegal or unenforceable, shall not be affected thereby, and each
portion and provision of this Agreement shall be valid and enforceable to the
fullest extent permitted by law.
<PAGE> 10
16. ALLOCATION OF OBLIGATIONS BETWEEN EMPLOYERS. The obligations of the
Employers under this Agreement are intended to be the joint and several
obligations of the Bank and the Company and the Employers shall, as between
themselves, allocate these obligations in a manner agreed upon by them.
17. WAIVER. No waiver of any provision hereof shall be effective unless
made in writing and signed by the waiving party. The failure of any party to
require the performance of any term or obligation of this Agreement, or the
waiver by any party of any breach of this Agreement, shall not prevent any
subsequent enforcement of such term or obligation or be deemed a waiver of any
subsequent breach.
18. NOTICES. Any notices, requests, demands and other communications
provided for by this Agreement shall be sufficient if in writing and delivered
in person or sent by registered or certified mail, postage prepaid, to the
Executive at the last address the Executive has filed in writing with the
Employers or, in the case of the Bank, at its main offices, attention of the
Clerk or, in the case of the Company, at its main office, attention of the
Secretary.
19. AMENDMENT. This Agreement may be amended or modified only be a written
instrument signed by the Executive and by a duly authorized representative of
each of the Employers.
20. GOVERNING LAW. This is a Massachusetts contract and shall be construed
under and be governed in all respects by the laws of the Commonwealth of
Massachusetts.
IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument
by the Executive and by the Employers, by its duly authorized officer, as of the
date first above written.
/s/Gerald T. Mulligan
---------------------
GERALD T. MULLIGAN
ANDOVER SAVINGS BANK
/s/Robert M. Henderson
----------------------
Title: Chairman
ANDOVER BANCORP, INC.
/s/ Robert M. Henderson
-----------------------
Title: Chairman
<PAGE> 1
EXHIBIT 10.8
ANDOVER BANCORP, INC. STOCK OPTION PLAN
May 8, 1986
as amended May 22, 1986,
January 29, 1987 and
November 2, 1987
1. PURPOSE
This Stock Option Plan (the "Plan") is intended as a performance incentive
for officers and full-time employees of Andover Bancorp, Inc. (the
"Corporation") or its Subsidiaries (as hereinafter defined) to enable the
persons to whom options are granted (the "Optionees") to acquire or increase a
proprietary interest in the success of the Corporation. The Corporation intends
that this purpose will be effected by the granting of "incentive stock options"
("Incentive Options") as defined in Section 422A(b) of the Internal Revenue Code
of 1986, as amended (the "Code"), nonqualified stock options ("Nonqualified
Options") and stock appreciation rights under the Plan. The terms "Subsidiaries"
includes any corporations in which stock possessing fifty percent (50%) or more
of the total combined voting power of all classes of stock is owned directly or
indirectly by the Corporation.
2. OPTIONS TO BE GRANTED AND ADMINISTRATION
(a) Options granted under the Plan may be either Incentive Options or
Nonqualified Options.
(b) The Plan shall be administered by a committee (the "Option Committee")
of not less than three directors appointed by the Board of Directors of the
Corporation. None of the members of the Option Committee shall be an officer or
other full-time employee of the Corporation. No person shall serve as a member
of the Option Committee if such person is then eligible, or has been eligible at
any time during the prior twelve months, to receive stock options, or stock
appreciation rights under the Plan or any other option, stock purchase or
similar plan of the Corporation or its Subsidiaries. It is the intention of the
Corporation that the Plan shall be administered, in accordance with the
provisions of Section 4 hereof, in a manner consistent with the provisions of
Rule 16b-3(b) (entitled "Disinterested Administrators") as promulgated by the
Securities and Exchange Commission under the Securities Exchange Act of 1934, as
amended (the "1934 Act"). Action by the Option Committee shall require the
affirmative vote of a majority of all its members.
(c) Subject to the terms and conditions of the Plan, the Option Committee
shall have the power:
<PAGE> 2
(i) To determine from time to time the options to be granted to
eligible persons under the Plan and to prescribe the terms and
provisions (which need not be identical) of each option granted under
the Plan to such persons;
(ii) To construe and interpret the Plan and options granted thereunder
and to establish, amend, and revoke rules and regulations for
administration of the Plan. In this connection, the Option Committee
may correct any defect or supply any omission, or reconcile any
inconsistency in the Plan, or in any option agreement, in the manner
and to the extent it shall deem necessary or expedient to make the
Plan fully effective. All decisions and determinations by the Option
Committee in the exercise of this power shall be final and binding
upon the Corporation and Optionees; and
(iii) Generally, to exercise such powers and to perform such acts as
are deemed necessary or expedient to promote the best interests of the
Corporation with respect to the Plan.
3. STOCK
(a) The stock subject to the options granted under the Plan shall be
shares of the Corporation's authorized but unissued common stock, par value $.10
per share (the "Common Stock"). The total number of shares that may be issued
pursuant to options or stock appreciation rights granted under the Plan shall
not exceed an aggregate of 500,000 shares of Common Stock. Such number shall be
subject to adjustment as provided in Section 8 hereof.
(b) Whenever any outstanding option under the Plan expires, is cancelled
or is otherwise terminated (other than by exercise), the shares of Common Stock
allocable to the unexercised portion of such option may again be the subject of
options under the Plan, except for options surrendered as provided in Section 7
hereof.
4. ELIGIBILITY
(a) Incentive Options and/or Nonqualified Options may be granted only to
officers and other full-time employees of the Corporation or its Subsidiaries,
including members of the Board of Directors who are also officers or other
full-time employees of the Corporation or its Subsidiaries.
(b) No person shall be eligible to receive any option under the Plan, if
at the date of grant such person beneficially owns in excess of ten percent
(10%) of the outstanding Common Stock of the Corporation.
<PAGE> 3
(c) With respect to Incentive Options granted after December 31, 1986, the
aggregate fair market value (determined at the time each respective option is
granted) of the stock with respect to which Incentive Options are exercisable
for the first time by any individual during any calendar year (under all plans
of the Corporation and its parent and subsidiary corporations as defined in
Section 425 of the Code) shall not exceed $100,000. Any option granted in excess
of the foregoing limitation shall be clearly and specifically designated as not
being an Incentive Option.
5. TERMS OF THE OPTION AGREEMENTS
Each option agreement shall contain such provisions as the Option Committee
shall from time to time deem appropriate. Option agreements need not be
identical, but each option agreement by appropriate language shall include the
substance of all of the following provisions:
(a) EXPIRATION. Notwithstanding any other provision of the Plan or of any
option agreement, each option shall expire on the date specified in the option
agreement, which date shall not be later than the tenth anniversary of the date
on which the option was granted.
(b) MINIMUM SHARES EXERCISABLE. The minimum number of shares with respect
to which an option may be exercised at any one time shall be 100 shares, or such
lesser number as is subject to exercise under the option at the time.
(c) EXERCISE.
(i) Each option shall be exercisable in such installments (which need
not be equal) and at such times as designated by the Option Committee. To
the extent not exercised, installments shall accumulate and be exercisable,
in whole or in part, at any time after becoming exercisable, but not later
than the date the option expires.
(ii) In the event of a Change in Control of the Corporation (as
defined in (f) below), all options outstanding as of the date of such
Change in Control shall become vested and immediately exercisable.
(iii) The exercise of options granted hereunder shall be subject to
the receipt of any prior regulatory approvals that may be required.
(d) PURCHASE PRICE. The purchase price per share of Common Stock under
each option shall be not less than the fair market value of the Common Stock on
the date the option is granted. For the purposes of the Plan, the fair market
value of the Common Stock shall be determined in good faith by the Option
Committee.
<PAGE> 4
(e) RIGHTS OF OPTIONEES. No Optionee shall be deemed for any purpose to be
the owner of any shares of Common Stock subject to any option unless and until
(i) the option shall have been exercised pursuant to the terms thereof, (ii) the
Corporation shall have issued and delivered the Shares to the Optionee, and
(iii) the Optionee's name shall have been entered as a stockholder of record on
the books of the Corporation. Thereupon, the Optionee shall have full voting,
dividend and other ownership rights with respect to such shares of Common Stock.
(f) CHANGE IN CONTROL. For purposes of the Plan, a "Change in Control"
shall be deemed to have occurred in either of the following events: (i) if there
has occurred a change in control which the Corporation would be required to
report in response to Item 1 of Form 8-K promulgated under the 1934 Act, or, if
such regulation is no longer in effect, any regulations promulgated by the
Securities and Exchange Commission pursuant to the 1934 Act which are intended
to serve similar purposes or (ii) when any "person" (as such term is used in
Section 13(d) and 14(d)(2) of the 1934 Act) becomes a "beneficial owner" (as
such term is defined in Rule 13d-3 promulgated under the 1934 Act), directly or
indirectly, of securities of the Corporation representing twenty-five percent
(25%) or more of the total number of votes that may be generally cast for the
election of directors of the Corporation, and in the case of either (i) or (ii)
above, the Corporation's Board of Directors has not consented to such event by a
two-thirds vote of all of the members of the Board of Directors then in office
adopted prior to such event. In addition, a Change in Control shall be deemed to
have occurred if, as the result of, or in connection with, any tender or
exchange offer, merger or other business combination, sale of assets or
contested election, or any combination of the foregoing transactions, persons
who were directors of the Corporation before such transaction shall cease to
constitute a majority of the Board of Directors of the Corporation or of any
successor institution.
(g) TRANSFER. No options or stock appreciation rights shall be
transferable by the Optionee other than by will or the laws of descent and
distribution, and options or stock appreciation rights may be exercised during
the Optionee's lifetime only by the Optionee, or his or her guardian or legal
representative.
6. METHOD OF EXERCISE; PAYMENT OF PURCHASE PRICE
(a) Any option granted under the Plan may be exercised by the Optionee by
delivering to the Option Committee on any business day a written notice
specifying the number of shares of Common Stock the Optionee then desires to
purchase (the "Notice").
<PAGE> 5
(b) Payment for the shares of Common Stock purchased pursuant to the
exercise of an option shall be made either in (i) cash equal to the option price
for the number of shares specified in the Notice (the "Total Option Price"), or
(ii) if authorized by the applicable option agreement, shares of Common Stock of
the Corporation having a fair market value, as determined in good faith by the
Option Committee, equal to or less than the Total Option Price, plus cash in an
amount equal to the excess, if any of the Total Option Price over the fair
market value of such shares of Common Stock.
7. STOCK APPRECIATION RIGHTS
(a) The Option Committee may, but shall not be obligated to, include stock
appreciation rights in any option agreement, on such terms and conditions as it
deems appropriate in each case. Such stock appreciation rights shall permit the
Optionee, at his or her election, to surrender to the Corporation the right to
exercise such option (or portion thereof) in consideration for the payment by
the Corporation of any amount equal to the excess of the fair market value on
the date of such surrender of the shares of Common Stock subject to such option
(or portion thereof) surrendered over the exercise price of such shares. Such
payment may be made, at the discretion of the Option Committee upon the request
of the Optionee, in shares of Common Stock valued at the fair market value
thereof on the date of such surrender or in cash, or any combination thereof.
(b) Any election by an Optionee to exercise stock appreciation rights
included in any option agreement by settlement in cash shall be made only during
the period beginning on the third business day following the date of the release
for publication of quarterly or annual financial information and ending on the
twelfth business day following such date. This condition shall be deemed to be
satisfied when the specified financial data appears on or in a wire service,
financial news service or newspaper of general circulation or is otherwise first
made publicly available. No stock appreciation right may be exercised within six
months from the date of grant thereof, except that this limitation shall not
apply in the event that death or disability of the Optionee occurs prior to the
expiration of such six-month period.
(c) Any option surrendered as provided in this Section 7 shall be
cancelled by the Corporation and shall not be subject to further grant.
(d) The Option Committee shall be authorized hereunder to make payment to
the Optionee in shares of Common Stock only if Section 61 and 83 of the Code
apply to the Common Stock transferred to the Optionee.
<PAGE> 6
(e) Notwithstanding the foregoing, a stock appreciation right may not be
settled in either cash or shares of the Corporation's Common Stock, if such
settlement would result in the settlement of the stock appreciation right not
complying with Rule 16b-3(e) under the Exchange Act or any successor provision
thereto.
8. ADJUSTMENT UPON CHANGES IN CAPITALIZATION
(a) If the shares of the Corporation's Common Stock as a whole are
increased, decreased, changed into or exchanged for, a different number or kind
of shares or securities of the Corporation, whether through merger,
consolidation, reorganization, recapitalization, reclassification, stock
dividend, stock split, combination of shares, exchange of shares, change in
corporate structure or the like, an appropriate and proportionate adjustment
shall be made in the number and kind of shares subject to the Plan and in the
number, kind, and per share exercise price of shares or other securities subject
to unexercised options or portions thereof granted prior to any such change. In
the event of any such adjustment in an outstanding option, the Optionee
thereafter shall have the right to purchase the number of shares or securities
under such option at the per share price or per unit price, as so adjusted,
which the Optionee could purchase for the total purchase price applicable to the
option immediately prior to such adjustment.
(b) Adjustments under this Section 8 shall be determined by the Option
Committee and such determinations shall be conclusive. The Option Committee
shall have the discretion and power in any such event to determine and to make
effective provision for acceleration of the time or times at which any option or
portion thereof shall become exercisable. No fractional shares of Common Stock
shall be issued under the plan on account of any adjustment specified above.
9. EFFECT OF CERTAIN TRANSACTIONS
In the case of (i) the dissolution or liquidation of the Corporation, (ii)
a reorganization, merger or consolidation in which the Corporation is acquired
by another entity or in which the Corporation is not the surviving corporation,
or (iii) the sale of all or substantially all of the property of the Corporation
to another corporation, the Plan and the options issued hereunder shall
terminate on the effective date of such transaction, unless provision is made in
connection with such transaction for the assumption of options theretofore
granted under the Plan, or the substitution for such options of new options of
the successor corporation or parent thereof, with appropriate adjustment as to
the number and kind of shares and the per share exercise prices, as provided in
Section 8. In the event of such termination, all outstanding options shall be
exercisable in full for at least 15 days prior to the date of such termination
whether or not otherwise exercisable during such period.
<PAGE> 7
10. RELEASE OF FINANCIAL INFORMATION
A copy of the Corporation's annual report to stockholders shall be
delivered to each Optionee at the time such report is distributed to the
Corporation's stockholders. Upon request, the Corporation shall furnish to each
Optionee a copy of its most recent annual report and each quarterly report and
current report filed under the 1934 Act since the end of the Corporation's prior
fiscal year.
11. AMENDMENT OF THE PLAN
The Board of Directors may amend the Plan at any time, and from time to
time, subject to any required regulatory approval and to the limitation that,
except as provided in Sections 8 and 9 hereof, no amendment shall be effective
unless approved by the stockholders of the Corporation in accordance with
applicable law and regulations at an annual or special meeting held within
twelve months before or after the date of adoption of such amendment, where such
amendment will:
(a) increase the number of shares of Common Stock as to which options may
be granted under the Plan;
(b) change in substance Section 4 hereof relating to eligibility to
participate in the Plan;
(c) change the minimum option price;
(d) increase the maximum term of options provided herein; or
(e) otherwise materially increase the benefits accruing to participants
under the Plan.
Except as provided in Sections 8 and 9 hereof, rights and obligations under
any option granted before any amendment of the Plan shall not be altered or
impaired by such amendment, except with the consent of the Optionee.
12. NONEXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan by the Board of Directors nor the
submission of the Plan to stockholders for approval shall be construed as having
created any limitations on the power of the Board of Directors to adopt such
other incentive arrangements as it may deem desirable, including, without
limitation, the granting of stock options otherwise than under the Plan, and
such arrangements may be either applicable generally or only in specific cases.
<PAGE> 8
13. GOVERNMENT AND OTHER REGULATIONS; GOVERNING LAW
(a) The obligation of the Corporation to sell and deliver shares of Common
Stock with respect to options granted under the Plan shall be subject to all
applicable laws, rules and regulations, including all applicable federal and
state securities laws, and the obtaining of all such approvals by governmental
agencies as may be deemed necessary or appropriate by the Option Committee.
(b) The Plan shall be governed by Massachusetts law, except to the extent
that such law is preempted by federal law.
(c) The Plan is intended to comply with the provisions of Rule 16b-3
promulgated under the 1934 Act. Any provision inconsistent with such Rule shall
be inoperative and shall not affect the validity of the Plan.
14. TERMINATION OF GRANTING OF OPTIONS UNDER PLAN
No option may be granted under the Plan after May 8, 1996, which is the
tenth anniversary of the date the Plan became effective as the Andover Savings
Bank 1986 Stock Option Plan.
<PAGE> 1
Exhibit 13
ANDOVER BANCORP, INC. ANNUAL REPORT
1999
[COVER ILLUSTRATION FEATURES
MAP OF NORTHERN MASSACHUSETTS
AND SOUTHERN NEW HAMPSHIRE]
<PAGE> 2
ANDOVER BANCORP, INC. IS THE HOLDING COMPANY PARENT OF ANDOVER BANK. ANDOVER
BANK IS A MASSACHUSETTS CHARTERED BANK ORGANIZED IN 1834 AND HEADQUARTERED IN
ANDOVER, APPROXIMATELY 25 MILES NORTH OF DOWNTOWN BOSTON. ANDOVER BANK OPERATES
12 BANKING OFFICES IN ANDOVER, LAWRENCE, METHUEN, NORTH ANDOVER, AND TEWKSBURY,
MASSACHUSETTS AS WELL AS LONDONDERRY AND SALEM, NEW HAMPSHIRE. A 13TH BANKING
OFFICE IS SCHEDULED TO OPEN IN DERRY, NEW HAMPSHIRE IN THE SECOND QUARTER 2000.
Illustration [ANDOVER BANK LOGO]
[MAP OF NORTHERN MASSACHUSETTS
AND SOUTHERN NEW HAMPSHIRE]
<PAGE> 3
- --------------------------
Andover Bancorp, Inc. 1999
------------------------------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
At or for the years ended December 31,
-------------------------------------------------
Percentage
1998 1999 Change
- --------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA: (Dollars in thousands, except per share data)
<S> <C> <C> <C>
Total assets $1,410,247 $1,491,054 + 6%
Loans, net 1,040,279 1,121,717 + 8
Deposits 988,656 968,533 - 2
Stockholders' equity 121,142 130,263 + 8
Non-performing assets 3,492 2,497 - 28
- --------------------------------------------------------------------------------------------------------
OPERATING DATA:
Net interest and dividend income $ 42,231 $ 47,309 + 12%
Non-interest expense 22,577 21,977 - 3
Pre-tax income 25,545 29,172 + 14
Net income 17,386 18,885 + 9
- --------------------------------------------------------------------------------------------------------
PER SHARE DATA:
Basic earnings per share $ 2.68 $ 2.89 + 8%
Diluted earnings per share 2.60 2.82 + 8
Dividends declared 0.69 0.87 + 26
Book value(1) 18.39 20.40 + 11
- --------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL RATIOS:
Return on average assets 1.27% 1.31%
Return on average equity(1) 15.64 15.05
Net yield on average earning assets 3.18 3.37
Efficiency ratio 49.37 42.33
</TABLE>
(1) Excludes the effect of SFAS No. 115
i
<PAGE> 4
- -------------------
1999 LETTER
-------------------------------------------------------------
TO SHAREHOLDERS
Dear Shareholders,
As I prepare to write this letter every year, I gather material that I have set
aside during the year as reminders of events and accomplishments, which should
be reported to you. Just before writing, I go back and reread last year's
letter. I was struck by how similar, only even better, this year's report to you
would be.
Last year I reported the fifth consecutive year of record earnings. This year, I
am pleased to report a sixth consecutive year of record earnings. The extent of
our success this year is reflected in the following financial highlights for
1999:
- Record earnings of $18.9 million, an increase of 9%
- Return on average assets increased to 1.31%
- Return on average equity of 15.05%
- Dividends of $0.87 per share, a 26% increase
In 1999, loan growth was coupled with a 6% increase in net interest margin,
while the earning increase in 1998 was primarily the result of loan growth,
which offset a decline in net interest margin. As in 1998, almost every loan
category witnessed growth in 1999, with special success in the following
categories:
- Commercial real estate loans increased by 26%
- Commercial and industrial loans increased by 49%
- Construction loans increased by 13%
- Equipment leases increased by 192%
I cannot conclude any discussion of loan growth without referring to credit
quality. This year's level of problem and delinquent loans is even below last
year's minimal level.
The excellent results and similarities in both the amount and sources of growth
from year to year indicate the fundamental strength of the Bank's core
businesses. The excellent returns on assets and equity validate both the Bank's
strategies and their execution. They further indicate the Bank's ability to meet
profitably the financial needs of its customers and marketplace.
ii
<PAGE> 5
- --------------------------------------------------------------------------------
For the year ahead, we look to augment those fundamentally strong operating
principles with expanded geography and new non-traditional products.
One of our most exciting expansion developments is our pending acquisition of
Gloucester Bank and Trust ("Gloucester Bank"). Gloucester Bank offers both
geographic and product expansion opportunities. As a commercial bank, it will
strengthen our commercial lending capabilities. Additionally, Gloucester Bank
offers us a new market to offer our broader, more competitively priced
residential mortgage and consumer loan products.
As I have reported to you before, Andover Bank's expansion into southern New
Hampshire has been extraordinarily well received. Our deposit and loan growth
and our gain in market share have greatly exceeded our expectations. Seeking to
capitalize and expand on that success, we have begun construction on a new
banking office in Derry. Based on marketing data and our positive reception in
neighboring Londonderry, we are excited about the prospects for this new office.
In addition, other expansion efforts occurred in Tewksbury, where Andover Bank
already enjoys the largest market share. Our new Tewksbury office is a larger
facility that offers greater customer convenience and access.
With regard to new products, we are excited about the banks recently initiated
insurance program. We are now offering a complete line of consumer and
commercial insurance products through our newly formed subsidiary, AB Insurance
Services. We look to offer our insurance products with very attractive,
competitive rates and the superior service our customers have come to expect.
Insurance represents only our most recent new product offering. It is our goal
to continue to broaden our array of products and services to meet all the
financial needs of our customers.
In addition to the challenge of increasing the services we provide, we must
continually strive to improve both the quality and convenience of our delivery
of those products. In this "electronic age," the delivery convenience of more
banking office locations must be matched with improvements in electronic and
remote product and service delivery.
[BAR GRAPH]
1995 - $ 9,938
1996 - $12,479
1997 - $13,206
1998 - $17,386
1999 - $18,885
EARNINGS
For the years ended December 31,
In thousands
[BAR GRAPH]
1997 - $195,116
1998 - $248,905
1999 - $327,523
CORPORATE LOAN GROWTH
At December 31,
In thousands
Includes outstanding balances for construction and land, commercial real estate,
commercial loans and lease financing.
iii
<PAGE> 6
- -----------------
Letter to Shareholders (continued)
---------------------------------------------------------------
Once it might have seemed a leap to go from discussing on-line banking to
reporting on our record of community lending and service. In a world of
e-tailers and e-mailers, both traditional and electronic banking are running
together. Last year, I was proud to report that the Commonwealth of
Massachusetts awarded Andover Bank an "Outstanding" rating for its performance
under the Community Reinvestment Act. As a state chartered, federally insured
bank, Andover Bank is examined annually by either the Commonwealth or the FDIC
on alternating years. I am pleased to report that the FDIC also awarded Andover
Bank with an "Outstanding" rating this year. This recognition, by both our
state and federal regulators, validates our strong commitment, throughout the
Bank, to serve, equitable and well, our entire community.
After reporting all the positive news of 1999, I know that shareholders, like
all of us at the Bank, are disappointed by the stock's price performance. One
would hope and expect that financial markets would recognize and reward our
superior results. There has been a divergence between the valuation of
traditional companies and the new high-tech companies. Investors are enamored by
the stratospheric returns presently enjoyed by technology stocks. Our stock
price shares its lagging performance with many traditional industries, including
the entire financial services industry. All we can do is to continue to operate
as successfully as possible, to record superior results and to trust that the
investment community will again appreciate the value of reliable earnings
growth.
On behalf of the Board of Directors, I wish to thank our Shareholders for their
continued support and the Employees for their commitment in achieving the
excellent results recorded over the past year.
[BAR GRAPH]
1995 - $13.37
1996 - $14.89
1997 - $16.40
1998 - $18.39
1999 - $20.40
BOOK VALUE PER SHARE
At December 31,
Excludes the effect of SFAS No. 115
[BAR GRAPH]
1995 - $.30
1996 - $.40
1997 - $.54
1998 - $.69
1999 - $.87
CASH DIVIDENDS PER SHARE
For the years ended December 31,
Very truly yours,
/s/ Gerald T. Mulligan
Gerald T. Mulligan
President and Chief Executive Officer
iv
<PAGE> 7
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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, MA 01810
(Address of principal executive office) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (978)749-2000
------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.10 PAR VALUE
(Title of Class)
PREFERRED STOCK PURCHASED RIGHTS
(Title of Class)
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 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___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based on the closing sale price for the Registrant's Common
Stock on March 1, 2000, as reported by Nasdaq, was $167,683,066.75.
The number of shares outstanding of each of the Registrant's classes of
Common Stock, as of the latest practicable date, is:
Class: Common Stock, par value $0.10 per share
Outstanding as of March 1, 2000: 6,403,172 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Andover Bancorp, Inc. Definitive Notice of Annual Meeting
and Proxy Statement for the 2000 Annual Meeting of Shareholders are incorporated
by reference into Part III of Form 10-K.
<PAGE> 8
FORM 10-K
TABLE OF CONTENTS
PART 1
<TABLE>
<S> <C> <C>
Item 1 Business.............................................................................. 3
Item 2 Properties............................................................................. 10
Item 3 Legal Proceedings...................................................................... 11
Item 4 Submission of Matters to a Vote of Security Holders.................................... 11
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters................. 11
Item 6 Selected Consolidated Financial Data.................................................. 12
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................. 13
Item 7A Quantitative and Qualitative Disclosures About Market Risk............................ 30
Item 8 Financial Statements and Supplementary Data
Independent Auditors Report ..................................................... 37
Consolidated Financial Statements.................................................. 38-42
Notes to Consolidated Financial Statements......................................... 43-68
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................................... Non-applicable
</TABLE>
PART III
The information called for by Part III (Items 10 through 13) is incorporated by
reference from Andover's Definitive Notice of Annual Meeting and Proxy Statement
for the 2000 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission.
<TABLE>
<CAPTION>
PART IV
<S> <C> <C>
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K....................... 69
</TABLE>
2
<PAGE> 9
PRELIMINARY NOTE IN REGARD TO FORWARD-LOOKING STATEMENTS. This Annual
Report on Form 10-K 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 Annual Report on Form 10-K or presented
elsewhere by management from time to time. Defined terms used elsewhere in this
Annual 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 Bank's (as
defined below) continued ability to originate quality loans, fluctuation 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 (as defined below) 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.
PART I
ITEM 1. BUSINESS
GENERAL
Andover Bancorp, Inc. ("Andover" or the "Company") is a Delaware
corporation that was organized in 1987. Although Andover has corporate authority
to engage in any activity permitted by the Delaware General Corporation Law,
Andover's primary activity is to act as the holding company for Andover Bank
(the "Bank").
The Bank is a Massachusetts-chartered savings bank which was incorporated
in 1834 and is headquartered in Andover, Massachusetts. On May 8, 1986, Andover
Bank converted from mutual to stock form. Deposits at the Bank are insured by
the Federal Deposit Insurance Corporation ("FDIC") up to $100,000 per separately
insured account and by the Depositors Insurance Fund, Inc. ("DIF") for that
portion of deposits in excess of $100,000.
On June 30, 1999, Andover Bank NH, a wholly-owned subsidiary of Andover,
was merged with and into Andover Bank. As a result, the two banking offices of
Andover Bank NH are currently operating as branches of Andover Bank.
The Bank is engaged principally in the business of attracting deposits from
the general public and investing in residential and commercial real estate
loans, in construction, consumer, commercial loans and lease financing, and in
various securities. Emphasis is placed on both retail and corporate banking.
Retail activities, an important source of franchise value to the Bank, consist
of branch operations, home mortgage and consumer lending, and mortgage banking.
The Bank offers a variety of retail products through branch offices, automated
teller machines ("ATMs"), its telephone call center with its expanded hours,
online banking and product specialists. Other non-banking services available to
its customers include the recently initiated insurance program in addition to
the investment services provided by a third party. Corporate banking activities
consist primarily of commercial real estate, construction, land and commercial
lending and lease financing. These activities are conducted primarily by
experienced loan officers and business development specialists.
3
<PAGE> 10
The Company's strong financial performance in 1999 includes pre-tax gains
of $1.6 million from the termination of the Company's defined benefit pension
plan as well as an increase in the net interest margin while the Company's
financial performance in 1998 was positively impacted by a credit for loan
losses of $1.7 million and a tax benefit of $1.1 million.
On January 26, 2000, the Company entered into a definitive agreement to
acquire GBT Bancorp ("GBT") and its wholly-owned subsidiary, Gloucester Bank and
Trust Company. This agreement is subject to customary closing conditions and a
number of approvals from various regulatory agencies. At December 31, 1999, GBT
had $130.9 in assets, primarily commercial real estate loans and investment
securities, and deposits of $103.5 million. The acquisition will be accounted
for as a purchase and had a total value on the date of announcement of
approximately $16.2 million and estimated goodwill of approximately $9.2
million.
MARKET AREA
The Bank's market area is centered in Andover, Massachusetts, approximately
25 miles north of downtown Boston. The Bank operates banking offices in the
towns of Andover, Lawrence, Methuen, North Andover and Tewksbury, Massachusetts
and Salem and Londonderry, New Hampshire, which serve those towns as well as
surrounding communities in northeastern Massachusetts and in southern New
Hampshire. Andover Capital Group, Inc., a subsidiary of Andover Bank, offering
commercial equipment loans and lease financing, is located in Westford with the
entire Northeast as its primary market area.
LENDING ACTIVITIES
General. Lending is the principal business of the Bank and loans represent
the largest portion of the Bank's assets. At December 31, 1999, the Bank's loan
portfolio, prior to the allowance for loan losses, amounted to $1.1 billion or
76.0% of total assets. The Bank's loan portfolio increased 7.8% during 1999
resulting primarily from higher corporate loan originations. For additional
information on the composition of the loan portfolio and loan originations, see
Note 4 to the "Consolidated Financial Statements" and Item F, "Management's
Discussion and Analysis -- Results of Operations -- Financial Condition --
Loans".
The primary lending activity has been the origination of first mortgage
loans for the purchase or refinance of residential properties in Andover's
primary market area and adjacent communities. Such loans are generally viewed as
having less risk than other types of retail and non-retail loans and provide a
relatively stable source of interest income in the loan portfolio. They also
provide a significant source of fee income when they are sold in the secondary
mortgage market and serviced by the Bank. The Bank is an active servicer of
residential loans for investors in the secondary mortgage market.
The Bank originates a variety of other loans for consumer purposes. These
include home equity, second mortgage, and personal loans, among others, and
constitute an additional source of interest income in the loan portfolio. The
consumer lending activities of the Bank complement its home mortgage activities
and position it as a full service retail lender. The retail lending activities
of the Bank complement the retail deposit gathering activities and strengthen
the overall retail franchise value. At December 31, 1999, retail loans totaled
$805.6 million or 71.1% of total loans.
The Bank also originates non-retail or corporate loans, such as commercial
real estate, commercial, construction and land loans and lease financings.
Historically, these types of loans have generated higher yields and returns than
retail loans, but also involve additional risk. See "Risk Elements" below.
Corporate loans have also been viewed as a means of maintaining a diversified
loan and asset portfolio. At December 31, 1999, corporate loans amounted to
$327.5 million, or 28.9% of total loans.
Residential Mortgage Loans. Residential mortgage loans totaling $743.7
million represented 65.6% of the total loan portfolio at December 31, 1999. An
additional $1.5 million in residential mortgage loans was held for sale at that
date. During 1999, the Bank purchased from other banks and correspondent
relationships $28.2 million of locally originated residential real estate whole
loans.
4
<PAGE> 11
Nearly all of the loans in the residential mortgage portfolio are secured
by homes located in Massachusetts or in southern New Hampshire. According to
internal policy, the majority of these loans are written to be eligible for sale
in the secondary mortgage market, primarily to the Federal Home Loan Mortgage
Corporation ("FHLMC") and the Federal National Mortgage Association ("FNMA").
Residential mortgage loans include both fixed and variable rate mortgages with
original terms of 5 to 30 years. The Bank remains an active seller of originated
home mortgages in the secondary market.
Commercial Real Estate Loans. At December 31, 1999, commercial real estate
loans totaled $207.4 million, representing 18.3% of total loans. Approximately
$43.5 million, or 21.0% of these loans, are secured by apartment buildings and
multi-family residential properties. The balance of the commercial real estate
portfolio is secured by commercial facilities, including office, mixed use,
retail or light manufacturing properties, small shopping centers, and various
other types of commercial real estate. During 1999, the Bank purchased $10.1
million of commercial real estate first mortgages. Commercial real estate loans
generally amortize over a period of 15 to 25 years. Variable interest rates on
such loans are set at a margin above either the one-year Treasury index or the
prime rate as published in the Wall Street Journal and are subject to periodic
adjustment. Commercial real estate loans with fixed interest rates are generally
set at a margin above the equivalent Federal Home Loan Bank term advance rate.
Construction and Land Loans. Construction and land loans totaled $63.7
million at December 31, 1999, representing 5.6% of total loans. At that date,
amounts committed but not yet advanced in connection with such loans totaled an
additional $26.5 million. At December 31, 1999, outstanding construction loans
totaled $34.5 million and outstanding land loans (including loans for unimproved
land and land development) totaled $29.2 million. The majority of the
construction loans are for residential development of single-family homes.
However, the Bank is increasingly undertaking commercial construction projects
at this time. Construction and land loans generally have a term of two years,
although the Bank typically is entitled to review and adjust the interest rate
at the end of the first year. The interest rate is set at a margin above the
prime rate as published in the Wall Street Journal.
Consumer Loans. Consumer loans totaled $61.8 million at December 31, 1999,
representing 5.5% of total loans. Home equity lines constitute the greatest
portion of the Bank's consumer lending activity and totaled $41.7 million at
December 31, 1999. At that date, unadvanced amounts relating to home equity
lines totaled an additional $74.2 million. Home equity lines are offered both in
fixed rate and adjustable form with varying terms of three to ten years. The
adjustable rate loans are generally tied to the prime rate as published in the
Wall Street Journal. Home equity lines are subject to the same general
underwriting standards as residential first mortgage loans. Other consumer loans
are offered in fixed rate form with varying terms of three to eight years, while
second mortgages have terms of five to fifteen years.
Commercial and Lease Loans. At December 31, 1999, commercial and lease
loans totaled $27.4 million, or approximately 2.4% of total loans. Secured
equipment loans included in the commercial and lease loan portfolio amounted to
$7.3 million and $4.9 million at December 31, 1999 and 1998, respectively. The
interest rate on commercial loans generally varies at a margin above the prime
rate as published in the Wall Street Journal. Commercial loans may be secured in
whole or in part by real estate unrelated to the principal purpose of the loan
or secured by inventories and receivables and are ordinarily guaranteed by the
principals of the borrower. Commercial loans with fixed interest rates are set
at a margin above the Federal Home Loan Bank advance rate.
Lease Financing. Andover Capital Group, Inc. offers commercial equipment
loan and lease financing as an additional financing option for the Bank's
corporate customers. Total lease financing balances were $29.1 million and $10.0
million at December 31, 1999 and 1998, respectively.
Loan Origination. Mortgage loans originate from a number of sources. These
include realtor, builder and customer referrals, direct advertising and
participation in home shows and other events. The Bank employs a number of
mortgage loan originators who maintain regular contact with real estate firms
and other sources of business and who respond to general mortgage inquiries.
These mortgage specialists are assigned specific territories and receive
commissions on closed mortgage loans. Total residential mortgages originated by
the Bank in 1999
5
<PAGE> 12
amounted to $173.8 million. The decline in total residential originations from
1998 to 1999 was primarily due to lower mortgage refinancing activity
experienced throughout the year as a result of rising interest rates.
Consumer loans are solicited by advertising and by direct mail targeted to
existing deposit and mortgage customers and, from time to time, selected market
area households which have no customer relationship with the Bank. The primary
origination activity in the consumer loan area relates to home equity lines of
credit and second mortgages, totaling $22.5 million in 1999, or nearly 82.2% of
the total consumer originations.
Corporate originations, comprised of commercial real estate, commercial,
construction and land loans and lease financings, are originated from direct
solicitation of existing and prospective customers and from a variety of
referral sources. The Banks originated $174.3 million of these corporate loans
during 1999.
RISK ELEMENTS
General. For further information concerning the composition of the loan
portfolio, nonaccrual loans, impaired loans and the allowance for loan losses,
see Note 4 to the "Consolidated Financial Statements" and Item 7, "Management's
Discussion and Analysis -- Results of Operations -- Financial Condition -- Risk
Elements.".
Non-performing Assets. Non-performing assets consist of nonaccruing loans
and other real estate owned. During 1999, non-performing assets decreased 28.5%
or $995,000 from 1998 levels, to $2.5 million and amounted to 0.2% of total
assets at year-end. The Company places all loans, regardless of collateral
values, on nonaccrual status when principal or interest is past due 90 days or
more. Loans for which payments are less than 90 days past due are placed on
non-accrual status where there exists serious doubt as to collectibility. At
December 31, 1999, the Bank had $2.5 million in nonaccruing loans and $41,000 in
other real estate owned.
Provision (Credit) 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. The Company recorded provisions for loan losses of $400,000 in 1999
as compared to a credit for loan losses of $1.7 million in 1998. Among the
factors used to determine that the provision for loan losses was appropriate
were the increase in corporate loan balances and the deterioration of two loans
on nonaccrual during the fourth quarter of 1999.
INVESTMENT ACTIVITIES
The investment portfolio, an important component of Andover's asset
structure, is a source of earnings in the form of interest and dividends,
provides for diversification and is a source of liquidity. Overall, the
portfolio, comprised of mortgage-backed securities, corporate bonds, U.S.
Treasury and federal agency securities, short-term investments and equity
securities, represented 19.2% of total assets, or $286.7 million as of December
31, 1999.
In 1999, the total investment portfolio produced interest and dividend
income of $19.8 million, or 19.8% of the total interest and dividend income
earned by the Company. The investment portfolio and the sale of loans generated
losses of $368,000 in 1999, as compared to gains of $670,000 in 1998 on sales,
redemptions and the marking of certain securities to market. For additional
information on investments, see Notes 1, 2 and 3 to the "Consolidated Financial
Statements" and Item 7, "Management's Discussion and Analysis -- Results of
Operations -- Financial Condition -- Investments".
DEPOSITS AND BORROWED FUNDS
The Bank's major sources of funds are deposits, borrowings, principal
payments or payoffs on loans and mortgage-backed securities, and maturities of
investments. Borrowings are generally used to fund long-term assets and
short-term liquidity requirements or to manage interest rate risk. Total
deposits amounted to $968.5 million at December 31, 1999.
6
<PAGE> 13
The Bank is a member of the Federal Home Loan Bank of Boston ("FHLB") and
is authorized to borrow funds to meet withdrawals of savings deposits or to
expand the loan or investment portfolios. These borrowings are subject to
collateral requirements and borrowing limitations. The Bank also has available
various other sources of funds, including secured borrowings, federal funds
purchased or lines of credit from commercial banks and reverse repurchase
agreements from brokerage firms, FHLMC and FNMA. In addition, the Bank has
overnight repurchase agreements with various corporate customers. The Bank may
also obtain funds at the discount window of the Federal Reserve Bank of Boston.
At December 31, 1999, total borrowings outstanding from all of the Company's
various sources amounted to $379.4 million.
For additional information concerning the composition and maturity of
deposits and borrowings, see Notes 8, 9 and 10 to the "Consolidated Financial
Statements" and Item 7, "Management's Discussion and Analysis -- Results of
Operations -- Financial Condition -- Deposits -- Borrowings -- Asset and
Liability Management and Market Risk -- Liquidity".
OTHER SERVICES
Investment Services. The Bank makes investment and brokerage services
available to their customers through a contract with Liberty Securities
Corporation, an unaffiliated company. A fully licensed broker of Liberty
Securities located at the Bank's headquarters is available for consultation on
investment opportunities, including mutual funds, municipal bonds,
government-backed securities and annuities. The Bank received income of
approximately $68,000 from these services in 1999.
COMPETITION
The Bank's lending and deposit-taking activities are concentrated in the
Merrimack Valley and the surrounding communities in northeastern Massachusetts
and southern New Hampshire. The Bank faces strong competition both in
originating loans and in attracting deposits. Competition in originating loans
in the Bank's expansive lending area comes primarily from thrift institutions,
commercial banks, mortgage companies, credit unions and consumer finance
companies. The Bank competes for loans principally on the basis of interest
rates and loan fees, the types of loans offered, and the quality of service and
convenience provided to borrowers.
In attracting deposits, the Bank's primary competitors are thrift
institutions, commercial banks, credit unions and mutual funds. The attraction
and retention of deposits depends on the Bank's ability to provide investment
opportunities that satisfy the requirements of depositors with respect to the
rate of return, liquidity, risk, service and other factors. The Bank competes
for these deposits by offering competitive rates, convenient branch locations,
extended business hours, electronic delivery channels and automated teller
machines.
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act (the "Gramm-Leach-Bliley Act"). Under the
Gramm-Leach-Bliley Act, effective March 11, 2000, securities firms, insurance
companies and other financial services providers that elect to become financial
holding companies may acquire banks and other financial institutions. The
Gramm-Leach-Bliley Act may significantly change the competitive environment in
which the Company and its subsidiaries conduct business. See "Supervision and
Regulation -- Gramm-Leach-Bliley Act of 1999" below. The financial services
industry is also likely to become more competitive as further technological
advances enable more companies to provide financial services.
SUPERVISION AND REGULATION
General. The Company and the Bank are heavily regulated. As a bank holding
company, Andover is supervised by the Board of Governors of the Federal Reserve
Board System ("the Federal Reserve Board") and it is also subject to the
jurisdiction of the Massachusetts Board of Bank Incorporation. The activities of
bank holding companies, such as Andover, that do not become financial holding
companies under the recently enacted Gramm-Leach-Bliley Act (as discussed below)
are limited to the business of banking and activities closely related or
incidental to banking. Provided that it does not become a financial holding
company, Andover may not directly or indirectly acquire the ownership or control
of more than 5 percent of any class of voting shares or substantially all of the
7
<PAGE> 14
assets of any company that is not engaged in activities determined by the
Federal Reserve Board prior to November 12, 1999 by order or regulation to be
closely related to banking, and also generally must provide notice to or obtain
the approval of the Federal Reserve Board in connection with any such
acquisition. As a Massachusetts-chartered savings bank, the Bank is subject to
regulation, examination and supervision by the FDIC and the Massachusetts
Commissioner of Banks ("the Commissioner"). The Bank is also subject to certain
requirements established by the Federal Reserve Board.
Federal Deposit Insurance Corporation. The FDIC insures the Bank's deposit
accounts up to the $100,000 maximum per separately insured account and is
subject to reporting requirements of the FDIC. The FDIC has adopted requirements
setting minimum standards for capital adequacy and imposing minimum leverage
capital ratios. The Bank exceeded all applicable requirements at December 31,
1999. Furthermore, under the capital standards established pursuant to the FDIC
Improvement Act of 1991, the Bank is currently well-capitalized. International
bank supervisory organizations, principally the Basel Committee on Banking
Supervision, currently are considering changes to the risk-based capital
adequacy framework, which ultimately could affect the FDIC's guidelines
regarding capital adequacy. For additional information on regulatory capital
ratios, see Note 12 to the "Consolidated Financial Statements" and Item 7,
"Management's Discussion and Analysis -- Financial Condition -- Capital
Resources".
Massachusetts Commissioner of Banks and Board of Bank Incorporation.
Massachusetts statutes and regulations govern, among other things, investment
powers, lending powers, deposit activities, maintenance of surplus and reserve
accounts, the distribution of earnings, the payment of dividends, issuance of
capital stock, branching, acquisitions and mergers and consolidations. Any
Massachusetts bank that does not operate in accordance with the regulations,
policies and directives of the Commissioner may be subject to sanctions for
noncompliance. The Commissioner may, under certain circumstances, suspend or
remove officers or directors who have violated the law, conducted the Bank's
business in a manner which is unsafe, unsound or contrary to the depositors'
interest, or been negligent in the performance of their duties. In response to a
Massachusetts law enacted in 1996, in 1997 and 2000, the Commissioner finalized
rules that generally give Massachusetts banks, and their subsidiaries, many
powers equivalent to those of national banks. The Commissioner also has adopted
regulations and procedures expediting the approval process for well-capitalized
banks to establish branches or to engage in certain activities.
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Under
the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Riegle-Neal"), certain interstate transactions and activities are permitted.
Interstate transactions and activities permitted for under the law include: (i)
bank holding company acquisitions of separately held banks in a state other than
a bank holding company's home state; (ii) mergers between banks with different
home states, including consolidations of affiliated banks; (iii) establishment
of interstate branches either de novo or by branch acquisition; and (iv)
affiliate banks acting as agents for one another for certain banking functions
without being considered a "branch". In general, subject to limitations,
nationwide interstate acquisitions are now permissible, irrespective of state
law limitations other than limitations related to deposit concentrations and
bank age requirements. Interstate mergers generally also are permissible, and
affiliated banks may act as agents for one another. Each of the transactions and
activities must be approved by the appropriate federal bank regulator, with
separate and specific criteria established for each category.
In 1996, Massachusetts enacted interstate banking laws in response to the
Riegle-Neal Act. The laws permit, subject to certain deposit and other
limitations, interstate acquisitions, mergers and branching on a reciprocal
basis. The Riegle-Neal Act has made it easier for out-of-state institutions to
attempt to purchase or otherwise acquire a Massachusetts bank, or to compete
with the Bank in Massachusetts, and similarly has made it easier for the Bank to
compete outside the state.
Gramm-Leach-Bliley Act of 1999. The general effect of the new law is to
establish a comprehensive framework to permit affiliations among commercial
banks, insurance companies, securities firms, and other financial service
providers by revising and expanding the Bank Holding Company Act framework to
permit a holding company system, such as Andover, to engage in a full range of
financial activities through a new entity known as a "financial holding
company." "Financial activities" is broadly defined to include not only banking,
insurance, and securities activities, but also merchant banking and additional
activities that the Federal Reserve Board, in consultation with
8
<PAGE> 15
the Secretary of the Treasury, determines to be financial in nature, incidental
to such financial activities or complementary activities that do not pose a
substantial risk to the safety and soundness of depository institutions or the
financial system generally. Generally, the Gramm-Leach-Bliley Act does the
following: (i) repeals historical restrictions on, and eliminates many federal
and state law barriers to, affiliations among banks, securities firms, insurance
companies, and other financial service providers; (ii) provides a uniform
framework for the functional regulation of the activities of banks, savings
institutions, and their holding companies; (iii) broadens the activities that
may be conducted by national banks (and derivatively, state banks), banking
subsidiaries of bank holding companies, and their financial subsidiaries; (iv)
provides an enhanced framework for protecting the privacy of consumer
information; (v) adopts a number of provisions related to the capitalization,
membership, corporate governance, and other measures designed to modernize the
Federal Home Loan Bank system; (vi) modifies the laws governing the
implementation of the Community Reinvestment Act of 1977; and (vii) addresses a
variety of other legal and regulatory issues affecting both day-to-day
operations and long-term activities of financial institutions. In order to
engage in the new activities, a bank holding company, such as Andover, must meet
certain tests and elect to become a financial holding company. Specifically, all
of a bank holding company's banking subsidiaries must be well-capitalized and
well-managed, as measured by regulatory guidelines, and all of the bank holding
company's banks must have been rated "satisfactory" or better in their most
recent CRA evaluation. Furthermore, a bank holding company that elects to be
treated as a financial holding company may face significant consequences if its
banks fail to maintain the required capital and management ratings, including
entering into an agreement with the Federal Reserve Board that imposes
limitations on its operations and may even require divestitures. Such possible
ramifications may limit the ability of a bank subsidiary to significantly expand
or acquire less than well-capitalized and well-managed institutions. At this
time, Andover has not determined whether it will become a financial holding
company.
Further, the Gramm-Leach-Bliley Act includes a new section of the Federal
Deposit Insurance Act governing subsidiaries of state banks that engage in
"activities as principal that would only be permissible" for a national bank to
conduct in a financial subsidiary. The provision will permit state banks, to the
extent permitted under state law, to engage in certain new activities which are
permissible for subsidiaries of a financial holding company. Further, it
expressly preserves the ability of a state bank to retain all existing
subsidiaries. Massachusetts permits Massachusetts-chartered banks to engage in
activities which are permissible for national banks and that are approved by the
Commissioner. Thus, the Bank would only be permitted to engage in the activities
authorized by the Gramm-Leach-Bliley Act that are also approved by the
Commissioner or otherwise authorized by Massachusetts law. In order to form a
financial subsidiary, a state bank must be well-capitalized, and the state bank
would be subject to certain capital deduction, risk management and affiliate
transaction rules which are applicable to national banks.
EMPLOYEES
At December 31, 1999, Andover had 281 full-time equivalent employees. None
of the employees of Andover are represented by a collective bargaining group and
management considers relations with its employees to be good.
SUBSIDIARIES
Andover has one direct subsidiary, the Bank. The Bank has two wholly-owned
subsidiaries and one majority-owned subsidiary. One of the Bank's subsidiaries,
AB Insurance Services LLC, was created in 1999 to act as an insurance agent or
broker enabling it to sell all lines of consumer and commercial insurance. The
Bank's other direct subsidiary, ASB Development Corp. ("ASB"), has five
subsidiaries and holds title to a portion of Andover's main office, the loan
operations building and to other income producing property. One subsidiary of
ASB holds real estate property that comprises a portion of Andover's main office
location. Three other subsidiaries of ASB were organized as Massachusetts
security corporations to take advantage of beneficial state tax treatment
related to the holding of certain investments. The fifth subsidiary of ASB,
Andover Preferred Capital Corporation ("APCC"), is 99 percent owned by ASB and
is a Massachusetts business corporation which has elected to be taxed as a real
estate investment trust for federal and Massachusetts tax purposes. APCC holds
mortgage loans which were previously originated by Andover Bank. The
majority-owned subsidiary of the Bank, Andover Capital Group, Inc., provides
secured equipment lending and lease financing.
9
<PAGE> 16
ITEM 2. PROPERTIES
Andover conducts its business from its main office and multiple locations
listed below, all of which are considered to be in good condition and suitable
for the purposes for which they are used. Andover also serves customers through
its affiliation with several Automatic Teller Machine ("ATM") networks: NYCE(R),
EXCHANGE(R), CIRRUS(R) and the SUM(R) program with over 260,000 ATM locations
worldwide. As a member of the SUM program, AndoveR Bank customers receive
surcharge free access at over 1,300 locations throughout New England, primarily
Massachusetts. In addition, the Company has an affiliation with Maestro(R) for
its debit card customers. The following table sets forth certain information
relating to bank premises owned or used by Andover and its subsidiaries in
conducting its business.
<TABLE>
<CAPTION>
OWNED OR
LOCATION LEASED
- -------- --------
<S> <C>
Andover Bank
- ------------
Main Office:
Andover, Massachusetts
61 Main Street....................................................................Owned
31-45 Main Street-Annex...........................................................Owned
11 Chestnut Street................................................................Owned
18-20 Central Street (1)..........................................................Leased
Branches:
Lawrence, Massachusetts
450 Essex Street..................................................................Owned
305 South Broadway................................................................Owned
Methuen, Massachusetts
547 Broadway......................................................................Owned
91 Pleasant Valley Street (2).....................................................Owned
228 Haverhill Street..............................................................Owned
145-147 Pelham Street (ATM only) (3)..............................................Leased
North Andover, Massachusetts
108 Main Street...................................................................Owned
1077 Osgood Street (ATM only) (4).................................................Leased
Tewksbury, Massachusetts
995 Main Street...................................................................Owned
2345 Main Street..................................................................Owned
Andover, Massachusetts
159 River Road....................................................................Owned
Salem, New Hampshire
130 Main Street (5)...............................................................Leased
Londonderry, New Hampshire
62 Nashua Road....................................................................Owned
Derry, New Hampshire (under construction)
35 Manchester Road (6)............................................................Owned
Andover Capital Group, Inc.
- ---------------------------
238 Littleton Road, Westford (7)........................................................Leased
</TABLE>
(1) Lease expires January 31, 2004, with a renewal option for an additional
four years.
(2) Land is held under a ground lease which expires December 1, 2006, with
renewal options for an additional 69 years.
(3) Lease expires May 31, 2006, with renewal options for an additional ten
years.
(4) Lease expires May 31, 2001, with renewal options for an additional ten
years.
(5) Lease expires July 31, 2001 with a renewal option for an additional two
years.
(6) Land is held under a ground lease which expires December 31, 2010, with
renewal options for an additional 35 years.
(7) Lease expires February 14, 2002, with a renewal option for an additional
two years.
10
<PAGE> 17
ITEM 3. LEGAL PROCEEDINGS
Andover and the Bank are involved in various legal proceedings incidental
to their business, none of which is believed by management to be material to the
financial condition of Andover or the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
STOCK PRICES AND DIVIDENDS
Andover's Common Stock trades on The Nasdaq Stock Market(R) under the
symbol "ANDB". On March 6, 2000, there were approximately 2,299 holders of
record of the 6,393,172 shares of Andover Common Stock outstanding.
The following table sets forth the comparative market prices per share of
Andover Common Stock based on high and low sale prices as reported on by
Nasdaq(R) and the dividends per share that have been declared by Andover, for
the periods indicated.
<TABLE>
<CAPTION>
PRICE DIVIDENDS
----- DECLARED
QUARTER ENDED HIGH LOW PER SHARE
------------- ---- --- ---------
<S> <C> <C> <C> <C>
1997 March 31, 1997.........................$24.20 $19.80 $.120
----
June 30, 1997......................... 25.40 20.60 .136
September 30, 1997.................... 29.40 23.60 .136
December 31, 1997..................... 33.80 26.20 .152
1998 March 31, 1998.........................$33.00 $27.40 $.152
----
June 30, 1998......................... 38.75 31.50 .180
September 30, 1998.................... 40.75 25.50 .180
December 31, 1998..................... 35.00 24.75 .180
1999 March 31, 1999.........................$34.75 $27.00 $.210
----
June 30, 1999......................... 32.63 25.50 .210
September 30, 1999.................... 34.75 28.88 .210
December 31, 1999..................... 31.50 27.38 .240
</TABLE>
The payment of dividends by Andover is subject to the discretion of
Andover's Board of Directors. Holding companies such as Andover engage in no
business other than acting as the holding company of their subsidiaries. The
only funds available to Andover for the payment of dividends are cash and cash
equivalents held at the holding company level, dividends paid by the Bank to
Andover, and borrowings. At December 31, 1999, Andover held $10.0 million in
cash and interest-bearing deposits at the holding company level.
Dividend payments to stockholders totaled $5.7 million in 1999 and $4.5
million in 1998. On January 20, 2000, a dividend of $0.24 per share was
declared, payable on February 15, 2000.
11
<PAGE> 18
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table summarizes selected consolidated financial data of
Andover at or for the periods indicated, and should be read in conjunction with
the consolidated financial statements and related notes thereto included in Item
8 of this Report.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets.............................. $1,491,054 $1,410,247 $1,322,745 $1,204,813 $1,110,847
Total loans............................... 1,133,101 1,050,765 978,823 870,035 768,598
Allowance for loan losses................. 11,384 10,486 12,521 12,229 11,665
Investments (1)........................... 286,722 283,048 282,813 276,727 285,308
Assets held for sale...................... 1,494 11,282 5,537 2,220 5,162
Deposits.................................. 968,533 988,656 946,982 824,311 743,205
Borrowed funds............................ 379,384 283,824 258,732 274,418 272,626
Stockholders' equity...................... 130,263 121,142 107,079 95,846 85,165
Non-performing assets..................... 2,497 3,492 8,255 12,382 15,785
Number of banking offices and locations... 13 13 13 12 11
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Interest and dividend income ................ $ 100,010 $ 97,246 $ 90,752 $ 83,823 $ 76,886
Interest expense ............................ 52,701 55,015 52,047 48,529 44,552
----------- ---------- ---------- ---------- ----------
Net interest and dividend income .......... 47,309 42,231 38,705 35,294 32,334
Provision (credit) for loan losses .......... 400 (1,705) 983 2,555 1,295
Net gains (losses) from sales of
assets held for sale and investments(1) ... (368) 670 422 (265) 324
Gains (losses) on real estate operations, net (5) 14 (971) (1,542) (2,003)
Other income ................................ 4,613 3,502 5,307 4,804 4,870
Merger expense (recovery) ................... -- -- -- (225) 1,000
Non-interest expense ........................ 21,977 22,577 21,986 20,045 18,258
----------- ---------- ---------- ---------- ----------
Income before income tax expense
and extraordinary item .................... 29,172 25,545 20,494 15,916 14,972
Income tax expense .......................... 10,287 8,159 7,288 3,264 5,634
----------- ---------- ---------- ---------- ----------
Income before extraordinary item ............ 18,885 17,386 13,206 12,652 9,338
Extraordinary item .......................... -- -- -- (173) --
----------- ---------- ---------- ---------- ----------
Net income .................................. $ 18,885 $ 17,386 $ 13,206 $ 12,479 $ 9,338
=========== ========== ========== ========== ==========
PER SHARE DATA:
Basic earnings per share:
Income per share before extraordinary item $ 2.89 $ 2.68 $ 2.05 $ 1.98 $ 1.48
Extraordinary item per share, net of tax .. -- -- -- (0.03) --
----------- ---------- ---------- ---------- ----------
Net income per share ...................... $ 2.89 $ 2.68 $ 2.05 $ 1.95 $ 1.48
=========== ========== ========== ========== ==========
Diluted earnings per share:
Income per share before extraordinary item $ 2.82 $ 2.60 $ 1.99 $ 1.95 $ 1.46
Extraordinary item per share, net of tax .. -- -- -- (0.03) --
----------- ---------- ---------- ---------- ----------
Net income per share ...................... $ 2.82 $ 2.60 $ 1.99 $ 1.92 $ 1.46
=========== ========== ========== ========== ==========
Dividends declared .......................... $ 0.87 $ 0.69 $ 0.54 $ 0.40 $ 0.30
Book value at end of period ................. 19.94 18.58 16.58 14.94 13.40
Book value(2) ............................... 20.40 18.39 16.40 14.89 13.37
SELECTED FINANCIAL RATIOS:
Return on average assets .................... 1.31% 1.27% 1.06% 1.08% 0.87%
Return on average equity(2) ................. 15.05 15.64 13.24 13.89 11.51
Average equity as a percentage
of average assets(2) ...................... 8.68 8.13 8.00 7.76 7.59
Dividend payout ratio ....................... 30.85 26.54 27.14 20.83 20.55
Weighted average interest rate spread ....... 2.79 2.57 2.67 2.66 2.71
Net yield on average earning assets ......... 3.37 3.18 3.22 3.16 3.14
Efficiency ratio ............................ 42.33 49.37 49.95 49.43 51.76
</TABLE>
- ----------------------------
(1) Includes investment securities, mortgage-backed securities and short-term
investments, both available for sale and held to maturity.
(2) Excludes the effect of SFAS No. 115.
12
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
General. The Company's results of operations depend to a great extent on
the Bank's net interest income, which is the difference between income earned on
the loan and investment portfolios and the interest paid by the Bank on deposits
and borrowed funds, the size of the provisions or credits for loan losses and
operating expenses. Net interest income is primarily affected by the level of
earning assets as a percentage of total assets, the level of interest-bearing
liabilities, yields earned on assets and rates paid on liabilities. Earnings are
also affected by non-interest income which consists primarily of mortgage
banking income, transaction account fees, gains and losses on sales of the
investment portfolio and real estate operations. The levels of operating
expenses and income taxes also affect earnings.
On June 30, 1999, the Company merged Andover Bank NH with and into Andover
Bank with the two banking offices of Andover Bank NH remaining in full operation
as branches of Andover Bank.
The following is a discussion and analysis of the Company's consolidated
results of operations for the last three years and its financial condition at
the end of fiscal 1999 and 1998. This section is intended to be read in
conjunction with the Consolidated Financial Statements and accompanying
footnotes.
The following also contains forward-looking statements. There are a number
of important risks, uncertainties and other factors that could cause the
Company's actual results, performance or achievements to differ materially from
those expressed or implied by such forward-looking statements. These risks,
uncertainties and other factors include, without limitation, those set forth
under the caption "Certain Factors That May Affect Future Results".
RESULTS OF OPERATIONS
Andover generated net income of $18.9 million or $2.82 per diluted share,
$17.4 million or $2.60 per diluted share and $13.2 million or $1.99 per diluted
share in 1999, 1998 and 1997, respectively. Andover's return on average assets
increased in 1999 to 1.31%, as compared to 1.27% in 1998 and 1.06% in 1997.
Return on average stockholders' equity decreased in 1999 to 15.05%, as compared
to 15.64% in 1998 and 13.24% in 1997. The Company's financial performance in
1999 includes a pre-tax gain of $1.6 million from the termination of the
Company's defined benefit pension plan, increased mortgage banking income and an
increase in net interest income. The Company's financial performance in 1998 was
positively impacted by a credit for loan losses of $1.7 million and an increase
in net interest income. The financial performance in 1997 was impacted by an
increase in total earning assets as well as the net yield on those assets.
Net Interest and Dividend Income. Net interest and dividend income was
$47.3 million in 1999, $42.2 million in 1998 and $38.7 million in 1997. Net
interest income increased $5.1 million in 1999, $3.5 million during 1998 and
$3.4 million during 1997, primarily due to higher average earning asset volumes
in each of the years. Market interest rates have been fairly volatile over the
past several years. During 1999, market interest began to rise in the spring and
continued to rise throughout the year. The Company was able to hold the rates
paid on deposits during 1999 in spite of the market rate increase, the effect of
which allowed the interest rate spread to widen to 2.79% and the net yield to
increase to 3.37% in 1999. During 1998, the difference between longer-term
interest rates and shorter-term interest rates lessened, thereby creating a flat
yield curve. This compression in the margins was reflected in the declines in
both the interest rate spread of 2.57% and the net yield of 3.18% for 1998. In
1997, the interest rate spread of 2.67% and the net yield of 3.22% were
favorably impacted by market interest rates. The amount of foregone interest
income from nonaccruing and restructured loans totaled $256,000 in 1999,
$514,000 in 1998 and $716,000 in 1997.
Average earning assets increased 5.9% in 1999 to $1,404.3 million as of
December 31, 1999, and increased 10.5% during 1998 to $1,326.5 million. The
increase in each of the two years was primarily due to higher loan growth
resulting from increased loan originations and purchases.
13
<PAGE> 20
The volatility in the interest rates has also impacted the yields earned on
the investment portfolio. The yield on short-term investments decreased 29 basis
points during 1999 to 5.02%, while also decreasing 14 basis points during 1998
to 5.31%. The yields earned on investment securities decreased 32 basis points
in 1999 to 6.36% as compared to 6.68% in 1998 and 1997. The yield on
mortgage-backed securities decreased 9 and 22 basis points during 1999 and 1998,
respectively, to 6.52% and 6.61%, respectively. In the latter part of 1999,
there were three increases in the federal funds rate totaling 75 basis points.
During 1998, there were three decreases in the federal funds rate totaling 75
basis points while there was an increase of 25 basis points in 1997. The swings
in the federal funds rate have impacted the short-term investment yield in a
corresponding manner. The decline in the yield on mortgage-backed securities
reflects the decline in long-term interest rates since the cash flows generated
by the high prepayment activity were unable to be reinvested at a comparable
interest rate.
Total average loans increased $71.5 million during 1999 and $118.7 million
during 1998 primarily due to retained loan originations and whole loan
purchases. The yield on real estate loans decreased 19 basis points in 1999 to
7.26% while decreasing 31 basis points during 1998 to 7.45%. The largest
component of the yield on real estate loans was residential loans. Due to the
compression in the yield curve in 1998, the biggest impact has been felt in the
residential portfolio as evidenced by the 27 and 35 basis point decline,
respectively, in the average yield during 1999 and 1998. The yields on the
commercial real estate and construction and land portfolios have declined
slightly over the past two years. The yield on consumer loans decreased 55 basis
points in 1999 to 7.94% and increased 29 basis points in 1998 to 8.49%. The
impact of the declines in the prime rate in the fourth quarter of 1998 was felt
in 1999. The yield on commercial loans decreased 101 basis points in 1999 to
8.05% and decreased 38 basis points during 1998 to 9.06%. The decline in the
yield on commercial loans reflects a decline in the prime rate as well as
competitive pricing pressures. In addition, the yield on the lease financings,
included in the commercial portfolio, was lower than the portfolio, thereby
dragging down the overall yield.
The rate paid on interest-bearing deposits decreased 56 basis points in
1999 to 3.92%, and decreased 14 basis points during 1998 to 4.48%. Core
deposits, which include NOW, savings and money market accounts, typically have
rates lower than those paid on certificates of deposit. However, to grow the
core deposit balances, the Bank has offered promotional rates on certain
products. While the Bank reduced the rates in 1998 in connection with a decline
in market interest rates, the impact of the rate reduction was felt in 1999. The
impact of the promotional rates on the savings rate has been an increase of 21
basis points in 1998 and 98 basis points in 1997. Average balances on these
savings accounts, meanwhile, have grown by $34.0 million and $54.6 million,
respectively, in 1999 and 1998. The Bank moderated the rates it paid on money
market accounts and had a decrease in the rate paid of 8 and 14 basis points,
respectively, in 1999 and 1998. However, the balances maintained in money market
accounts have declined in each of those years as customers have migrated to the
savings account promotional products. The balances maintained in NOW accounts
have increased modestly in both years while the rates have remained fairly
stable during that same time period. Certificate of deposit average balances
decreased $37.0 million and $7.6 million, respectively, and the rates paid
decreased 62 and 8 basis points, respectively, during 1999 and 1998. The decline
in the average balances and rates paid on the certificates of deposit reflect
the customers' desire to migrate out of longer-term deposits into core deposit
or short-term maturities.
The Company has continued its reliance on borrowed funds as an alternative
source of funds to deposits in order to grow average earning assets. During
1999, the average balance of borrowed funds increased $59.3 million while the
rate paid decreased 25 basis points. In 1998, the average balance of borrowed
funds increased $44.2 million while the rate paid decreased 17 basis points. The
Company's reliance on shorter term borrowed funds in 1999 allowed it to keep the
rates paid on its borrowed funds low in spite of the overall increase in market
rates. The decline in the rate paid on borrowed funds in 1998 was due to the
reduction in overall market interest rates.
The combination of the factors mentioned above contributed to a 22 basis
point increase to 2.79% in the interest rate spread in 1999 and a 10 basis point
decline in the interest rate spread to 2.57% during 1998. The net yield on
earnings assets was 3.37% for the year ended December 31, 1999 and 3.18% and
3.22%, respectively, for 1998 and 1997.
14
<PAGE> 21
The following table presents an analysis of the average yields earned and rates
paid for the years indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1999 1998
---------------------------------- ----------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
------- -------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Short-term investments ................... $ 10,313 $ 518 5.02% $ 15,760 $ 837 5.31%
Investment securities(1)(2) .............. 160,535 10,212 6.36 109,920 7,340 6.68
Mortgage-backed securities(1) ............ 138,376 9,028 6.52 177,276 11,711 6.61
----------- ----------- ----------- -----------
Total investments ...................... 309,224 19,758 6.39 302,956 19,888 6.56
----------- ----------- ----------- -----------
Residential loans ........................ 754,626 51,118 6.77 747,430 52,616 7.04
Commercial real estate loans ............. 171,982 14,959 8.70 145,352 12,927 8.89
Construction and land loans .............. 62,565 5,715 9.13 39,988 3,964 9.91
----------- ----------- ----------- -----------
Total real estate loans(1)(3) .......... 989,173 71,792 7.26 932,770 69,507 7.45
----------- ----------- ----------- -----------
Consumer loans(3) ........................ 60,196 4,781 7.94 65,159 5,531 8.49
----------- ----------- ----------- -----------
Commercial and lease loans(3) ............ 28,717 2,424 8.44 21,368 1,998 9.35
Lease financing(3) ....................... 16,969 1,255 7.40 4,234 322 7.61
----------- ----------- ----------- -----------
Total commercial ....................... 45,686 3,679 8.05 25,602 2,320 9.06
----------- ----------- ----------- -----------
Total loans .......................... 1,095,055 80,252 7.33 1,023,531 77,358 7.56
----------- ----------- ----------- -----------
Total interest-earning assets 1,404,279 100,010 7.12% 1,326,487 97,246 7.33%
----------- -----------
Allowance for loan losses .................. (11,271) (11,524)
Other assets ............................... 52,878 52,100
----------- -----------
Total assets ........................... $ 1,445,886 $ 1,367,063
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts ............................. $ 95,390 $ 772 0.81% $ 86,028 $ 806 0.94%
Money market deposit accounts ............ 96,184 2,657 2.76 100,751 2,861 2.84
Savings accounts ......................... 210,668 6,770 3.21 176,633 6,256 3.54
Certificates of deposit .................. 473,764 24,142 5.10 510,794 29,214 5.72
----------- ----------- ----------- -----------
Total interest-bearing deposits ........ 876,006 34,341 3.92 874,206 39,137 4.48
----------- ----------- ----------- -----------
Borrowed funds:
Other borrowings ......................... 44,574 2,146 4.81 11,794 578 4.90
Federal Home Loan Bank
advances ............................. 296,237 16,214 5.47 269,766 15,300 5.67
----------- ----------- ----------- -----------
Total borrowed funds ................... 340,811 18,360 5.39 281,560 15,878 5.64
----------- ----------- ----------- -----------
Total interest-bearing
liabilities ......................... 1,216,817 52,701 4.33% 1,155,766 55,015 4.76%
----------- -----------
Demand deposits ............................ 92,662 89,051
Other liabilities .......................... 10,926 11,104
----------- -----------
Total liabilities ...................... 1,320,405 1,255,921
Stockholders' equity ....................... 125,481 111,142
----------- -----------
Total liabilities and stock-
holders' equity ...................... $ 1,445,886 $ 1,367,063
=========== ===========
Net interest income ........................ $ 47,309 $ 42,231
=========== ===========
Interest rate spread ....................... 2.79% 2.57%
==== ====
Net yield on earning assets ................ 3.37% 3.18%
==== ====
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1997
---------------------------------
INTEREST AVERAGE
AVERAGE EARNED/ YIELD/
BALANCE PAID RATE
------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Interest-earning assets:
Short-term investments ................... $ 13,691 $ 746 5.45%
Investment securities(1)(2) .............. 101,491 6,783 6.68
Mortgage-backed securities(1) ............ 180,889 12,362 6.83
---------- -------
Total investments ...................... 296,071 19,891 6.72
---------- -------
Residential loans ........................ 650,089 48,043 7.39
Commercial real estate loans ............. 136,234 12,253 8.99
Construction and land loans .............. 32,395 3,237 9.99
---------- -------
Total real estate loans(1)(3) .......... 818,718 63,533 7.76
----------
Consumer loans(3) ........................ 64,816 5,317 8.20
---------- -------
Commercial and lease loans(3) ............ 21,286 2,008 9.43
Lease financing(3) ....................... 27 3 11.11
----------
Total commercial ....................... 21,313 2,011 9.44
---------- -------
Total loans .......................... 904,847 70,861 7.83
---------- -------
Total interest-earning assets 1,200,918 90,752 7.56%
-------
Allowance for loan losses .................. (12,395)
Other assets ............................... 58,144
----------
Total assets ........................... $1,246,667
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts ............................. $ 74,202 $ 740 1.00%
Money market deposit accounts ............ 113,325 3,381 2.98
Savings accounts ......................... 122,045 4,060 3.33
Certificates of deposit .................. 518,368 30,070 5.80
---------- -------
Total interest-bearing deposits ........ 827,940 38,251 4.62
---------- -------
Borrowed funds:
Other borrowings ......................... 9,614 481 5.00
Federal Home Loan Bank
advances ............................. 227,726 13,315 5.85
---------- -------
Total borrowed funds ................... 237,340 13,796 5.81
---------- -------
Total interest-bearing
liabilities ......................... 1,065,280 52,047 4.89%
-------
Demand deposits ............................ 69,942
Other liabilities .......................... 11,702
----------
Total liabilities ...................... 1,146,924
Stockholders' equity ....................... 99,743
----------
Total liabilities and stock-
holders' equity ...................... $1,246,667
==========
Net interest income ........................ $38,705
=======
Interest rate spread ....................... 2.67%
====
Net yield on earning assets ................ 3.22%
====
</TABLE>
(1) Included in the average balance amounts are the corresponding components of
the assets held for sale, available for sale and held to maturity. The
yield is calculated using interest income divided by the average balance of
the amortized historical cost.
(2) 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 outstanding.
15
<PAGE> 22
Rate/Volume Analysis. The following table shows the changes in interest
income and interest expense caused by changes in the volume of interest earning
assets and interest bearing liabilities, and changes in interest rates received
and paid, respectively. The change attributable to a mix of volume and rate has
been allocated proportionally to the change due to volume and the change due to
volume and the change due to rate.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1999 COMPARED TO 1998 1998 COMPARED TO 1997
--------------------------------- ----------------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
DUE TO DUE TO
VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ---------- ----- ------ ---------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest and dividend income:
Investments:
Short-term investments ............ $ (276) $ (43) $ (319) $ 110 $ (19) $ 91
Investment securities ............. 3,235 (363) 2,872 563 (6) 557
Mortgage-backed securities ........ (2,540) (143) (2,683) (244) (407) (651)
------- ------- ------- ------- ------- -------
Total interest and dividends
on investments ................ 419 (549) (130) 429 (432) (3)
------- ------- ------- ------- ------- -------
Loans:
Residential loans ................. 503 (2,001) (1,498) 6,935 (2,362) 4,573
Commercial real estate loans ...... 2,322 (290) 2,032 812 (138) 674
Construction and land loans ....... 2,084 (333) 1,751 753 (26) 727
------- ------- ------- ------- ------- -------
Total real estate loans ......... 4,909 (2,624) 2,285 8,500 (2,526) 5,974
------- ------- ------- ------- ------- -------
Consumer loans .................... (407) (343) (750) 28 186 214
------- ------- ------- ------- ------- -------
Commercial and lease loans ........ 635 (209) 426 8 (18) (10)
Lease financing ................... 942 (9) 933 320 (1) 319
------- ------- ------- ------- ------- -------
Total commercial ................ 1,577 (218) 1,359 328 (19) 309
------- ------- ------- ------- ------- -------
Total interest on loans ....... 6,079 (3,185) 2,894 8,856 (2,359) 6,497
------- ------- ------- ------- ------- -------
Total interest and dividend income .... 6,498 (3,734) 2,764 9,285 (2,791) 6,494
------- ------- ------- ------- ------- -------
Interest expense:
Core deposits ....................... 1,015 (739) 276 1,463 279 1,742
Certificates of deposit ............. (2,026) (3,046) (5,072) (436) (420) (856)
Other borrowings .................... 1,578 (10) 1,568 107 (10) 97
Federal Home Loan Bank advances ..... 1,463 (549) 914 2,395 (410) 1,985
------- ------- ------- ------- ------- -------
Total interest expense ............ 2,030 (4,344) (2,314) 3,529 (561) 2,968
------- ------- ------- ------- ------- -------
Net increase (decrease) in net interest
and dividend income ................. $ 4,468 $ 610 $ 5,078 $ 5,756 $(2,230) $ 3,526
======= ======= ======= ======= ======= =======
</TABLE>
Provision (Credit) 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
amounts required to meet possible losses in the loan portfolio after weighing
various factors. Among the factors 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 the collateral values of the underlying
security. Ultimate loan losses may vary significantly from current estimates and
future additions may be necessary. In addition, various regulatory agencies, as
an integral part of their 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.
16
<PAGE> 23
The provision for loan losses in 1999 and 1997 was $400,000 and $983,000,
respectively, as compared to a credit for loan losses in 1998 of $1.7 million.
Net recoveries amounted to $498,000 in 1999, while net charge-offs totaled
$330,000 in 1998 and $691,000 in 1997. The provision for loan losses of $400,000
in 1999 was taken in the fourth quarter due to the fact that almost half of the
corporate loan growth occurred in the fourth quarter, which when combined with
the sudden deterioration of two lease financing relationships, necessitated the
charge to earnings. The credit for loan losses in 1998 resulted from an
improvement in overall loan quality, as reflected by the 59% decline in
nonaccruing loans, 38% decline in total overdue loans and net charge-offs of
$330,000. The decline in the provision recorded in 1997 from 1996 reflects,
among other things, a 33% reduction in non-performing assets and reduced levels
of delinquencies, combined with lower levels of net charge-offs.
While management believes that it has been reasonable in its analysis of
the allowance for loan losses and in estimating the net fair values of other
real estate owned, management is unable to predict the ultimate course of the
economy or the extent of its impact on the Company's financial condition. See
"Financial Condition -- Risk Elements" and Notes 1 and 4 to the "Consolidated
Financial Statements".
Non-interest Income. The Company recorded income from non-interest sources
of $4.2 million in both 1999 and 1998 and $4.8 million in 1997. The increase of
$54,000 in 1999 resulted from an increase of $1.3 million in mortgage banking
income offset by losses from the sales of assets held for sale and investments
available for sale. The decrease in 1998 was primarily due to losses relating to
mortgage banking activities, offset by gains on real estate operations and
increased fee income on deposits and loans.
Net losses from sales and redemptions of investments totaled $385,000 in
1999, compared to net gains of $17,000 in 1998 and $158,000 in 1997. In the
third quarter of 1999, approximately $27.6 million of lower yielding investments
available for sale were sold at a loss of $385,000. The reinvestment of the
sales proceeds was intended to enhance future earnings. See "Financial Condition
- -- Investments" and Notes 1 and 3 to the "Consolidated Financial Statements".
The Company recorded net gains from sales of assets held for sale of
$17,000 in 1999, $653,000 in 1998 and $264,000 in 1997. Included in each of the
three years were gains totaling $439,000, $726,000 and $447,000, respectively,
from the capitalization of originated mortgage servicing rights. See "Financial
Condition -- Loans" and Notes 1, 2 and 5 to the "Consolidated Financial
Statements".
Andover may incur gains and losses on the sale of the loans that it
originates. These loans are generally securitized prior to sale in the form of
mortgage-backed securities which are guaranteed by a government agency and are
then held for sale. Because loans held for sale are stated at the lower of cost
or market value and mortgage-backed securities held for sale are stated at fair
value, periods of rising interest rates, such as was experienced in 1999, cause
the values of loans and mortgage-backed securities held for sale to decrease,
resulting in a charge to income. The Company frequently enters into forward
delivery contracts to reduce its exposure to this risk from rising interest
rates. Forward delivery contracts may, however, increase exposure to the risk
from declining interest rates if sufficient loans or mortgage-backed securities
held for sale bearing interest rates specified by the contracts are not
available to meet the delivery schedules under the contracts. See Note 17 to the
"Consolidated Financial Statements".
Mortgage banking income represents the gross servicing fee income less
amortization and provisions or credits for the valuation allowance on the
mortgage servicing assets. The Company retains as a service fee a portion of the
interest paid by the borrower. A valuation allowance for mortgage servicing
assets was established in 1996. A credit to the valuation allowance was recorded
in 1999 totaling $175,000, as compared to provisions charged against earnings
totaling $1.5 million and $285,000, respectively, for the years ended December
31, 1998 and 1997. In a low interest rate environment, the underlying
residential loans will repay faster than expected, causing the fair value of the
mortgage servicing assets to decline as well as reduce the gross cash flows
collected on a shrinking serviced portfolio. This prepayment risk results in
increased provisions and charge-offs to the valuation allowance, and thus lower
mortgage banking income.
17
<PAGE> 24
Mortgage banking income totaled $908,000 in 1999, as compared to a mortgage
banking loss of $389,000 in 1998 and income of $2.0 million in 1997. The
increase in income in 1999 was mainly due to the change in fair values caused by
higher market interest rates, thereby enabling the Company to record a credit to
the valuation allowance. The gross servicing income has fluctuated over the past
three years but generally corresponds to the level of average loans serviced for
investors.
The table below summarizes the Company's results from servicing loans for
investors.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Gross servicing income........................................... $ 3,219 $ 3,137 $ 4,054
Amortization..................................................... (2,486) (2,061) (1,754)
Credit (provisions) for valuation allowance...................... 175 (1,465) (285)
----------- ---------- ---------
Net mortgage banking income (loss)............................... $ 908 $ (389) $ 2,015
=========== ========== =========
Average loans serviced for investors............................. $ 851,981 $ 887,071 $ 977,659
Year-end loans serviced for investors............................ $ 956,358 $ 894,432 $ 971,041
</TABLE>
During 1999, 1998 and 1997, the Company purchased mortgage servicing rights
to $223.2 million, $184.7 million and $228.8 million, respectively, in
residential first mortgage loans. These purchased balances are included in the
balance of loans serviced for investors. As part of its long-term business plan,
the Company intends to continue purchasing mortgage servicing rights to
maintain, or even increase, the use of its existing servicing capacity as well
as increase non-interest income when it is deemed appropriate. The Company also
expects to continue selling mortgages in the secondary market while retaining
the servicing rights, therefore, servicing income related to this activity is
accordingly expected to continue for the foreseeable future. See Notes 1 and 5
to the "Consolidated Financial Statements".
Losses on real estate operations totaled $5,000 in 1999, versus gains of
$14,000 in 1998, compared to losses of $971,000 in 1997. Real estate operations
consist of provisions for the valuation allowance caused by declines in net fair
value, operating costs of maintaining other real estate owned, gains or losses
on sales of properties and costs associated with the foreclosure on nonaccrual
properties, less any rental income on other real estate owned. The Company
accounts for other real estate owned at the lower of cost or estimated net fair
value. Declines in value subsequent to foreclosure or substantive repossession
result in a charge to the valuation allowance.
In 1999 and 1998, credit provisions were taken to reduce the valuation
allowance in the amount of $20,000 and $107,000, respectively, while
replenishing the valuation allowance resulted in a charge of $350,000 in 1997.
Gains on sales of other real estate owned totaled $52,000 in 1999, $50,000 in
1998 and $110,000 in 1997. The costs of foreclosing on loans, as well as the
administrative costs of maintaining the non-performing assets, correspond with
the average volumes of problem assets and totaled $92,000 in 1999, $153,000 in
1998 and $757,000 in 1997. See "Financial Condition -- Risk Elements" and Note 1
to the "Consolidated Financial Statements".
Other income totaled $3.7 million, $3.9 million and $3.3 million in 1999,
1998 and 1997, respectively, and was derived primarily from customer service
charges and fees. Deposit account service charges, representing the largest
component of such other income, totaled $2.5 million in 1999, $2.3 million in
1998 and $2.0 million in 1997. Loan late charges and other fees decreased during
1999 by $201,000 to $502,000, while increasing in 1998 to $703,000 and remaining
stable in 1997 at $407,000, respectively. The majority of the increase in
deposit fee income in each of the two years is due to increased ATM fee income.
As customers increasingly use debit cards or non-customers use the Bank's
multiple ATM's, overall fee income has increased. The swings in the loan fee
income reflect the changes in the residential loan originations which increased
tremendously in 1998 and then decreased in 1999. Another source of income that
has remained stable in each of the three years is rental income. Other income
totaled $432,000, $577,000 and $559,000, respectively, for 1999, 1998 and 1997
and includes income from Liberty Securities, IRA, safe deposit and miscellaneous
charges. See Note 13 to the "Consolidated Financial Statements".
18
<PAGE> 25
Non-interest Expense. Non-interest expenses decreased $600,000 or 2.7% to
$22.0 million in 1999 while increasing $591,000 or 2.7% to $22.6 million in
1998. The decrease in 1999 was primarily due to the curtailment and settlement
gains of $1.6 million on terminating the Company's defined benefit plan. The
modest increase in 1998 reflects higher salary costs due to merit increases
partially offset by a higher level of capitalized loan origination costs
resulting from the high level of originations as well as the Company's continued
attempts at cost containment.
Salaries and employee benefits, the largest component of non-interest
expense, decreased $893,000 to $11.1 million in 1999 and increased $123,000 in
1998 to $12.0 million. The decrease in 1999 resulted from the aforementioned
gains of $1.6 million from the termination of the Company's defined benefit
pension plan which were reflected as a reduction of salary and employee
benefits. Offsetting these gains, however, were increased costs for higher staff
levels, merit increases and employee benefits. The increase in 1998 was
primarily due to increased benefits offset by higher levels of capitalized loan
origination costs. See Note 14 to the "Consolidated Financial Statements".
Office occupancy and equipment increased $195,000 to $3.2 million in 1999
and increased $87,000 in 1998 to $3.0 million. The increase in 1999 was
primarily due to increased depreciation costs on equipment purchases and high
expenses on the Company's leased properties. The increase in 1998 was primarily
due to increased rental expense resulting from rental increases and more
properties leased from third parties. See Note 6 to the "Consolidated Financial
Statements".
Data processing expenses totaled $2.4 million in 1999, $2.1 million in 1998
and $1.9 million in 1997. Data processing expenses increased $289,000 in 1999
and $157,000 in 1998 due to a higher loan and deposit base resulting from the
purchase of loans and mortgage loan servicing and internally generated loan
growth. In addition, the introduction of alternative delivery systems, via
customers' computers, debit cards and by the telephone service center, have
caused overall processing costs to increase in each of the two years. The level
of data processing expenses incurred in 1999 on behalf of the Company's effort
in its Y2K compliance was approximately $70,000. See "Financial Condition - -
Year 2000 Readiness Disclosure".
Professional fees, including corporate legal and accounting and auditing
expenses, totaled $1.2 million in 1999, $940,000 in 1998 and $862,000 in 1997.
Professional fees increased $238,000 in 1999 due to increased recruiting
expenses and consulting fees. Professional fees increased $78,000 in 1998 due to
increased consulting and corporate legal expenses.
Marketing expenses totaled $908,000 in 1999, $831,000 in 1998 and $988,000
in 1997. Marketing expenses increased $77,000 in 1999, due to an increase in
discretionary promotions while expenses decreased $157,000 in 1998 due to a
reduction in the number of discretionary promotions and direct mail
solicitations.
Mortgage banking expenses totaled $267,000 in 1999, $606,000 in 1998 and
$430,000 in 1997. Costs included in mortgage banking expenses are commissions
and related expenses paid to the mortgage loan originators, net of any deferred
origination expenses, and costs associated with servicing the portfolio for
outside investors. The swing in expenses in each of the two years reflect the
level of origination volume.
Other operating expenses totaled $3.0 million in 1999, $3.1 million in 1998
and $3.0 million in 1997. Some of the cost savings in 1999 result from the
combination of the two subsidiary banks as well as a continued focus on cost
containment. The Company has experienced some savings in the area of corporate
insurance and telephone expenses. The increase of $127,000 in 1998 was
distributed among multiple categories and generally reflected costs associated
with running a larger organization.
Federal and State Income Tax Expense. The Company recorded tax expenses of
$10.3 million, $8.2 million and $7.3 million in 1999, 1998 and 1997,
respectively, and realized effective tax rates of 35%, 32% and 36%,
respectively. The income tax expense increase of $2.1 million in 1999 resulted
from an increase in pre-tax income of 14.2% offset by tax benefits of $440,000.
The increase in 1998 was primarily due to an increase in pre-tax income of $5.1
million offset by a $1.1 million tax benefit resulting from the favorable
resolution of several tax
19
<PAGE> 26
issues that had previously been fully reserved against. Recognition of deferred
tax assets and liabilities is based on the expected future tax consequences of
temporary differences between the financial reporting and tax basis of the
Company's assets and liabilities. Measurement of deferred tax assets and
liabilities is based upon the provision of enacted tax laws and the effects of
future changes in tax laws or rates.
Management believes the existing net deductible temporary differences that
give rise to the net deferred income tax asset will reverse in periods in which
the Company generates net taxable income. For the years ending December 31,
1999, 1998, and 1997, the Company generated taxable income of approximately
$27.0 million, $22.1 million and $17.3 million, respectively. Taxable income
differs from pretax book income primarily as a result of loan losses and
provision for losses on other real estate owned being recognized in a different
period than for book income. The Company recorded a reduction of the valuation
allowance of $328,000 in 1998 and $500,000 in 1997. The amount recognized in
1998 was due to the expiration of subsidiary net operating loss carry forwards
while the amounts recognized in 1997 were due to increased recoverable federal
income taxes.
At December 31, 1999, the net deferred tax asset is supported by
recoverable income taxes of approximately $23.0 million. Management believes
that the net deferred income tax asset at December 31, 1999 will be realized
based upon the high level of taxable income in the past three years. It should
be noted, however, that factors beyond management's control, such as the general
state of the economy and real estate values, can affect future levels of taxable
income and that no assurance can be given that sufficient taxable income will be
generated to fully absorb gross deductible temporary differences.
See Note 11 to the "Consolidated Financial Statements" for further
information.
FINANCIAL CONDITION
Total assets increased $80.8 million, or 5.7%, to $1,491.1 million at
December 31, 1999. The growth in total assets was primarily due to an increase
of $82.3 million in total loans. Total assets at December 31, 1998 amounted to
$1,410.2 million, an increase of $87.5 million or 6.6% from $1,322.7 million at
December 31, 1997, resulting primarily from an increase in total loans of $71.9
million.
LOANS
Total loans at December 31, 1999, prior to the allowance for loan losses,
amounted to $1,133.1 million compared with $1,050.8 million at December 31,
1998, an increase of $82.3 million or 7.8%, primarily due to internally
generated loan growth combined with purchases of $38.3 million in residential
and commercial real estate whole loans. As of December 31, 1999, 58.1% of
Andover's total loan portfolio consisted of loans with adjustable rates as
compared to 60.0% at December 31, 1998, reflecting the increased preference for
fixed rate loans by the Bank's corporate customers.
20
<PAGE> 27
The following table shows the composition of the Company's loan portfolio
at the dates indicated. The balances shown are net of unadvanced funds, loan
premiums or discounts and deferred loan origination fees and costs.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential .................... $ 743,747 65.6% $ 740,009 70.4% $715,503 73.1% $619,955 71.3% $558,231 72.6%
Commercial ..................... 207,364 18.3 163,999 15.6 148,462 15.2 142,496 16.4 128,143 16.7
Construction and land .......... 63,660 5.6 56,568 5.4 31,499 3.2 35,001 4.0 18,138 2.4
---------- ----- ---------- ----- -------- ----- -------- ----- -------- -----
Total real estate loans ...... 1,014,771 89.5 960,576 91.4 895,464 91.5 797,452 91.7 704,512 91.7
---------- ----- ---------- ----- -------- ----- -------- ----- -------- -----
Consumer loans:
Home equity lines of credit
and second mortgages ......... 56,412 5.0 55,691 5.3 58,605 6.0 49,670 5.7 43,463 5.6
Other consumer ................. 5,419 0.5 6,160 0.6 9,599 1.0 9,554 1.1 7,707 1.0
---------- ----- ---------- ----- -------- ----- -------- ----- -------- -----
Total consumer loans ......... 61,831 5.5 61,851 5.9 68,204 7.0 59,224 6.8 51,170 6.6
---------- ----- ---------- ----- -------- ----- -------- ----- -------- -----
Commercial loans:
Commercial and lease loans ..... 27,378 2.4 18,365 1.7 14,325 1.5 13,359 1.5 12,916 1.7
Lease financing ................ 29,121 2.6 9,973 1.0 830 -- -- -- -- --
--------- ----- ---------- ----- -------- ----- -------- ----- -------- -----
Total commercial loans ....... 56,499 5.0 28,338 2.7 15,155 1.5 13,359 1.5 12,916 1.7
---------- ----- ---------- ----- -------- ----- -------- ----- -------- -----
Total loans .................... 1,133,101 100.0% 1,050,765 100.0% 978,823 100.0% 870,035 100.0% 768,598 100.0%
===== ===== ===== ===== =====
Allowance for loan losses ........ (11,384) (10,486) (12,521) (12,229) (11,665)
---------- ---------- -------- -------- --------
Net loans....................... $1,121,717 $1,040,279 $966,302 $857,806 $756,933
========== ========== ======== ======== ========
</TABLE>
Total real estate loans, which represent the largest component of the loan
portfolio, increased $54.2 million in 1999 to $1,014.8 million at December 31,
1999, due to real estate loan originations of $295.1 million. Origination
volumes are sensitive to market rates, particularly in the residential loan
refinancing arena. As can be determined by the following table, total loan
originations were the highest in 1998, a year with low interest rates throughout
the year. At the start of 1999, low interest rates prevailed but in the spring
of 1999, market interest rates increased, a trend that continued through the
year. However, total loan originations were strong in each of the other years
but the mix between retail and corporate originations changes in relation to the
level of mortgage refinance activity.
The following table shows the composition of the Company's loan originations and
loan purchases for the years indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Retail loans:
Residential fixed rate loans ......... $ 82,500 $212,248 $ 81,342 $ 89,830 $ 88,990
Residential variable rate loans ...... 91,321 117,146 83,917 78,453 43,138
-------- -------- -------- -------- --------
Total residential originations ..... 173,821 329,394 165,259 168,283 132,128
-------- -------- -------- -------- --------
Home equity lines of credit
and second mortgages ............... 22,471 22,562 28,486 25,411 13,829
Other consumer ....................... 4,881 5,489 6,029 6,149 4,543
-------- -------- -------- -------- --------
Total consumer originations ........ 27,352 28,051 34,515 31,560 18,372
-------- -------- -------- -------- --------
Total retail originations ......... 201,173 357,445 199,774 199,843 150,500
-------- -------- -------- -------- --------
Corporate loans:
Commercial real estate loans ......... 68,318 64,662 32,858 32,800 17,991
Construction and land loans .......... 52,941 51,852 31,800 41,888 31,543
Commercial and lease loans ........... 33,330 24,296 18,591 19,732 16,933
Lease financing ...................... 22,735 13,098 830 -- --
-------- -------- -------- -------- --------
Total corporate originations ....... 177,324 153,908 84,079 94,420 66,467
-------- -------- -------- -------- --------
Residential and commercial real estate
whole loan purchases ............. 38,346 22,875 71,297 32,474 59,878
-------- -------- -------- -------- --------
Total loan originations and purchases .. $416,843 $534,228 $355,150 $326,737 $276,845
======== ======== ======== ======== ========
</TABLE>
21
<PAGE> 28
Residential loan originations totaled $173.8 million in 1999, $329.4
million in 1998 and $165.3 million in 1997. It should be noted that these
originations are not fully reflected in loan balances outstanding due to the
securitization, regular amortization and prepayments of residential real estate
loans as well as refinancings and the sale of a portion of new loan production.
As mentioned above, the originations of residential loans are sensitive to
market interest rates and 1998 experienced extremely high levels of
refinancings.
The majority of the Company's residential loans are underwritten to be
eligible for sale in the secondary market. Andover sells most of the eligible
30-year fixed rate loans it originates. A loan which the Company intends to sell
may be sold directly or converted into mortgage-backed securities and sold in
that form. Residential loans sold directly amounted to $1.4 million in 1999,
$6.1 million in 1998 and $3.4 million in 1997. Those sold in the form of
mortgage-backed securities held for sale or available for sale totaled $32.3
million, $53.3 million and $24.2 million, respectively, in 1999, 1998 and 1997.
The portfolio of residential mortgage loans serviced for others totaled $956.4
million at December 31, 1999, compared to $894.4 million at December 31, 1998
and $971.0 million at December 31, 1997.
Commercial real estate loans increased $43.4 million in 1999 to $207.4
million at December 31, 1999, while construction and land loan balances
increased $7.1 million to $63.7 million in the same period. Outstanding
commercial loans increased $28.2 million in 1999 to $56.5 million at December
31, 1999. While originations of corporate loans, comprised of commercial real
estate, commercial, construction and land loans and lease financings, are
sensitive to the interest rate environment; a customer's capacity for borrowing,
real estate values and current and anticipated economic conditions have a more
critical role. Origination volumes for these loan types have increased
substantially in 1999, reflecting increasing real estate values, higher capacity
for borrowings, as well as the Company's continued interest in corporate
lending. Total originations of corporate loans were $177.3 million in 1999,
$153.9 million in 1998 and $84.1 million in 1997. Not all originations reflect
the balances advanced at the time of origination due to amounts available for
future commitments, nor does it reflect the level of prepayments experienced in
the corporate loans.
Commercial real estate, construction and land, commercial loans and lease
financings involve significant risks compared with single-family residential
mortgage and consumer lending. See Item 1, "Business -- Lending Activities".
Consumer loans outstanding decreased modestly to $61.8 million at December
31, 1999, and decreased $6.4 million in 1998. A large component of the decline
during 1998 resulted from the sale of student loans totaling $2.9 million. Over
the past four years, the Company has aggressively priced its home equity lines
of credit and second mortgage loans; thereby keeping originations of these loans
in excess of $20 million per year. Other consumer loans include collateral loans
and installment loans. Originations of consumer loans are also sensitive to
changes in the interest rate environment.
RISK ELEMENTS
The following table shows the composition of non-performing assets at
December 31:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccruing loans ................. $ 2,456 $ 3,240 $ 7,849 $10,699 $11,627
Other real estate owned ........... 41 252 406 1,683 4,158
------- ------- ------- ------- -------
Total non-performing assets... $ 2,497 $ 3,492 $ 8,255 $12,382 $15,785
======= ======= ======= ======= =======
Total non-performing assets as a
percentage of total assets ...... 0.2% 0.2% 0.6% 1.0% 1.4%
</TABLE>
During 1999, continued progress was made in reducing non-performing assets
with a reduction of $995,000 or 28.5%, primarily due to a reduction of
nonaccruing loans. Loans transferred into other real estate owned totaled
22
<PAGE> 29
$395,000, $773,000 and $2.1 million in 1999, 1998 and 1997, respectively The
impact of existing non-performing assets on future interest income will be
largely dependent upon converting these assets to earning status, either through
a return to performing status or through foreclosure and subsequent disposition
of the property.
At December 31, 1999, total impaired loans were $2.5 million, of which $1.1
million had related allowances of $197,000 and $1.4 million which did not
require a related impairment allowance. All of the $2.5 million in impaired
loans have been measured using the fair value of the collateral method. During
the year ended December 31, 1999, the average recorded value of impaired loans
was $2.1 million and the related amount of interest income recognized was
$40,000.
See Notes 1 and 4 to the "Consolidated Financial Statements" for further
information.
Nonaccruing Loans. Management places loans, regardless of collateral
values, on nonaccrual status when principal or interest is past due 90 days or
more. 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 collection of principal or
interest. Non-performing 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 December
31:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Residential real estate ............. $ 588 $ 932 $ 2,436 $ 2,838 $ 3,037
Commercial real estate .............. 1,308 2,023 4,866 6,901 7,195
Construction and land ............... -- -- -- 79 --
Commercial and lease loans .......... 101 255 513 727 1,136
Lease financing ..................... 435 -- -- -- --
Consumer ............................ 24 30 34 154 259
------- ------- ------- ------- -------
Total nonaccrual loans ............ $ 2,456 $ 3,240 $ 7,849 $10,699 $11,627
======= ======= ======= ======= =======
Allowance for loan losses ........... $11,384 $10,486 $12,521 $12,229 $11,665
======= ======= ======= ======= =======
Allowance for loan losses as a
percentage of nonaccruing loans ... 463.5% 323.6% 159.5% 114.3% 100.3%
Allowance for loan losses as a
percentage of total loans ......... 1.0% 1.0% 1.3% 1.4% 1.5%
</TABLE>
During 1999, loans on nonaccrual decreased 24.2% to $2.5 million,
throughout most loan categories. Interest income of approximately $477,000 would
have been recorded in 1999 on nonaccruing loans if those loans had been on a
current basis in accordance with their original terms. Interest income actually
recognized in 1999 on nonaccruing loans amounted to approximately $159,000.
Additionally, another $62,000 in interest payments were received on nonaccruing
loans during 1999 and applied as a reduction of the loan balance instead of as
interest income.
Restructured Loans. A restructured loan is one for which the Bank has
modified the terms to provide a temporary reduction in the rate of interest
below the prevailing market interest rates at the time of modification and, in
most instances, an extension of payments of principal or interest or both due to
the deterioration in the financial position of the borrowers. Restructured loans
are not returned to performing status until the obligation has performed for a
reasonable period of time, its ultimate collectibility is no longer in doubt and
is at a market rate of interest. Restructured loans totaled $413,000 at December
31, 1999.
23
<PAGE> 30
Other Real Estate Owned. Andover's other real estate owned has consistently
declined over the last several years as economic conditions improved. The
valuation allowance represents management's estimate of the net fair value of
other real estate owned.
The following table shows the composition of other real estate owned at
December 31:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Other real estate owned .............. $ 61 $ 293 $ 641 $ 1,859 $ 4,571
Valuation allowance .................. (20) (41) (235) (176) (413)
------- ------- ------- ------- -------
Total other real estate owned.... $ 41 $ 252 $ 406 $ 1,683 $ 4,158
======= ======= ======= ======= =======
</TABLE>
All other real estate owned is carried at the lower of the carrying value
of the loan or the net fair value of the property. Initial writedowns to net
fair value are charged to the allowance for loan losses and totaled $104,000 in
1999, $172,000 in 1998 and $836,000 in 1997. In 1999 and 1998, credit provisions
were taken to reduce the valuation allowance in the amount of $20,000 and
$107,000, respectively. Subsequent provisions due to deterioration in real
estate values are charged to real estate operations and totaled $350,000 in
1997. Gains of $52,000, $50,000 and $110,000 were recognized on sales of
$678,000, $1.1 million and $3.2 million in other real estate owned in 1999, 1998
and 1997, respectively.
Allowance for Loan Losses. The following table summarizes the activity in
Andover's allowance for loan losses during the five years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year ........ $ 10,486 $ 12,521 $ 12,229 $ 11,665 $ 12,343
Provision (credit) for loan losses .. 400 (1,705) 983 2,555 1,295
Charge-offs:
Residential real estate ........ (97) (223) (767) (822) (1,501)
Commercial real estate ......... (20) (739) (920) (2,208) (867)
Construction and land .......... -- -- -- -- (57)
Commercial and lease loans ..... (162) (37) (90) (100) (171)
Lease financing ................ (462) (491) -- -- --
Consumer ....................... (7) (10) (27) (153) (171)
-------- -------- -------- -------- --------
Total charge-offs .............. (748) (1,500) (1,804) (3,283) (2,767)
-------- -------- -------- -------- --------
Recoveries:
Residential real estate ........ 30 80 27 45 120
Commercial real estate ......... 706 400 142 178 183
Construction and land .......... 19 371 324 588 2
Commercial and lease loans ..... 289 289 597 461 461
Lease financing ................ 180 -- -- -- --
Consumer ....................... 22 30 23 20 28
-------- -------- -------- -------- --------
Total recoveries ............... 1,246 1,170 1,113 1,292 794
-------- -------- -------- -------- --------
Net (charge-offs) recoveries ........ 498 (330) (691) (1,991) (1,973)
-------- -------- -------- -------- --------
Balance at end of year .............. $ 11,384 $ 10,486 $ 12,521 $ 12,229 $ 11,665
======== ======== ======== ======== ========
Ratio of net (charge-offs) recoveries
to average loans outstanding ...... 0.05% (0.03)% (0.08)% (0.24)% (0.29)%
</TABLE>
24
<PAGE> 31
The allowance for loan losses as a percentage of total loans remained
stable at 1.0% at both December 31, 1999, and December 31, 1998, as compared to
1.3% at December 31, 1997. While the Company has experienced four years with
loan recoveries in excess of $1.1 million each, this trend is not expected to
continue. Management analyzes the adequacy of the allowance for loan losses on a
quarterly basis. See "Results of Operations -- Provision for Loan Losses".
Management measures the adequacy of its allowance for loan losses by assigning
loans into risk categories based on a loan classification system modeled after
the bank regulatory classification system. While management believes that its
allowance for loan losses is adequate to cover possible losses, there are
uncertainties regarding future events. Deterioration in the real estate market
or economy may result in additions to nonaccruing loans, charge-offs or
provisions for loan losses to maintain an adequate allowance. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to provide additions to the allowance based on their judgments
about information available to them at the time of their examination. Allocation
of the allowance for loan losses to the various categories of the portfolio is
also made periodically, based on management's judgment in weighing various
factors, including the quality of specific loans, the level of nonaccruing loans
in the various categories, current economic conditions, trends in delinquencies
and prior charge-offs, and the collateral value of the underlying security.
Because the allowance for loan losses is based on various estimates, including
loan collectibility and real estate values, and includes a high degree of
judgment, subsequent changes in the general economic prospects of the borrowers
may require changes in those estimates.
The changes in the allowance allocated to each category of loan directly
corresponds to the level of nonaccrual loans and adversely classified loans as
well as the level of outstanding loans. Andover historically has experienced
lower losses in its residential mortgage loan portfolio and, therefore,
allocations applicable to this portfolio are lower.
The following table summarizes the allocation of the allowance for loan
losses at December 31:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------------------- -------------------- ------------------- ------------------- --------------------
LOAN LOAN LOAN LOAN LOAN
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
AS A % OF AS A % OF AS A % OF AS A % OF AS A % OF
TOTAL TOTAL TOTAL TOTAL TOTAL
AMOUNT LOAN AMOUNT LOAN AMOUNT LOAN AMOUNT LOAN AMOUNT LOAN
LOAN CATEGORY ALLOCATED PORTFOLIO ALLOCATED PORTFOLIO ALLOCATED PORTFOLIO ALLOCATED PORTFOLIO ALLOCATED PORTFOLIO
- ------------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate:
Residential ............ $ 2,346 66% $ 2,341 70% $ 2,399 73% $ 2,154 71% $ 1,794 73%
Commercial ............. 5,017 18 4,425 16 5,526 15 5,952 16 7,381 16
Construction and land .. 1,470 6 1,256 5 697 3 802 4 549 2
------- --- ------- --- ------- --- ------- --- ------- ---
Total real estate .... 8,833 90 8,022 91 8,622 91 8,908 91 9,724 91
Consumer ................. 358 5 365 6 421 7 392 7 344 7
Commercial and lease loans 992 2 716 2 798 2 848 2 1,201 2
Lease financing .......... 801 3 274 1 23 -- -- -- -- --
Unallocated .............. 400 -- 1,109 -- 2,657 -- 2,081 -- 396 --
------- --- ------- --- ------- --- ------- --- ------- ---
Totals .............. $11,384 100% $10,486 100% $12,521 100% $12,229 100% $11,665 100%
======= === ======= === ======= === ======= === ======= ===
</TABLE>
Notwithstanding the foregoing allocations, the entire allowance for loan
losses is available to absorb charge-offs in any category of loans.
INVESTMENTS
Andover's investment portfolio totaled $286.7 million as of December 31,
1999, and $283.0 million as of December 31, 1998. The Company manages the
investment portfolio in accordance with an investment policy adopted by the
Board of Directors. The primary objectives are to provide interest and dividend
income, to ensure adequate liquidity and achieve an acceptable asset/liability
gap position while diversifying the asset mix. The investment portfolio is also
evaluated in comparison to returns that are earned by the loan portfolio.
25
<PAGE> 32
During the third quarter of 1999, approximately $27.6 million of lower
yielding investments were sold at a loss of $385,000. These included U.S.
government obligations and GNMA mortgage-backed securities. The reinvestment of
the sales proceeds was intended to enhance future earnings.
The principal component of the total investment portfolio is
mortgage-backed securities, which accounted for 43.0% of total investments at
December 31, 1999. The remaining portion of the total investment portfolio
consists of U.S. government and federal agency obligations, corporate bonds,
short-term investments, equity securities and other investment grade securities.
Corporate bonds represent the fastest growing component of the investment
portfolio and totaled 30.6% as of December 31, 1999, as compared to 14.9% at
year end 1998.
All of the mortgage-backed securities represent undivided interests in
pools of mortgages which have been formed into pass-through securities and sold
to investors by GNMA, FHLMC and FNMA. Securities issued by GNMA, a wholly-owned
U.S. government corporation, are fully guaranteed as to the timely payment of
principal and interest. Securities issued by FHLMC and FNMA, government
sponsored corporations, carry each corporation's guarantee as to the timely
payment of interest and the ultimate payment of principal. Cash flows from the
underlying mortgages of all mortgage-backed securities are passed through to
Andover in the form of monthly payments of interest, scheduled principal
amortization, and prepayments of mortgage balances. These securities, therefore,
have unpredictable cash flows. Principal repayments on all mortgaged-backed
securities in the investment portfolio totaled $54.4 million in 1999 as compared
to $60.4 million in 1998, reflecting, among other things, the slowdown in the
mortgage refinance market. The approximate market value of adjustable rate
mortgage-backed securities included in the investment portfolio totaled $11.6
million at December 31, 1999, as compared to $41.1 million at December 31, 1998,
primarily due to the sale of investments mentioned above.
The carrying amount of callable securities included in investments
available for sale and investments held to maturity totaled $45.9 million and
$5.0 million, respectively, as of December 31, 1999.
26
<PAGE> 33
The following table sets forth information regarding the carrying amounts
of the investment portfolio at December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS .......................... $ 1,600 $ 16,100 $ 14,150
======== ======== ========
INVESTMENTS AVAILABLE FOR SALE (AT MARKET):
Common stocks ................................... $ 1,248 $ 537 $ 246
U.S. government and federal agency obligations .. 65,191 62,556 55,777
Other bonds and obligations ..................... 84,336 37,561 14,573
-------- -------- --------
Total bonds and obligations ................... 149,527 100,117 70,350
-------- -------- --------
GNMA mortgage-backed securities ................. 27,381 35,884 27,793
FHLMC participation certificates ................ 19,118 26,981 36,805
FNMA pass-through certificates .................. 11,433 2,509 4,106
Collateralized mortgage obligations ............. 12,663 -- --
-------- -------- --------
Total mortgage-backed securities .............. 70,595 65,374 68,704
-------- -------- --------
Total investments available for sale ........ $221,370 $166,028 $139,300
======== ======== ========
INVESTMENTS HELD TO MATURITY (AT AMORTIZED COST):
U.S. government and federal agency obligations .. $ 8,507 $ 8,526 $ 10,001
Other bonds and obligations ..................... 2,514 4,545 7,106
-------- -------- --------
Total bonds and obligations ................... 11,021 13,071 17,107
-------- -------- --------
FNMA pass-through certificates .................. 24,082 35,435 48,835
FHLMC participation certificates ................ 18,073 30,207 49,217
GNMA mortgage-backed securities ................. 1,923 2,576 3,383
Collateralized mortgage obligations ............. 8,268 19,080 10,021
Other asset-backed securities ................... 385 551 800
-------- -------- --------
Total mortgage-backed securities .............. 52,731 87,849 112,256
-------- -------- --------
Total investments held to maturity .......... $ 63,752 $100,920 $129,363
======== ======== ========
Total investments ......................... $286,722 $283,048 $282,813
======== ======== ========
</TABLE>
Debt securities are classified as held to maturity only when there is
positive intent and ability to hold them to maturity. Such securities are
recorded at amortized cost. Trading securities are debt and equity securities
held principally for the purpose of selling in the near term. The Company does
not have any securities designated as trading securities. Such securities are
recorded at fair value, with unrealized gains and losses recorded in earnings.
Investments available for sale are any debt or equity security not classified as
either held to maturity or trading securities. Investments available for sale
are recorded at fair value with any changes in fair value recorded as a separate
component of stockholders' equity, net of related income taxes.
See Notes 1, 2 and 3 to the "Consolidated Financial Statements" for further
information.
There was a fair value decline of $9.8 million in the investment portfolio,
from a net unrealized gain of $3.7 million at December 31, 1998 to a net
unrealized loss of $6.2 million at December 31, 1999, resulting from a
significant increase in market interest rates. Changes in interest rates and
their impact on the unrealized gain or loss in the investment portfolio are not
material factors in the Company's overall investment strategy. This is largely
due to the fact that neither the changes nor their impact can be controlled by
the Company. Additionally, investment purchases are often funded by long-term
advances of an equivalent term in order to achieve a consistent spread on a
particular investment.
27
<PAGE> 34
The following table presents unrealized gains and losses by major
categories of securities at December 31, 1999. The net unrealized losses of $5.0
million on investments available for sale is included in stockholders' equity,
net of applicable income taxes at December 31, 1999. At that date, Andover's net
unrealized losses on investments held to maturity amounted to $1.2 million.
<TABLE>
<CAPTION>
UNREALIZED UNREALIZED
GAINS LOSSES
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
INVESTMENTS AVAILABLE FOR SALE:
Common stocks ..................................... $ 76 $ (68)
U.S. government and federal agency obligations..... 43 (1,222)
Other bonds and obligations ....................... 14 (2,727)
Mortgage-backed securities ........................ 54 (1,132)
------- -------
Total investments available for sale ............ $ 187 $(5,149)
======= =======
INVESTMENTS HELD TO MATURITY:
U.S. government and federal agency obligations..... $ -- $ (90)
Other bonds and obligations ....................... 26 --
Mortgage-backed securities ........................ 163 (1,294)
------- -------
Total investments held to maturity .............. $ 189 $(1,384)
======= =======
Total unrealized gains and losses ............... $ 376 $(6,533)
======= =======
</TABLE>
The following table presents an analysis of the maturity distribution and
average yields of investments available for sale and held to maturity at
December 31, 1999. Callable investments available for sale and investments held
to maturity are shown in the periods corresponding to their scheduled maturity
without regard to call dates. Mortgage-backed securities are shown in the
periods corresponding to scheduled principal amortization computed based on
their weighted average maturities and weighted average rates without regard to
prepayments.
<TABLE>
<CAPTION>
LENGTH OF TIME TO MATURITY
--------------------------
AFTER ONE AFTER FIVE
YEAR BUT YEARS BUT
WITHIN WITHIN WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL
---------------- ---------------- ---------------- ---------------- -----------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Short-term investments ........ $ 1,600 3.00% $ -- .--% $ -- .--% $ -- .--% $ 1,600 3.00%
======== ==== ======== ==== ======== ==== ======== ==== ======== ====
Investments available for sale:
Total bonds and obligations . $ 9,918 6.50% $ 82,339 6.53% $ 53,769 6.66% $ 3,501 5.60% $149,527 6.55%
Total mortgage-backed
securities ................ 3,327 6.74 15,708 6.74 22,445 6.81 29,115 6.75 70,595 6.77
-------- -------- -------- -------- --------
Total investments
available for sale .... $ 13,245 6.56% $ 98,047 6.56% $ 76,214 6.70% $ 32,616 6.63% $220,122 6.62%
======== ==== ======== ==== ======== ==== ======== ==== ======== ====
Investments held to maturity:
Total bonds and obligations . $ 1,504 6.07% $ 9,517 6.48% $ -- .--% $ -- .--% $ 11,021 6.42%
Total mortgage-backed
securities ................ 3,027 7.02 13,528 6.97 22,064 6.99 14,112 6.89 52,731 6.96
-------- -------- -------- -------- --------
Total investments held
to maturity ........... $ 4,531 6.70% $ 23,045 6.77% $ 22,064 6.99% $ 14,112 6.89% $ 63,752 6.87%
======== ==== ======== ==== ======== ==== ======== ==== ======== ====
Total investments ............. $ 19,376 6.30% $121,092 6.60% $ 98,278 6.77% $ 46,728 6.71 $285,474 6.66%
======== ==== ======== ==== ======== ==== ======== ==== ======== ====
</TABLE>
28
<PAGE> 35
DEPOSITS
Total deposits decreased $20.1 million during 1999 to $968.5 million at
December 31, 1999, compared to an increase of $41.7 million during 1998. This
decrease was most pronounced in demand deposit accounts which decreased $16.2
million during 1999 although the balances increased $23.5 million in 1998. In
addition, certificates of deposit declined by $12.3 million during 1999. The
decline in 1999 and the increase in 1998 in demand deposits resulted from the
high level of custodial balances at year-end 1998 due to the high level of
mortgage refinance activity experienced at that time. The decline in
certificates of deposit balances reflect the continued customer preference for
shorter term or core deposit accounts without fixed maturities. Partially
offsetting these declines were increases in the savings account balances of
$14.0 million and $49.7 million in 1999 and 1998, respectively. The popularity
of these accounts were primarily due to the introduction of a tiered savings
product offering customers a premium rate on balances in excess of $50,000. This
premium product represents more than half of the savings account balances. The
decline in each of the past two years in money market accounts is primarily due
to a shift in customer preference for the premium savings account.
See Note 8 to the "Consolidated Financial Statements" for further
information.
The following table reflects the balance of deposit accounts of Andover at
each date indicated and the weighted average interest rates at December 31:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------- ---------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
PERCENT AVERAGE PERCENT AVERAGE PERCENT AVERAGE
OF INTEREST OF INTEREST OF INTEREST
AMOUNT TOTAL RATE AMOUNT TOTAL RATE AMOUNT TOTAL RATE
------ ------- -------- ------ ------- -------- ------ ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand deposit accounts ........ $ 86,871 9.0% .--% $103,029 10.4% .--% $ 79,501 8.4% .--%
NOW accounts ................... 99,040 10.2 0.76 102,635 10.4 0.79 85,917 9.1 1.02
Money market deposit accounts... 95,291 9.8 2.75 96,332 9.7 2.77 104,353 11.0 2.96
Savings accounts ............... 213,286 22.0 3.25 199,304 20.2 3.19 149,607 15.8 3.61
Variable rate certificates ..... 3,434 0.4 4.59 4,463 0.5 4.31 5,182 0.5 5.43
Fixed rate certificates ........ 470,611 48.6 5.05 482,893 48.8 5.53 522,422 55.2 5.89
-------- ----- -------- ----- -------- -----
Total deposits ............... $968,533 100.0% 3.53% $988,656 100.0% 3.72% $946,982 100.0% 4.27%
======== ===== ==== ======== ===== ==== ======== ===== ====
</TABLE>
Deposits are derived from customers who work or reside in the Company's
market area and surrounding communities, and from businesses located in that
area. There were no brokered deposits in each of the three years ending December
31, 1999.
The following table presents Andover's outstanding time certificates in
denominations of $100,000 and over, with remaining maturities at December 31:
<TABLE>
<CAPTION>
REMAINING TERM TO MATURITY 1999 1998 1997
-------------------------- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Three months or less.................................. $18,448 $21,612 $15,085
Over three months to six months....................... 18,421 24,751 7,413
Over six months to twelve months...................... 21,701 23,114 23,953
Over twelve months.................................... 32,781 17,711 38,675
------- ------- -------
$91,351 $87,188 $85,126
======= ======= =======
</TABLE>
BORROWINGS
Total borrowings increased $95.6 million in 1999 to $379.4 million at
December 31, 1999, and increased $25.1 million during 1998 to $283.8 million at
December 31, 1998. In order to fund the growth in total assets, the Bank has
increased its reliance on borrowed funds in 1999 due to the decline in total
deposits. The Bank will continue to
29
<PAGE> 36
rely on borrowed funds as an alternative source of funds in order to grow
interest earning assets. The Bank has multiple sources for borrowed funds,
including its primary source, the FHLB of Boston.
The weighted average rate on the total borrowed funds dropped to 5.31% at
December 31, 1999, from 5.39% at December 31, 1998. The decline in the weighted
average interest rate since year-end 1998 was due to a change in the mix of
borrowed funds and reflects the shorter term maturities at December 31, 1999.
Borrowed funds, maturing within one year or with an initial call date within one
year as of December 31, 1999, were approximately 81.4% as compared to 61.0% at
December 31, 1998. This reliance on shorter term borrowed funds in 1999 has
allowed the Company to keep the rates paid on its borrowed funds low in spite of
the overall increase in market interest rates.
The amount of callable advances included in total borrowings totaled $125.0
million as of December 31, 1999. These advances are callable at the discretion
of the FHLB of Boston, starting in 2000 and at regular intervals thereafter.
See Notes 9 and 10 to the "Consolidated Financial Statements" for further
information.
ASSET AND LIABILITY MANAGEMENT AND MARKET RISK
The Bank's earnings are largely dependent on its 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
changes in interest rates, or market risk, through active monitoring and
management of its interest rate risk exposure. The policies and procedures for
managing both on and off balance sheet activities are established by Andover's
asset/liability management committee (ALCO). The Board of Directors reviews and
approves the ALCO policy annually and monitors its related activities on an
ongoing basis.
Market risk is the risk of loss from adverse changes in market prices and
rates. The Bank's market risk arises primarily from interest rate risk inherent
in its lending and deposit taking activities.
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. The Company relies
primarily on its asset/liability structure to control interest rate risk.
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.
The following two tables reflect different methods of disclosing the
Company's exposure to a change in interest rates and its potential impact on the
Company's net interest income. The gap analysis uses estimated prepayments,
contractual maturities and next repricing dates while the market risk analysis
excludes the next repricing dates. The interest rate sensitivity of the
Company's assets and liabilities in both tables would vary substantially if
different assumptions were used or if actual experience differs from the
assumptions provided.
One method used to measure the interest rate risk exposure is the Company's
gap analysis, which involves comparing the difference between assets and
liabilities that mature or reprice during a given period of time. These
differences are a primary component of the risk to net interest income. A gap is
considered positive when the amount of interest sensitive assets exceeds the
amount of interest sensitive liabilities, and is considered negative when the
amount of interest sensitive liabilities exceeds the amount of interest
sensitive assets. A positive gap would produce increased net interest income
during a period of rising interest rates and decreased net interest income when
interest rates decline. A negative gap would have the reciprocal impact on net
interest income.
The primary cause for the change in the Company's gap position from
December 31, 1998 to December 31, 1999, was the prepayment speeds used on the
residential loan and mortgage-backed securities portfolios from one year to the
next. This resulted in a negative gap position of 22.4% at December 31, 1999, as
compared to 9.3% at December 31, 1998.
30
<PAGE> 37
The following table illustrates the Company's gap position, or the
estimated maturity and repricing structure of its interest sensitive assets and
interest sensitive liabilities, at December 31, 1999.
<TABLE>
<CAPTION>
1-180 181-365 >1-3 >3-5 5+
DAYS DAYS YEARS YEARS YEARS TOTAL
------ ------ ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest sensitive assets:
Fixed rate securities ................ $ 14,877 $ 12,319 $ 80,517 $ 70,975 $ 93,630 $ 272,318
Variable rate securities ............. 9,627 3,529 -- -- -- 13,156
Fixed rate loans ..................... 41,219 38,529 144,219 107,364 140,922 472,253
Variable rate loans .................. 170,539 107,285 210,391 124,809 45,368 658,392
Other interest sensitive assets ...... 19,231 -- -- -- -- 19,231
---------- ---------- ---------- ---------- ---------- ----------
Total interest sensitive assets .... 255,493 161,662 435,127 303,148 279,920 1,435,350
Interest sensitive liabilities:
NOW accounts ......................... 4,804 4,560 16,085 11,838 61,753 99,040
Savings and money market
deposit accounts .................... 56,732 55,321 94,467 17,578 84,479 308,577
Certificates of deposit .............. 198,456 122,361 146,658 6,570 -- 474,045
Total borrowed funds ................. 252,167 56,543 53,199 15,500 1,975 379,384
---------- ---------- ---------- ---------- ---------- ----------
Total interest sensitive liabilities 512,159 238,785 310,409 51,486 148,207 1,261,046
---------- ---------- ---------- ---------- ---------- ----------
Net interest rate sensitivity gap ...... $ (256,666) $ (77,123) $ 124,718 $ 251,662 $ 131,713 $ 174,304
========== ========== ========== ========== ========== ==========
Cumulative net interest rate
sensitivity gap ...................... $ (256,666) $ (333,789) $ (209,071) $ 42,591 $ 174,304
========== ========== ========== ========== ==========
Cumulative net interest rate
sensitivity gap as a percentage
of total assets ...................... (17.2)% (22.4)% (14.0)% 2.9% 11.7%
AT DECEMBER 31, 1998:
Cumulative net interest rate
sensitivity gap ...................... $ (125,069) $ (131,140) $ (20,685) $ 150,692 $ 187,614
========== ========== ========== ========== ==========
Cumulative net interest rate
sensitivity gap as a percentage
of total assets ...................... (8.9)% (9.3)% (1.5)% 10.7% 13.3%
</TABLE>
The balances on the interest sensitive asset and liability accounts have
been allocated among the various periods using common industry techniques and
market consensus data. Fixed and variable rate retail loans, the largest
component of the loan portfolio, are shown in the table in the time period
corresponding to scheduled principal amortization and anticipated prepayments
using annual conditional prepayment rates that vary from 11.1% to 18.0% at
December 31, 1999, as compared with 11.9% to 25.3% at December 31, 1998. In
addition, variable rate retail and corporate loans are allocated to the periods
in which the loans could be next adjusted. Fixed rate mortgage-backed securities
are allocated using annual conditional prepayment rates of 10.3% to 11.2% at
December 31, 1999, versus 21.2% to 46.9% at December 31, 1998. All other loans
and securities, certificates of deposit and borrowed funds are allocated to the
period in which the rates could be next adjusted or to their final contractual
maturity for the fixed rate instruments. Substantially all of the callable
advances from the FHLB are allocated according to their initial call dates due
to the strong likelihood of their being called by the FHLB given current market
interest rates. Other interest sensitive assets include assets held for sale and
FHLB stock. Nonaccruing loans have been excluded from both the gap analysis and
the market risk analysis.
A substantial portion of the savings, money market and NOW accounts are
considered core deposits by management and, therefore, relatively insensitive to
interest rates. In addition, any future changes to the interest rates paid on
these accounts are at the sole discretion of management. Despite the foregoing
factors, these deposits
31
<PAGE> 38
have been allocated between each time period based on the Bank's own historical
experience, or decay rates, in determining the deposit runoff.
Another method used to measure interest rate risk is the market risk
analysis. The following table shows the Company's financial instruments that are
sensitive to changes in interest rates, categorized by expected maturity, and
the instruments' fair values at December 31, 1999.
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE AS OF DECEMBER 31, 1999
----------------------------------------------
FAIR VALUE
AT
2000 2001 2002 2003 2004 THEREAFTER TOTAL 12/31/99
---- ---- ---- ---- ---- ---------- ----- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest sensitive assets:
Fixed rate securities ................ $ 27.2 $ 38.7 $ 41.8 $ 24.3 $ 46.7 $ 93.6 $ 272.3 $ 271.1
Average interest rate .............. 6.56% 6.58% 6.41% 6.51% 6.85% 6.75% 6.65%
Variable rate securities ............. $ 4.3 $ 2.1 $ 1.6 $ 1.2 $ 0.9 $ 3.1 $ 13.2 $ 13.2
Average interest rate .............. 6.46% 7.02% 7.02% 7.02% 7.01% 7.01% 6.83%
Fixed rate retail loans .............. $ 56.4 $ 50.8 $ 43.7 $ 37.2 $ 31.1 $ 126.3 $ 345.5 $ 332.8
Average interest rate .............. 7.04% 7.04% 7.04% 7.04% 7.06% 7.01% 7.03%
Variable rate retail loans ........... $ 80.8 $ 70.9 $ 58.0 $ 47.4 $ 38.7 $ 163.7 $ 459.5 $ 453.9
Average interest rate .............. 7.18% 7.10% 7.08% 7.07% 7.06% 6.99% 7.07%
Fixed rate corporate loans ........... $ 23.4 $ 22.5 $ 27.1 $ 23.2 $ 16.0 $ 14.6 $ 126.8 $ 123.7
Average interest rate .............. 8.19% 8.14% 8.01% 8.35% 8.38% 8.84% 8.27%
Variable rate corporate loans ........ $ 42.6 $ 32.0 $ 28.3 $ 26.3 $ 22.3 $ 47.3 $ 198.8 $ 196.7
Average interest rate .............. 8.66% 8.56% 8.53% 8.51% 8.44% 8.43% 8.53%
Other interest sensitive assets ...... $ 19.2 -- -- -- -- -- $ 19.2 $ 19.2
Average interest rate .............. 6.64% -- -- -- -- -- 6.64%
--------- ------- ------- ------- ------- --------- --------- --------
Total interest sensitive assets ...... $ 253.9 $ 217.0 $ 200.5 $ 159.6 $ 155.7 $ 448.6 $ 1,435.3 $1,410.6
========= ======= ======= ======= ======= ========= ========= ========
Interest sensitive liabilities:
NOW accounts ......................... $ 9.4 $ 8.0 $ 8.0 $ 5.9 $ 5.9 $ 61.8 $ 99.0 $ 99.0
Average interest rate .............. 0.76% 0.76% 0.76% 0.76% 0.76% 0.76% 0.76%
Savings and money market
deposit accounts .................. $ 112.1 $ 47.2 $ 47.2 $ 8.8 $ 8.8 $ 84.5 $ 308.6 $ 308.6
Average interest rate .............. 3.35% 3.59% 3.59% 2.40% 2.40% 2.40% 3.10%
Certificates of deposit .............. $ 320.8 $ 88.9 $ 57.8 $ 3.9 $ 2.6 -- $ 474.0 $ 474.1
Average interest rate .............. 4.90% 5.13% 5.76% 5.25% 5.03% -- 5.05%
Total borrowed funds ................. $ 218.7 $ 23.6 $ 14.6 $ 5.5 $ 15.0 $ 102.0 $ 379.4 $ 379.0
Average interest rate .............. 5.29% 5.45% 5.94% 5.73% 5.58% 5.15% 5.31%
--------- ------- ------- ------- ------- --------- --------- --------
Total interest sensitive liabilities . $ 661.0 $ 167.7 $ 127.6 $ 24.1 $ 32.3 $ 248.3 $ 1,261.0 $1,260.7
========= ======= ======= ======= ======= ========= ========= ========
AT DECEMBER 31, 1998:
Total interest sensitive assets ...... $ 338.9 $ 246.1 $ 205.1 $ 142.8 $ 127.6 $ 296.6 $ 1,357.1 $1,370.8
========= ======= ======= ======= ======= ========= ========= ========
Total interest sensitive liabilities . $ 602.5 $ 173.3 $ 77.1 $ 50.3 $ 36.2 $ 230.0 $ 1,169.4 $1,186.6
========= ======= ======= ======= ======= ========= ========= ========
</TABLE>
Market risk sensitive instruments are generally defined as on and off
balance sheet derivatives and other financial instruments. Expected maturities
are contractual maturities adjusted for prepayments of principal. The Company
uses certain assumptions to estimate fair values and expected maturities. For
interest sensitive assets, expected maturities are based upon contractual
maturity, projected repayments and prepayments of principal using the same
ratios used for the gap analysis presented previously. However, as mentioned
above, the market risk analysis excludes repricing features on all interest
sensitive assets. Retail loans include residential and consumer loans while
corporate loans are comprised of commercial real estate, commercial,
construction and land loans and leases. For interest sensitive liabilities, the
same decay rates and contractual maturities used for the gap analysis are used
for the market risk analysis. The only difference between the gap analysis and
the market analysis of the interest sensitive liabilities are the callable
features on the FHLB advances. The market risk analysis uses the advances
contractual maturity date in all cases, whereas the gap report allocates the
callable advances using their respective initial call date.
32
<PAGE> 39
The following table reflects the scheduled maturities of selected loans at
December 31, 1999:
<TABLE>
<CAPTION>
ONE OVER
LESS THAN THROUGH FIVE
ONE YEAR FIVE YEARS YEARS TOTAL
--------- ---------- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Construction and land loans................. $ 8,070 $40,041 $15,549 $63,660
Commercial loans............................ 13,516 6,383 162 20,061
-------- ------- ------- -------
$ 21,586 $46,424 $15,711 $83,721
======== ======= ======= =======
</TABLE>
Of the loans maturing after one year, $4.6 million, or 7.4%, have fixed
rates and $57.5 million, or 92.6%, have floating or variable rates.
LIQUIDITY
The Company's primary source of funds is dividends from its bank
subsidiary. The Company could also access the capital market to raise additional
equity. Dividends from the Bank to the Company totaled $7.0 million in 1999,
$9.5 million in 1998 and $7.0 million in 1997.
The Company made payments of dividends to stockholders in the amount of
$5.7 million, $4.5 million and $3.5 million, respectively, for the years ended
December 31, 1999, 1998 and 1997.
The goal of the Company's liquidity management process is to assess 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 Bank has a diverse base of funding. Sources of liquidity include
maturation, amortization and prepayment of the investment and loan portfolios.
In addition, the Bank's investments available for sale portfolio provides the
Bank with flexibility to sell these securities quickly. Other sources of
liquidity are increasing deposit balances, funds purchased from other banks, the
sale of securities under repurchase agreements, customer repurchase agreements,
and borrowings from the FHLB, of which Andover Bank is a voluntary member. The
Bank may also obtain funds at the discount window of the Federal Reserve Bank of
Boston.
At December 31, 1999, the Company had home equity, reserve credit and
commercial unadvanced lines of credit totaling $101.8 million. Outstanding
commitments to originate loans totaled $53.7 million. Unadvanced portions of
construction and land loans amounted to $26.5 million. Standby letters of credit
were $3.2 million. Loans sold with recourse totaled $1.2 million. Management
believes that its sources of liquidity are sufficient to meet these commitments
if and as called upon.
See Notes 9, 10, 12, 16 and 17 to the "Consolidated Financial Statements"
for further information.
Cash flows provided by operating activities increased by $9.7 million to
$30.2 million at December 31, 1999, and increased by $6.4 million to $20.5
million at December 31, 1998. The increase in cash flows provided in 1999 was
due to a decrease in assets held for sale. The change in 1998 was primarily
attributable to an increase in net income and an increase in accrued income
taxes payable. Cash flows used by investing activities increased by $43.0
million to $117.1 million during 1999 and decreased $54.6 million during 1998 to
$74.1 million. The change in 1999 was primarily attributable to a much higher
level of purchases of investments and mortgage-backed securities available for
sale and increased purchases of whole loans. The decrease in 1998 was due to a
large reduction in the purchases of whole loans. Cash flows provided by
financing activities increased by $6.7 million to $70.0 million during 1999 due
to a significant increase in total borrowed funds offset by a decline in
deposits. The decrease of $40.9 million in cash flows provided by financing
activities to $63.3 million at December 31, 1998, was mainly attributable to a
smaller increase in deposits.
33
<PAGE> 40
CAPITAL RESOURCES
At December 31, 1999, the Company reported total capital of $130.3 million,
or 8.7% of total assets as compared to $121.1 million, or 8.6% at December 31,
1998. The Company and the Bank continue to maintain capital ratios in excess of
all applicable regulatory minimums.
The capital position of banks and bank holding companies are regulated by
various Federal and state agencies. The following table presents regulatory
capital ratios under current regulatory and risk-based capital requirements as
of December 31, 1999:
<TABLE>
<CAPTION>
REGULATORY ANDOVER ANDOVER
MINIMUM BANCORP, INC. BANK
---------- ------------- -------
<S> <C> <C> <C>
Leverage Capital Ratio Tier 1................................... 4.0% 9.0% 8.3%
Risk Based Capital Ratio:
Tier 1..................................................... 4.0 13.4 12.4
Total...................................................... 8.0 14.6 13.5
</TABLE>
Under the FDIC's prompt corrective action regulations promulgated pursuant
to the FDIC Improvement Act of 1991, the Bank has sufficient capital to be
considered "well capitalized". Therefore, the Bank is entitled to pay the lowest
deposit premiums possible.
In January, 1999, the Company adopted a Shareholder Rights Plan and in
1998, the Company's Board of Directors approved a stock repurchase program.
See Item 1, "Business -- Supervision and Regulation" and Note 12 to the
"Consolidated Financial Statements" for further information.
IMPACT OF INFLATION
The Consolidated Financial Statements and related consolidated financial
data presented herein have been prepared in accordance with generally accepted
accounting principles which require the measurement of financial position and
operating results in terms of historical dollars without considering the changes
in the relative purchasing power of money over time due to inflation. The
primary impact of inflation on operations of Andover is reflected in increased
operating costs. Unlike most industrial companies, virtually all the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or to the same extent as the price of
goods and services.
YEAR 2000 DISCLOSURE
The Year 2000 computer software compliance issues affected Andover and many
other financial institutions and companies in the U.S. The primary concern was
that computer programs would not recognize the proper date which could then
generate erroneous data or cause systems to fail, thereby creating an adverse
impact on the Company's business and possibly its operating results.
The Company started its Year 2000 initiative in early 1997. Prior to the
end of 1999, the Company completed its assessment, testing and remediating of
Year 2000 issues. The Company developed multiple contingency plans, tested its
various software information systems, hardware components and non-technology
systems and arranged for the required human and financial resources to complete
its necessary remediation efforts.
Due to the extensive planning and testing over the past three years, the
Company did not experience any Year 2000 difficulties with regards to software,
hardware or non-technology systems.
34
<PAGE> 41
Included in other noninterest expenses during 1999 were charges incurred in
connection with the modification or replacement of software and hardware in
order for the Company's computer systems to properly recognize the Year 2000.
The level of data processing expenses and consulting services incurred in 1999
was approximately $70,000 and $45,000, respectively. Total expenses incurred and
hardware capitalized were approximately $415,000 for the year ended December 31,
1999 and $700,000 over the course of the project.
RECENT ACCOUNTING DEVELOPMENTS
In June, 1998, the Financial Accounting Standards Board ("FASB") 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.
35
<PAGE> 42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.................................................................... 37
Consolidated Balance Sheets as of December 31, 1999 and 1998.................................... 38
Consolidated Statements of Operations for each of the years ended
December 31, 1999, 1998 and 1997.............................................................. 39
Consolidated Statements of Changes in Stockholders' Equity for each of the
years ended December 31, 1999, 1998 and 1997.................................................. 40
Consolidated Statements of Cash Flows for each of the years ended
December 31, 1999, 1998 and 1997................................................................. 41-42
Notes to Consolidated Financial Statements......................................................... 43-68
</TABLE>
36
<PAGE> 43
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Andover Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of Andover
Bancorp, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Andover
Bancorp, Inc. and subsidiaries as of December 31, 1999 and 1998 and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ KMPG LLP
- ------------
KMPG LLP
Boston, Massachusetts
January 13, 2000
37
<PAGE> 44
ANDOVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks (note 17) ........................................... $ 26,913 $ 29,337
Short-term investments (note 3) ............................................. 1,600 16,100
----------- -----------
Cash and cash equivalents ................................................. 28,513 45,437
----------- -----------
Assets held for sale, at lower of cost or market (note 2) ................... 1,494 11,282
Investments available for sale (amortized cost of $226,332 in 1999
and $163,936 in 1998) (notes 3, 9 and 10) ................................. 221,370 166,028
Investments held to maturity (market value $62,557 in 1999 and
$102,512 in 1998) (notes 3, 9 and 10) ..................................... 63,752 100,920
Loans (notes 4, 9 and 10) ................................................... 1,133,101 1,050,765
Allowance for loan losses (note 4) .......................................... (11,384) (10,486)
----------- -----------
Net loans .............................................................. 1,121,717 1,040,279
----------- -----------
Mortgage servicing assets, net (note 5) ..................................... 10,635 8,956
Premises and equipment, net (note 6) ........................................ 10,663 9,255
Accrued interest receivable ................................................. 8,236 7,432
Stock in FHLB of Boston, at cost (notes 7 and 10) ........................... 17,737 15,747
Net deferred income taxes receivable (note 11) .............................. 5,259 2,925
Other assets ................................................................ 1,678 1,986
----------- -----------
Total assets ...................................................... $ 1,491,054 $ 1,410,247
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 8) ...................................................... $ 968,533 $ 988,656
Other borrowings (notes 9 and 10) ...................................... 73,662 16,332
Federal Home Loan Bank advances (notes 9 and 10) ....................... 305,722 267,492
Mortgagors' escrow accounts ............................................ 3,412 2,819
Income taxes payable (note 11) ......................................... 3,817 7,631
Accrued expenses and other liabilities ................................. 5,645 6,175
----------- -----------
Total liabilities ................................................. 1,360,791 1,289,105
----------- -----------
Commitments and contingencies (notes 6 and 17)
Stockholders' equity (notes 12 and 14):
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 and 6,520,012 shares issued in 1999 and 1998, respectively . 653 652
Additional paid-in capital ............................................. 60,745 60,507
Retained earnings ...................................................... 71,924 58,716
Accumulated other comprehensive income (loss) (notes 3 and 11) ......... (3,059) 1,267
----------- -----------
Total stockholders' equity ........................................ 130,263 121,142
----------- -----------
Total liabilities and stockholders' equity ........................ $ 1,491,054 $ 1,410,247
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
38
<PAGE> 45
ANDOVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Interest and dividend income:
Loans ..................................................... $ 80,252 $ 77,358 $ 70,861
Mortgage-backed securities ................................ 9,028 11,711 12,362
Investment securities ..................................... 9,094 6,320 5,753
Dividends on equity securities (note 7) ................... 1,118 1,020 1,030
Short-term investments .................................... 518 837 746
--------- --------- ---------
Total interest and dividend income ...................... 100,010 97,246 90,752
--------- --------- ---------
Interest expense:
Deposits (note 8) ......................................... 34,341 39,137 38,251
Federal Home Loan Bank advances ........................... 16,214 15,300 13,315
Other borrowings .......................................... 2,146 578 481
--------- --------- ---------
Total interest expense .................................. 52,701 55,015 52,047
--------- --------- ---------
Net interest and dividend income ...................... 47,309 42,231 38,705
Provision (credit) for loan losses (note 4) ................. 400 (1,705) 983
--------- --------- ---------
Net interest and dividend income after provision (credit)
for loan losses ....................................... 46,909 43,936 37,722
--------- --------- ---------
Non-interest income:
Net gains from sales of assets held for sale (note 2) ..... 17 653 264
Net gains (losses) from sales
of investments available for sale (note 3) .............. (385) 17 158
Mortgage banking income (loss), net (note 5) .............. 908 (389) 2,015
Gains (losses) on real estate operations, net ............. (5) 14 (971)
Other income (note 13) .................................... 3,705 3,891 3,292
--------- --------- ---------
Total non-interest income ............................... 4,240 4,186 4,758
--------- --------- ---------
Non-interest expense:
Salaries and employee benefits (note 14) .................. 11,116 12,009 11,886
Office occupancy and equipment (note 6) ................... 3,167 2,972 2,885
Data processing ........................................... 2,379 2,090 1,933
Professional fees ......................................... 1,178 940 862
Marketing ................................................. 908 831 988
Mortgage banking expense .................................. 267 606 430
Other operating expense ................................... 2,962 3,129 3,002
--------- --------- ---------
Total non-interest expense .............................. 21,977 22,577 21,986
--------- --------- ---------
Income before income tax expense ........................ 29,172 25,545 20,494
Income tax expense (note 11) ................................ 10,287 8,159 7,288
--------- --------- ---------
Net income .................................................. $ 18,885 $ 17,386 $ 13,206
========= ========= =========
Average number of common shares outstanding, basic .......... 6,527 6,482 6,434
Average number of common shares outstanding, diluted ........ 6,708 6,697 6,629
Basic earnings per share .................................... $ 2.89 $ 2.68 $ 2.05
========= ========= =========
Diluted earnings per share .................................. $ 2.82 $ 2.60 $ 1.99
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
39
<PAGE> 46
ANDOVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
ADDITIONAL COMPRE- STOCK-
COMMON PAID-IN RETAINED TREASURY HENSIVE HOLDERS'
STOCK CAPITAL EARNINGS STOCK INCOME (LOSS) EQUITY
------ ---------- -------- -------- ------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 .................. $ 515 $ 59,222 $ 36,109 $ (301) $ 301 $ 95,846
Comprehensive income:
Net income .................................. -- -- 13,206 -- -- 13,206
Other comprehensive income:
Unrealized holding gains arising during
the period, net of taxes of $493 .......... -- -- -- -- 726 726
Realized gains included in
net income, net of taxes of $56 ........... -- -- -- -- 102 102
---------
Total comprehensive income ................ 14,034
Dividends declared and paid
($0.54 per share) ......................... -- -- (3,501) -- -- (3,501)
Stock options exercised (note 14) ........... 2 397 -- 301 -- 700
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1997 .................. 517 59,619 45,814 -- 1,129 107,079
Comprehensive income:
Net income .................................. -- -- 17,386 -- -- 17,386
Other comprehensive income:
Unrealized holding gains arising during
the period, net of taxes of $70 ........... -- -- -- -- 126 126
Realized gains included in
net income, net of taxes of $5 ............ -- -- -- -- 12 12
---------
Total comprehensive income ................ 17,524
Dividends declared and paid
($0.69 per share) ......................... -- -- (4,484) -- -- (4,484)
Par value adjustment for stock split ........ 130 (130) -- -- -- --
Stock options exercised (note 14) ........... 5 1,018 -- -- -- 1,023
--------- --------- --------- --------- --------- ---------
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 (note 14) ........... 1 238 -- -- -- 239
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1999 .................. $ 653 $ 60,745 $ 71,924 $ -- $ (3,059) $ 130,263
========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
40
<PAGE> 47
ANDOVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................. $ 18,885 $ 17,386 $ 13,206
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision (credit) for loan losses .......................... 400 (1,705) 983
Net (gains) losses on sales and provisions
for other real estate owned ............................... (72) (157) 240
Net (gains) losses from sales of
investments available for sale ............................ 385 (17) (158)
Net gains from sales of assets held for sale ................ (17) (653) (264)
Depreciation and amortization ............................... 1,463 1,362 1,397
Amortization of fees, discounts and premiums, net ........... 1,109 541 405
Deferred income taxes ....................................... 394 (1,168) (1,008)
(Increase) decrease in:
Assets held for sale ...................................... 9,805 (5,092) (3,053)
Accrued interest receivable ............................... (804) 135 (403)
Mortgage servicing assets ................................. 2,311 3,110 1,592
Other assets .............................................. 97 128 1,541
Increase (decrease) in:
Mortgagors' escrow accounts ............................... 593 341 184
Accrued income taxes payable .............................. (3,814) 5,381 (320)
Accrued expenses and other liabilities .................... (530) 951 (150)
--------- --------- ---------
Net cash provided by operating activities .............. 30,205 20,543 14,192
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment and mortgage-backed securities available for sale:
Purchases ................................................. (151,683) (60,915) (51,149)
Proceeds from sales ....................................... 28,618 3,017 14,658
Proceeds from maturities and redemptions .................. 40,063 4,000 3,000
Principal repayments ...................................... 19,359 26,989 9,889
Investment and mortgage-backed securities held to maturity:
Purchases ................................................. -- (15,058) (18,571)
Proceeds from maturities and redemptions .................. 2,000 10,000 2,500
Principal repayments ...................................... 35,086 33,416 23,449
Net change FHLB stock ....................................... (1,990) -- --
Purchases of whole loans .................................... (38,346) (22,875) (71,297)
Purchased and capitalized mortgage servicing assets ......... (3,990) (2,566) (3,086)
Net increase in loans ....................................... (44,052) (50,215) (40,454)
Capital expenditures on premises and equipment, net ......... (2,871) (1,024) (796)
Proceeds from sales of other real estate owned .............. 678 1,084 3,182
Capital expenditures on other real estate owned ............. -- -- (54)
--------- --------- ---------
Net cash used by investing activities .................. (117,128) (74,147) (128,729)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits ......................... (20,123) 41,674 122,671
Net increase in other borrowings ............................ 57,330 6,161 7,338
Proceeds from issuance of FHLB advances ..................... 345,300 310,100 293,514
Principal repayments of FHLB advances ....................... (307,070) (291,169) (316,538)
Dividends paid .............................................. (5,677) (4,484) (3,501)
Stock options exercised ..................................... 239 1,023 700
--------- --------- ---------
Net cash provided by financing activities .............. 69,999 63,305 104,184
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ............. (16,924) 9,701 (10,353)
Cash and cash equivalents, beginning of year ..................... 45,437 35,736 46,089
--------- --------- ---------
Cash and cash equivalents, end of year ........................... $ 28,513 $ 45,437 $ 35,736
========= ========= =========
</TABLE>
Statement continued on next page.
41
<PAGE> 48
ANDOVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest .............................................. $52,499 $55,191 $52,129
Income taxes .......................................... 13,619 4,010 7,866
Cash received during the year for:
Income taxes .......................................... -- 397 --
Supplemental noncash investing and financing activities:
Conversion of real estate loans to mortgage-backed
securities held for sale or investments available for sale 32,153 53,300 24,068
Transfer of loans to other real estate owned ............... 395 773 2,091
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
42
<PAGE> 49
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Andover Bancorp, Inc. (the "Company") is a Delaware corporation and the
holding company of Andover Bank. Andover Bank (the "Bank") is a state-chartered
savings bank with its headquarters located in Andover, Massachusetts. The
Company provides a variety of loan and deposit services to its customers through
13 locations. The Company is supervised by the Board of Governors of the Federal
Reserve System ("FRB") and it is also subject to the jurisdiction of the
Massachusetts Board of Bank Incorporation, while the Bank is subject to
regulation and supervision by the Federal Deposit Insurance Corporation ("FDIC")
and the Massachusetts Commissioner of Banks (the "Commissioner"). The Bank's
deposits are insured by the FDIC and the Depositors Insurance Fund, Inc.
("DIF").
Andover Bank NH was a wholly-owned de novo guaranty savings bank chartered
in September, 1995 and headquartered in Salem, New Hampshire. The Company merged
Andover Bank NH with and into Andover Bank as of close of business on June 30,
1999.
The accounting and reporting policies of Andover Bancorp, Inc. and
subsidiaries conform with generally accepted accounting principles and general
practices within the banking industry. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet
and income and expenses for the period. Actual results could differ
significantly from those estimates. Material estimates that are particularly
susceptible to change relate to the allowance for loan loss and the valuation of
mortgage servicing assets. The following is a summary of the more significant
accounting policies.
Principles of Consolidation
The consolidated financial statements include the accounts of Andover
Bancorp, Inc. and its subsidiaries, including its principal subsidiary Andover
Bank. All intercompany accounts and transactions have been eliminated in
consolidation. Certain amounts in the prior years' financial statements have
been reclassified to conform with the current year's presentation for
comparative purposes. Such reclassifications had no effect on net income. In
addition, the Company is reporting its results as one operating segment.
Mortgage Banking Activities
Loans held for sale in the secondary market are stated at the lower of
aggregate amortized cost or market value. Market value is estimated based on
outstanding investor commitments or, in the absence of such commitments, current
investor yield requirements. Net unrealized losses, if any, are provided for in
a valuation allowance by charges to operations. When loans are sold, a gain or
loss is recognized to the extent that the sale proceeds exceed or are less than
the carrying amount of the loans. Gains and losses are determined using the
specific identification method.
The Company recognizes a servicing asset based on an allocation of the
carrying amount of the assets sold between the underlying asset sold and the
servicing obligation or other retained interests using the relative fair value
of the assets sold to the interests retained. These capitalized mortgage loan
servicing rights are a significant component of the net gains from sales of
assets held for sale income category.
Mortgage loan servicing rights purchased or originated are amortized
against mortgage banking income using a method which approximates the level
yield method in proportion to, and over the period of, estimated net servicing
income. Prepayment experience on each mortgage servicing asset is reviewed
periodically, and, when actual prepayments exceed estimated prepayments, the
balance of the mortgage servicing asset is adjusted by a charge to the valuation
allowance. On a regular basis, the mortgage servicing assets are assessed for
impairment based on the fair value of such rights. The fair value is estimated
using market prices when available or, alternatively, using a valuation model
that calculates the present value of future servicing asset cash flows using
discount rates and prepayment assumptions that management believes market
participants would use. Any impairment in the fair value of those mortgage
servicing assets is recognized by a charge to the valuation allowance. The risk
characteristics of the underlying loans used to measure impairment of originated
and purchased mortgage loan servicing rights include the loan type, interest
rate, loan origination date, term to maturity and geographic location.
43
<PAGE> 50
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
Investments
Investments include short-term, available for sale, held to maturity and
trading. Debt securities are classified as held to maturity only when there is
positive intent and ability to hold them to maturity. Such securities are
recorded at amortized cost, adjusted for amortization of premiums and accretion
of discounts and adjusted as necessary for estimated prepayments. Trading
securities are debt or equity securities held principally for the purpose of
selling in the near term. Such securities are recorded at fair value, with
unrealized gains and losses recorded in earnings. Investments available for sale
are any debt or equity securities not classified as either held to maturity or
trading securities. Such investments are recorded at fair value with changes in
fair value recorded as a separate component of stockholders' equity, net of the
related income tax effect. Originated mortgage loans converted to
mortgage-backed securities to be sold are classified as trading. Gains and
losses on sales of investment and mortgage-backed securities are recognized
using the specific identification method. Premiums and discounts on investment
and mortgage-backed securities are amortized or accreted into income by use of
the level-yield method. The yields on mortgage-backed securities are affected by
prepayments and changes in interest rates. If a decline in fair value below the
amortized cost basis of an investment or mortgage-backed security is judged to
be other than temporary, the cost basis of the security is written down to fair
value. The amount of the writedown is included as a charge against gain on sale
of securities. Short-term investments with original maturities of 90 days or
less are carried at cost, which approximates market value.
Loans
Accrual of interest income on loans and amortization of net deferred loan
fees are discontinued when loan payments are 90 days or more past due or earlier
when concern exists as to the ultimate collection of principal or interest. When
loans are placed on nonaccrual status, the interest receivable on the loan is
reversed against interest income of the current period. Non-performing loans are
not returned to performing status until the obligation is brought current, the
loan becomes well-secured and in the process of collection and, in either case,
when concern no longer exists as to the ultimate collectibility of principal or
interest. Interest received on nonaccruing loans is either applied against
principal or reported as income according to management's judgment as to the
collectibility of principal.
Loan origination fees and related direct incremental loan origination costs
are deferred and amortized over the life of the related loans as yield
adjustments using the level yield method. When loans are sold or paid off, the
unamortized fees and costs are recognized to income. Purchased loan discounts
and premiums are amortized or accreted into income over the weighted average
repricing term of the underlying loans.
Allowance for Loan Losses
The Bank maintains an allowance for possible losses that are inherent in
its loan portfolio. The allowance is increased by provisions charged against
earnings or by recoveries of previously charged-off loans. The allowance is
decreased as loans are charged-off.
The allowance is an amount that management believes will be adequate for
loan losses based on evaluations of collectibility and prior loss experience,
changes in the nature and volume of the loan portfolio, overall portfolio
quality, specific problem loans and current and anticipated economic conditions
that may affect the borrower's ability to pay. A substantial portion of the
Bank's loans are secured by real estate in Massachusetts and New Hampshire.
Accordingly, the ultimate collectibility of a substantial portion of the Bank's
loan portfolio is susceptible to changes in market conditions in these areas.
Management believes the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank to recognize additions to the
allowance based on their judgments about information available to them at the
time of their examination.
44
<PAGE> 51
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
Impaired loans are commercial, commercial real estate, and individually
significant mortgage and consumer loans for which it is probable that the
Company will not be able to collect all amounts due according to the contractual
terms of the loan agreement. The definition of "impaired loans" is not the same
as the definition of "nonaccrual loans", although the two categories overlap.
Nonaccrual loans include impaired loans and are those on which the accrual of
interest is discontinued when collectibility of principal or interest is
uncertain or payments of principal or interest have been contractually past due
90 days. The Company may choose to place a loan on nonaccrual status due to
payment delinquency, while not classifying the loan as impaired due to
insignificant payment delays and insignificant shortfalls in payment amounts.
Factors considered by management in determining impairment include payment
status and collateral value. The amount of impairment for these types of
impaired loans is determined by the difference between the present value of the
expected cash flows related to the loan, using the original contractual interest
rate and its recorded value, or, as a practical expedient in the case of
collateral dependent loans, the difference between the fair value of the
collateral and the recorded amount of the loans. When foreclosure is probable,
impairment is measured based on the fair value of the collateral. Loan
restructurings at below current market rates are reported as impaired loans and
impairment is measured as described above using the loan's pre-modification rate
of interest. Income received on impaired loans is recognized in income similar
to nonaccrual loans.
Other Real Estate Owned
Other real estate owned is comprised of properties acquired through
foreclosure proceedings, acceptance of a deed in lieu of foreclosure or when the
Bank is in possession of the collateral. Real estate owned is recorded at the
lower of the carrying value of the loan or the net fair value of the property.
Losses arising from the acquisition of such properties are charged against the
allowance for loan losses. Operating expenses, net of related income, and any
provisions to increase the valuation allowance are charged to real estate
operations. Subsequent declines in net fair value are charged-off to the
valuation allowance while gains and losses upon disposition are reflected in
real estate operations. Management believes the allowance is adequate to provide
for potential losses. However, future additions to the valuation allowance may
be necessary based on changes in economic conditions.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation or amortization is computed on the straight-line method over the
lesser of the estimated useful lives of the assets or over the terms of their
respective leases for leasehold improvements. It is the Company's practice to
charge the cost of maintenance and repairs to operations when incurred; major
expenditures for improvements are capitalized and depreciated.
Income Taxes
Income taxes are accounted for using the asset and liability method of
accounting. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax basis and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. The valuation allowance
related to deferred tax assets is recognized when, in management's judgment, it
is more likely than not that all, or a portion of, such deferred tax assets will
not be realized.
45
<PAGE> 52
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
Employee Benefits
The Company accounts for pension and postretirement benefits on the net
periodic cost method for financial reporting purposes. This method recognizes
the compensation cost of any employee's benefit over that employee's approximate
service period. After evaluating the Company's pension plan in early 1999, the
Company elected to terminate the plan. In its stead, the Bank increased the
employer contribution to the 401(k) plan and adopted a new replacement defined
contribution plan effective January 1, 2000. Due to the termination of the
pension plan, the Company recognized curtailment and settlement gains of $1.6
million in 1999.
The Company continues to follow APB Opinion No. 25 "Accounting for Stock
Issued to Employees" as permitted by Statement of Financial Accounting Standards
No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"). For companies
that elect to continue using APB 25, SFAS 123 requires disclosure of the pro
forma effect of using the fair value method of accounting for stock-based
compensation that is encouraged by SFAS 123. The proforma disclosures include
the effects of all awards granted on or after January 1, 1995. See footnote 14
for the expanded disclosures required by SFAS 123.
Earnings Per Share
There are two methods of calculating earnings per share: basic and diluted.
Basic earnings per share excludes common stock equivalents and is computed by
dividing net income by the weighted average number of common shares outstanding
for the period. Diluted earnings per share gives effect to all potential
dilutive common shares using the average market price of the Company's common
stock for the period plus the weighted average number of common shares
outstanding for the equivalent period of time.
A reconciliation of the common shares outstanding for the three years ended
December 31, follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Average number of common shares outstanding, basic................ 6,527 6,482 6,434
Dilutive impact of stock options.................................. 181 215 195
----- ----- -----
Average number of common shares outstanding, diluted.............. 6,708 6,697 6,629
</TABLE>
The numerator in the earnings per common share calculation is net income,
as reported, for both the basic and dilutive calculations.
46
<PAGE> 53
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(2) ASSETS HELD FOR SALE
The composition of assets held for sale at December 31 follows:
<TABLE>
<CAPTION>
1999 1998
------------------------- -------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---- ----- ---- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Loans.......................................... $1,494 $1,494 $11,282 $11,314
====== ====== ======= =======
</TABLE>
Proceeds from sales, realized and net unrealized gains and losses on assets
held for sale for the years ended December 31, follow:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Proceeds from sales.......................................... $33,611 $60,082 $27,732
Realized gains on sales...................................... 454 870 498
Realized losses on sales..................................... (408) (217) (260)
Net unrealized gains (losses)................................ (29) -- 26
</TABLE>
Included in the realized gains on sales are the capitalized originated
mortgage servicing rights of $439,000, $726,000 and $447,000, respectively, for
each of the three years ended December 31, 1999, 1998 and 1997.
(3) INVESTMENTS
The amortized cost and approximate fair value of the investment portfolio
at December 31 follow:
<TABLE>
<CAPTION>
1999 1998
-------------------------------------------- ------------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
---- ----- ------ ----- ---- ----- ------ -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SHORT-TERM INVESTMENTS:
Federal funds sold ................... $ 1,600 $ -- $ -- $ 1,600 $ 16,100 $ -- $ -- $ 16,100
======== ==== ======= ======== ======== ====== ===== ========
INVESTMENTS AVAILABLE FOR SALE:
Common stocks ........................ $ 1,240 $ 76 $ (68) $ 1,248 $ 537 $ -- $ -- $ 537
U.S. government and federal
agency obligations ................. 66,370 43 (1,222) 65,191 61,493 1,063 -- 62,556
Other bonds and obligations .......... 87,049 14 (2,727) 84,336 36,994 567 -- 37,561
GNMA mortgage-backed securities ...... 27,631 35 (285) 27,381 35,909 110 (135) 35,884
FHLMC participation certificates ..... 19,292 9 (183) 19,118 26,465 516 -- 26,981
FNMA pass-through certificates ....... 11,676 10 (253) 11,433 2,538 -- (29) 2,509
Collateralized mortgage obligations... 13,074 -- (411) 12,663 -- -- -- --
-------- ---- ------- -------- -------- ------ ----- --------
$226,332 $187 $(5,149) $221,370 $163,936 $2,256 $(164) $166,028
======== ==== ======= ======== ======== ====== ===== ========
INVESTMENTS HELD TO MATURITY:
U.S. government and federal
agency obligations ................. $ 8,507 $ -- $ (90) $ 8,417 $ 8,526 $ 141 $ -- $ 8,667
Other bonds and obligations .......... 2,514 26 -- 2,540 4,545 91 -- 4,636
FHLMC participation certificates ..... 18,073 89 (236) 17,926 30,207 658 -- 30,865
FNMA pass-through certificates ....... 24,082 68 (500) 23,650 35,435 632 (19) 36,048
GNMA mortgage-backed securities ...... 1,923 6 -- 1,929 2,576 74 -- 2,650
Collateralized mortgage obligations... 8,268 -- (548) 7,720 19,080 42 (23) 19,099
Other asset-backed securities ........ 385 -- (10) 375 551 -- (4) 547
-------- ---- ------- -------- -------- ------ ----- --------
$ 63,752 $189 $(1,384) $ 62,557 $100,920 $1,638 $ (46) $102,512
======== ==== ======= ======== ======== ====== ===== ========
Total investments .................. $291,684 $376 $(6,533) $285,527 $280,956 $3,894 $(210) $284,640
======== ==== ======= ======== ======== ====== ===== ========
</TABLE>
47
<PAGE> 54
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
Proceeds from sales, realized gains and losses on investments available for
sale for the years ended December 31, follow:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Proceeds from sales........................................... $28,618 $3,017 $14,658
Realized gains on sales....................................... 1 17 199
Realized losses on sales...................................... (386) -- (41)
</TABLE>
There were no sales of investments held to maturity in 1999, 1998 and 1997.
The amortized cost and fair value of mortgage-backed and asset-backed
securities available for sale and held to maturity at December 31 follow:
<TABLE>
<CAPTION>
1999 1998
---------------------------------------- -----------------------------------------
AVAILABLE FOR SALE HELD TO MATURITY AVAILABLE FOR SALE HELD TO MATURITY
------------------ ---------------- ------------------ ----------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE COST VALUE
--------- ----- --------- ----- --------- ----- --------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed and asset-backed
securities..................... $71,673 $70,595 $52,731 $51,600 $64,912 $65,374 $87,849 $89,209
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
The amortized cost and fair value of adjustable rate investments available
for sale and held to maturity at December 31 follow:
<TABLE>
<CAPTION>
1999 1998
---------------------------------------- -----------------------------------------
AVAILABLE FOR SALE HELD TO MATURITY AVAILABLE FOR SALE HELD TO MATURITY
------------------ ---------------- ------------------ ----------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE COST VALUE
--------- ----- --------- ----- --------- ----- --------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities........ $9,901 $9,904 $1,652 $1,682 $39,041 $39,010 $2,161 $2,141
====== ====== ====== ====== ======= ======= ====== ======
</TABLE>
The carrying amounts of callable securities included in investments
available for sale and investments held to maturity totaled $45,940,000 and
$5,005,000 in 1999 and $30,200,000 and $5,521,000 in 1998, respectively.
The maturity distribution of debt securities available for sale and held to
maturity at December 31 follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------------------------- ----------------------------------------------
AVAILABLE FOR SALE HELD TO MATURITY AVAILABLE FOR SALE HELD TO MATURITY
------------------ ---------------- ------------------ ----------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE COST VALUE
--------- ----- --------- ----- --------- ----- --------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Within 1 year ..................... $ 13,275 $ 13,245 $ 4,531 $ 4,482 $ 19,670 $ 19,805 $ 6,023 $ 6,099
1 to 5 years ...................... 99,632 98,047 23,045 22,753 75,485 76,961 45,948 46,529
5 to 10 years ..................... 78,912 76,214 22,064 21,712 29,931 30,337 31,001 31,604
Over 10 years ..................... 33,273 32,616 14,112 13,610 38,313 38,388 17,948 18,280
-------- -------- -------- -------- -------- -------- -------- --------
$225,092 $220,122 $ 63,752 $ 62,557 $163,399 $165,491 $100,920 $102,512
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
- ------------------------
Maturities of mortgage-backed securities are based on contractual maturities
with scheduled amortization. Actual maturities will differ from contractual
maturities due to prepayments.
48
<PAGE> 55
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
Securities pledged at December 31 follow:
<TABLE>
<CAPTION>
CORPORATE SECURITIES SOLD
CUSTOMER UNDER AGREEMENTS
GOVERNMENT DEPOSITS REPURCHASE AGREEMENTS TO REPURCHASE
------------------- --------------------- ----------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------- ----- --------- ----- --------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AT DECEMBER 31, 1999
FHLMC participation certificates available for sale $ 500 $ 497 $ -- $ -- $ -- $ --
GNMA mortgage-backed securities available for sale -- -- 14,705 14,528 -- --
U.S. government obligations available for sale .... -- -- -- -- 25,119 25,020
AT DECEMBER 31, 1998
FHLMC participation certificates available for sale 500 508 -- -- -- --
GNMA mortgage-backed securities available for sale -- -- 10,746 10,698 -- --
U.S. government obligations available for sale .... -- -- -- -- 10,088 10,087
</TABLE>
Securities available for sale and held to maturity with an amortized cost
of $62,347,000 and a fair value of $60,901,000 were collateralized for the
discount window at the Federal Reserve Bank at December 31, 1999.
(4) LOANS
The Company's lending activities are conducted principally in eastern
Massachusetts and southern New Hampshire. The Company grants single-family and
multi-family residential loans, commercial real estate loans, commercial and
lease loans and lease financing and a variety of consumer loans. In addition,
the Company grants loans for the construction of residential homes, commercial
real estate properties and for land development. The ability and willingness of
the single-family residential and consumer borrowers to honor their repayment
commitments is generally dependent on the level of overall economic activity
within the borrowers' geographic areas and real estate values. The ability and
willingness of commercial real estate, commercial and construction loan
borrowers to honor their repayment commitments are generally dependent on the
health of the real estate economic sector in the borrowers' geographic areas and
the general economy.
The composition of loans, shown net of unadvanced funds, loan premiums or
discounts and deferred loan origination fees and costs, at December 31 follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
Real estate loans:
Residential .......................... $ 743,747 $ 740,009
Commercial ........................... 207,364 163,999
Construction and land ................ 63,660 56,568
----------- -----------
Total real estate loans.......... 1,014,771 960,576
----------- -----------
Consumer loans:
Home equity lines of credit..........
and second mortgages ............... 56,412 55,691
Other consumer ....................... 5,419 6,160
----------- -----------
Total consumer loans ............ 61,831 61,851
----------- -----------
Commercial loans:
Commercial and lease loans ........... 27,378 18,365
Lease financing ...................... 29,121 9,973
----------- -----------
Total commercial loans .......... 56,499 28,338
----------- -----------
Total loans ..................... 1,133,101 1,050,765
Allowance for loan losses ................. (11,384) (10,486)
----------- -----------
Net loans ....................... $ 1,121,717 $ 1,040,279
=========== ===========
</TABLE>
49
<PAGE> 56
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
An analysis of the allowance for loan losses for the years ended December
31, follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year ............. $ 10,486 $ 12,521 $ 12,229
Provision (credit) for loan losses........ 400 (1,705) 983
Charge-offs .............................. (748) (1,500) (1,804)
Recoveries ............................... 1,246 1,170 1,113
-------- -------- --------
Balance at end of year ................... $ 11,384 $ 10,486 $ 12,521
======== ======== ========
</TABLE>
The balance of loans on nonaccrual status because of delinquency or other
problem characteristics amounted to $2,456,000 and $3,240,000 at December 31,
1999 and 1998, respectively.
The reduction in interest income for the years ended December 31,
associated with nonaccrual loans, follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income in accordance with original loan terms........ $ 477 $ 803 $ 1,191
Interest income recognized ................................... (159) (103) (130)
Interest income applied as a reduction in loan balance........ (62) (209) (359)
------- ------- -------
Foregone interest income ................................ $ 256 $ 491 $ 702
======= ======= =======
</TABLE>
The components of impaired loans at December 31 follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Total impaired loans ......................................... $2,499 $2,504 $6,356
Impaired loans with reserve .................................. 1,110 809 2,476
Impaired loan reserve ........................................ 197 94 280
Impaired loans without reserve ............................... 1,389 1,695 3,880
Impaired loans average balance ............................... 2,103 4,184 7,653
Interest income recognized ................................... 40 73 199
Interest income in accordance with original loan terms........ 235 458 738
</TABLE>
The impaired loan reserve represents an allocation from the existing
allowance for loan losses.
A summary of the activity with respect to loans made to directors and
officers and their related interests whose total aggregate loan balances
exceeded $60,000 during the years ended December 31, follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
Balance at beginning of year ......................... $ 1,889 $ 1,703
New loans granted .................................... 149 1,140
Retirement/reduction of directors and officers........ (666) (175)
Repayment of principal ............................... (344) (779)
------- -------
Balance at end of year ............................... $ 1,028 $ 1,889
======= =======
</TABLE>
50
<PAGE> 57
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
The outstanding balances of loans to directors and principal officers
included above totaled $450,000 and $878,000, respectively, at December 31, 1999
and 1998. Loans included above were made in the Bank's ordinary course of
business, on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons, and did not involve more than the normal risk of collectibility.
(5) MORTGAGE SERVICING ASSETS
A summary of the components of the mortgage servicing assets, including the
valuation allowance, for the years ended December 31, follows:
<TABLE>
<CAPTION>
MORTGAGE
SERVICING VALUATION
ASSETS ALLOWANCE TOTAL
--------- ---------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Balance as of December 31, 1996 ......... $ 8,206 $ (200) $ 8,006
Purchased and capitalized ............... 3,533 -- 3,533
Amortization ............................ (1,754) -- (1,754)
Provision for valuation allowance........ -- (285) (285)
Charge-offs ............................. (85) 85 --
-------- -------- --------
Balance as of December 31, 1997 ......... 9,900 (400) 9,500
Purchased and capitalized ............... 3,292 -- 3,292
Amortization ............................ (2,061) -- (2,061)
Provision for valuation allowance........ -- (1,465) (1,465)
Charge-offs ............................. (1,050) 740 (310)
-------- -------- --------
Balance as of December 31, 1998 ......... 10,081 (1,125) 8,956
Purchased and capitalized ............... 3,990 -- 3,990
Amortization ............................ (2,486) -- (2,486)
Credit for valuation allowance .......... -- 175 175
Charge-offs ............................. (450) 450 --
-------- -------- --------
Balance as of December 31, 1999 ......... $ 11,135 $ (500) $ 10,635
======== ======== ========
</TABLE>
At December 31, 1999, 1998 and 1997, mortgage loans partially or wholly
owned by others and serviced by the Company amounted to approximately
$956,358,000, $894,432,000 and $971,041,000 respectively, and are not reflected
in the accompanying consolidated financial statements because they are not
assets of the Company. The custodial balances included in the demand deposits
totaled $12,689,000 in 1999, $22,627,000 in 1998 and $16,422,000 in 1997.
During 1999, 1998 and 1997, the Company purchased mortgage servicing rights
to $233.2 million, $184.7 million and $228.8 million, respectively, in
residential first mortgage loans. These purchased balances are included in the
loans serviced for others reflected above. Gains resulting from the
capitalization of originated mortgage servicing rights are included in net gains
on assets held for sale. Amortization of the mortgage servicing assets and the
provisions for the valuation allowance are included as a reduction of mortgage
banking income. However, credits for the valuation allowance increase mortgage
banking income.
51
<PAGE> 58
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
(6) PREMISES AND EQUIPMENT
The composition of premises and equipment at December 31 follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
Land and buildings ...................... $ 13,124 $ 11,823
Furniture, fixtures and equipment........ 4,820 4,261
Leasehold improvements .................. 271 282
Construction in progress ................ 509 23
-------- --------
18,724 16,389
Less: accumulated depreciation .......... (8,061) (7,134)
-------- --------
$ 10,663 $ 9,255
======== ========
</TABLE>
Rent expense was $283,000, $231,000 and $126,000 for the years ended
December 31, 1999, 1998 and 1997, respectively. Rental income on portions of the
Company owned and occupied premises totaled $316,000, $322,000 and $319,000 for
the years ended December 31, 1999, 1998 and 1997, respectively.
A summary of future minimum rental expense and income under non-cancellable
operating leases at December 31, 1999 follows:
<TABLE>
<CAPTION>
MINIMUM MINIMUM
RENTAL RENTAL
EXPENSE INCOME
------- -------
(IN THOUSANDS)
<S> <C> <C>
2000 ............. $256 $359
2001 ............. 226 162
2002 ............. 161 62
2003 ............. 158 58
2004 ............. 112 58
Thereafter........ 455 --
</TABLE>
(7) STOCK IN FEDERAL HOME LOAN BANK OF BOSTON
As a voluntary member of the Federal Home Loan Bank ("FHLB") of Boston, the
Bank is required to invest in $100 par value stock of the FHLB of Boston in the
amount of 1% of its outstanding home loans or 5% of its outstanding advances
from the FHLB of Boston, whichever is higher. As and when such stock is
redeemed, the Bank would receive from the FHLB of Boston an amount equal to the
par value of the stock. At its discretion, the FHLB of Boston may declare
dividends on this stock. Such dividends, which are included in dividend income
on equity securities, amounted to $1,093,000, $1,008,000 and $1,020,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
52
<PAGE> 59
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
(8) DEPOSITS
The composition of deposits at December 31 follows:
<TABLE>
<CAPTION>
1999 1998
------------------------- -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
------ -------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Non-interest bearing:
Demand deposit accounts ............. $ 86,871 .--% $103,029 .--%
Interest bearing:
NOW accounts ........................ 99,040 0.76 102,635 0.79
Money market deposit accounts........ 95,291 2.75 96,332 2.77
Savings accounts .................... 213,286 3.25 199,304 3.19
Variable rate certificates .......... 3,434 4.59 4,463 4.31
Fixed rate certificates ............. 470,611 5.05 482,893 5.53
-------- --------
Total deposits ................. $968,533 3.53% $988,656 3.72%
======== ==== ======== ====
</TABLE>
Time certificates in excess of $100,000 at December 31, 1999 and 1998
amounted to $91,351,000 and $87,188,000, respectively.
A summary of interest expense on deposits for the years ended December 31,
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Now accounts ................................... $ 772 $ 806 $ 740
Money market deposit accounts .................. 2,657 2,861 3,381
Savings accounts ............................... 6,770 6,256 4,060
Certificates of deposit ........................ 24,142 29,214 30,070
------- ------- -------
Total interest expense on deposits......... $34,341 $39,137 $38,251
======= ======= =======
</TABLE>
Interest forfeitures resulting from early withdrawals from certificates of
deposit are credited to interest expense on deposits. Interest forfeitures
amounted to $118,000, $172,000 and $148,000 for the years ended December 31,
1999, 1998 and 1997, respectively.
The average interest rate on time certificates at December 31, 1999, by the
earlier of its repricing or period of maturity, follows:
<TABLE>
<CAPTION>
AVERAGE
AMOUNT RATE
------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Maturity/repricing in:
2000............................................................................ $320,817 4.90%
2001............................................................................ 88,863 5.13
2002............................................................................ 57,795 5.76
2003............................................................................ 3,920 5.25
2004............................................................................ 2,650 5.03
--------
$474,045 5.05%
======== ====
</TABLE>
Included in the table above are variable rate time certificates, the majority of
which mature in 2000.
53
<PAGE> 60
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
(9) OTHER BORROWINGS
Other borrowings consist of various short-term borrowings that typically
have a maturity date of 90 days or less. However, FHLB overnight and federal
funds purchased have maturities of one day. In addition, the Bank enters into
sales of securities under agreements to repurchase. These agreements are treated
as financings and the obligations to repurchase securities sold are reflected as
a liability in the consolidated balance sheets and the securities underlying the
agreements remain in the asset accounts. The securities underlying the
agreements are held by third parties as custodian for the Bank. The Bank has
also established overnight corporate customer repurchase agreements whereby
collateral is set aside by the Bank's custodian and the rates paid approximate
short term deposit or market interest rates (see note 3).
The composition of other borrowings at December 31 follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
FHLB overnight (see note 10)........................................ $35,000 $ -- $ --
Federal funds purchased............................................. 3,822 -- --
Securities sold under agreements to repurchase...................... 25,525 10,087 5,100
Corporate customer repurchase agreements............................ 9,315 6,245 5,071
------- ------- -------
$73,662 $16,332 $10,171
======= ======= =======
</TABLE>
Information concerning securities sold under agreements to repurchase and
corporate customer repurchase agreements for the years ended December 31,
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Outstanding at December 31........................................ $34,840 $16,332 $ 10,171
Outstanding collateral:
Amortized cost................................................. 39,824 20,834 14,029
Fair value..................................................... 39,548 20,785 14,138
Average balance outstanding during the year....................... 32,131 11,794 9,614
Maximum outstanding at any month-end.............................. 38,852 19,981 21,752
Weighted average rate at year-end................................. 5.15% 4.65% 5.17%
Weighted average rate during the year............................. 4.74% 4.90% 5.00%
</TABLE>
The repurchase agreements outstanding at December 31, 1999 and December 31,
1998 matured within 30 days while those outstanding at December 31, 1997 matured
within 45 days of year end. The customer repurchase agreements for each of the
three years matured the following day.
As of December 31, 1999, the Bank has established reverse repurchase lines
of credit with various lenders totaling $310.0 million. These lines would be
subject to the amount of securities available for collateralization purposes. In
addition, as part of its contingency plan for short-term liquidity requirements,
the Bank had $60.9 million available at the discount window of the Federal
Reserve Bank of Boston. At December 31, 1999, there were no borrowings from the
Federal Reserve Bank of Boston.
54
<PAGE> 61
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
(10) FEDERAL HOME LOAN BANK ADVANCES
A summary of Federal Home Loan Bank advances at December 31 follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------------------- ------------------------
WEIGHTED WEIGHTED
SCHEDULED REDEEMED AT AVERAGE SCHEDULED AVERAGE
MATURITY INITIAL CALL DATE(1) RATE(2) MATURITY RATE
-------- -------------------- ------- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Within 1 year..................... $145,048 $235,048 5.38% $ 81,769 5.52%
Over 1 year to 2 years............ 23,590 48,589 5.45 55,048 5.34
Over 2 years to 3 years........... 14,609 4,610 5.94 3,590 6.05
Over 3 years to 5 years........... 20,500 15,500 5.62 45,110 5.80
Over 5 years...................... 101,975 1,975 5.15 81,975 5.21
-------- -------- ---------
$305,722 $305,722 5.35% $ 267,492 5.44%
======== ======== ==== ========= ====
</TABLE>
(1) Callable FHLB advances are shown in the respective periods assuming that
the callable debt is redeemed at the initial call date while all other
advances are shown in the periods corresponding to their scheduled maturity
date.
(2) Weighted average rate based on scheduled maturity dates.
In accordance with an agreement with the FHLB of Boston, the Bank is
required to maintain qualified collateral, as defined by the FHLB, as collateral
for its advances. This collateral is primarily composed of the Bank's investment
in the FHLB stock and its residential mortgage and investment portfolios not
otherwise pledged (see notes 3, 7 and 9). The Bank has the capacity to borrow an
additional $254 million in short term or long term advances as well as a $55
million secured line of credit available from the FHLB of Boston as of December
31, 1999.
(11) FEDERAL AND STATE INCOME TAXES
The current and deferred components of income tax expense (benefit) for the
years ended December 31, follow:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Current income tax expense:
Federal .................................... $ 9,032 $ 8,440 $ 7,447
State ...................................... 861 887 843
-------- -------- --------
9,893 9,327 8,290
-------- -------- --------
Deferred income tax expense (benefit):
Federal .................................... 280 (1,107) (389)
State ...................................... 114 267 (113)
Change in valuation allowance .............. -- (328) (500)
-------- -------- --------
394 (1,168) (1,002)
-------- -------- --------
Total income tax expense ............................. $ 10,287 $ 8,159 $ 7,288
======== ======== ========
</TABLE>
55
<PAGE> 62
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
The causes of the difference between the total expected income tax expense
computed by applying the Federal statutory rate to income before income taxes
and the reported income tax expense for the years ended December 31, follow:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Federal income tax expense at statutory rate ..................... $ 10,213 $ 8,941 $ 7,173
Tax effect of:
State tax, net of federal benefit before valuation allowance,
excluding state impact of law change ..................... 634 750 475
Adjustment of deferred tax liabilities ...................... (440) (1,100) --
Change in valuation allowance ............................... -- (328) (500)
Other, net .................................................. (120) (104) 140
-------- -------- --------
Income tax expense ............................................... $ 10,287 $ 8,159 $ 7,288
======== ======== ========
Effective income tax rate ........................................ 35.3% 31.9% 35.6%
======== ======== ========
</TABLE>
The existing net deductible temporary differences that give rise to the net
deferred income tax asset are expected to reverse in periods in which the
Company will generate net taxable income. At December 31, 1999, the net deferred
tax asset is supported by recoverable income taxes of approximately $23.0
million. It should be noted, however, that factors beyond management's control,
such as the general state of the economy and real estate values, can affect
levels of taxable income and that no assurance can be given that sufficient
taxable income will be generated to fully absorb gross deductible temporary
differences.
The components of the net deferred taxes receivable for the years ended December
31, follow:
<TABLE>
<CAPTION>
1999 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses ............................... $4,210 $3,593
Unrealized losses on investments available for sale ..... 1,903 --
Unrealized losses on writedown of other real estate owned 65 102
Deferred benefits ....................................... 359 854
Depreciation ............................................ 214 135
Excess mortgage servicing fees .......................... 627 668
Other ................................................... 42 89
------ ------
Gross deferred assets ................................ 7,420 5,441
------ ------
Deferred tax liabilities:
Deferred expenses ....................................... 1,624 1,491
Unrealized gains on investments available for sale ...... -- 825
Equipment leases ........................................ 346 165
Other ................................................... 191 35
------ ------
Gross deferred liabilities ........................... 2,161 2,516
------ ------
Net deferred income taxes receivable ....................... $5,259 $2,925
====== ======
</TABLE>
(12) STOCKHOLDERS' EQUITY
Preferred Stock
In connection with the Company's adoption of a Shareholder Rights Plan on
January 21, 1999, the Company established a series of 100,000 shares of
preferred stock designated as Series A Junior Participating Cumulative Preferred
Stock, par value $0.10 per share ("Series A Stock") and declared a dividend of
one Preferred Stock Purchase Right (the "Right") for each outstanding share of
the Company's Common Stock held of record as of February 16, 1999.
56
<PAGE> 63
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
Pursuant to the Shareholder Rights Plan, each Right entitles the holder to
purchase a unit consisting of one one-thousandth of a share of Series A Stock,
par value $0.10 per share, at an initial cash exercise price of $130.00 per
unit, subject to adjustment. The Rights are not exercisable and remain attached
to all outstanding shares of Common Stock until the earliest of (i) ten calendar
days following a public announcement that a person or group of affiliated or
associated persons (an "Acquiring Person") has acquired beneficial ownership of
15% or more of the outstanding shares of Common Stock (the date of said
announcement being referred to as the "Stock Acquisition Date"), (ii) ten
business days following the commencement of a tender offer or exchange offer
that could result in a person or group becoming an Acquiring Person or (iii) the
declaration by the Board of Directors that a person is an "Adverse Person", as
such term is defined in the Shareholder Rights Plan.
In the event that a Stock Acquisition Date occurs or the Board of Directors
determines that a person is an Adverse Person, each holder of a Right will be
entitled to receive upon exercise that number of units of Series A Stock having
a market value of two times the exercise price of the Right. In the event that,
at any time following the Stock Acquisition Date, (i) the Company is acquired in
a merger or other business combination transaction or (ii) 50% or more of the
Company's assets or earning power is sold, each holder of a Right shall
thereafter have the right to receive, upon exercise, common stock of the
acquiring company having a market value equal to two times the exercise price of
the Right. The Rights have no voting or dividend privileges and, until they
become exercisable, have no dilutive effect on the earnings of the Company. The
Rights expire on February 16, 2009.
The holders of Series A Stock would be entitled to a preference with
respect to dividends and liquidation.
Stock Repurchase Plan
In October 1998, the Company's Board of Directors approved a common stock
repurchase program authorizing the repurchase of 5%, or 324,000 shares, of the
Company's common stock outstanding. Purchases may be made on the open market or
in private transactions. As of December 31, 1999, no shares had been
repurchased.
Retained Earnings
The Company may not declare or pay cash dividends on its common stock if
the effect thereof would cause its net worth to be reduced below regulatory net
worth requirements or if such declaration and payment would otherwise violate
regulatory requirements.
The Bank is subject to various regulatory capital requirements administered
by federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to risk
weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes that as of December 31, 1999, the Bank
met all capital adequacy requirements to which they are subject.
As of December 31, 1999, the most recent notification from the FDIC
categorized the Bank as well capitalized under the prompt corrective action
provisions. To be categorized as well capitalized, the Bank must maintain total
capital risk-based, Tier 1 capital risk-based, and Tier 1 capital leverage
ratios as set forth in the table. There are no conditions or events since that
notification that management believes would cause a change in the Bank's
categorization.
57
<PAGE> 64
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
The Company's and the Bank's as reported capital amounts and ratios in
addition to the minimum capital requirements and well capitalized capital
requirements at December 31 follow:
<TABLE>
<CAPTION>
TO BE WELL
MINIMUMS CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
AS REPORTED ADEQUACY ACTION PROVISIONS
----------------------- --------------------- ----------------------
(DOLLARS IN THOUSANDS)
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1999
- -----------------------
Risk-based capital ratios:
Total capital
Andover Bancorp, Inc. ...... $144,706 14.6% $ 79,386 >8.0% $ 99,233 >10.0%
Andover Bank ............... 133,786 13.5 79,312 >8.0 99,140 >10.0
Tier 1 capital
Andover Bancorp, Inc. ...... 133,322 13.4 39,693 >4.0 59,540 >6.0
Andover Bank ............... 122,402 12.4 39,656 >4.0 59,484 >6.0
Leverage capital ratio:
Tier 1 capital
Andover Bancorp, Inc. ...... 133,322 9.0 59,071 >4.0 73,839 >5.0
Andover Bank ............... 122,402 8.3 58,849 >4.0 73,561 >5.0
AS OF DECEMBER 31, 1998
- -----------------------
Risk-based capital ratios:
Total capital
Andover Bancorp, Inc. ...... $130,361 15.4% $ 67,675 >8.0% $ 84,594 >10.0%
Andover Bank ............... 111,872 14.3 62,705 >8.0 78,381 >10.0
Andover Bank NH ............ 8,707 14.1 4,953 >8.0 6,191 >10.0
Tier 1 capital
Andover Bancorp, Inc. ...... 119,875 14.2 33,837 >4.0 50,756 >6.0
Andover Bank ............... 102,074 13.0 31,352 >4.0 47,029 >6.0
Andover Bank NH ............ 8,234 13.3 2,476 >4.0 3,714 >6.0
Leverage capital ratio:
Tier 1 capital
Andover Bancorp, Inc. ...... 119,875 8.7 54,997 >4.0 68,746 >5.0
Andover Bank ............... 102,074 7.9 51,695 >4.0 64,619 >5.0
Andover Bank NH ............ 8,234 9.0 3,659 >4.0 4,574 >5.0
</TABLE>
(13) OTHER INCOME
Components of other income for the years ended December 31, follow:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Deposit account service charges and other fees....................... $2,455 $2,289 $2,007
Loan late charges and other fees..................................... 502 703 407
Rental income........................................................ 316 322 319
Other................................................................ 432 577 559
------ ------ ------
$3,705 $3,891 $3,292
====== ====== ======
</TABLE>
(14) EMPLOYEE BENEFITS
Pension Plan and Postretirement Benefits Other Than Pensions
The Company sponsors a non-contributory defined benefit pension plan that
covers all employees who meet specified age and employment requirements. The
plan provides for benefits to be paid to eligible employees at retirement based
primarily upon their years of service with the Company and compensation levels
near retirement. In addition, the Bank provides health care and life insurance
benefits for certain eligible retired employees.
58
<PAGE> 65
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
In 1999, the Company elected to terminate the defined benefit pension plan
and distribute the excess of the assets over the current obligation to the
employees on a proportionate basis. The expense incurred for the pension plan
until its curtailment was $104,000 and the curtailment and settlement gains
recognized by the Bank totaled $1.6 million in 1999.
The funding status and other components of the pension plan and the
postretirement benefits plan for the years ended October 31, and December 31,
respectively, follow:
<TABLE>
<CAPTION>
PENSION PLAN OTHER BENEFITS PLAN
------------------------- -------------------------------------------
1998 1997 1999 1998 1997
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 5,946 $ 4,992 $ 360 $ 333 $ 248
Service cost .......................... 702 564 -- -- --
Interest cost ......................... 418 364 25 21 22
Actuarial loss (gain) ................. 536 256 14 42 97
Benefits paid ......................... (242) (230) (38) (36) (34)
------- ------- ------- ------- -------
Benefit obligation at end of year ..... $ 7,360 $ 5,946 $ 361 $ 360 $ 333
======= ======= ======= ======= =======
CHANGE IN PLAN ASSETS
Fair value at beginning of year ....... $ 5,194 $ 4,269 $ -- $ -- $ --
Actual return on plan assets .......... 426 777 -- -- --
Company contribution .................. 482 378 -- -- --
Benefits paid ......................... (242) (230) -- -- --
------- ------- ------- ------- -------
Fair value at end of year ............. $ 5,860 $ 5,194 $ -- $ -- $ --
======= ======= ======= ======= =======
RECONCILIATION OF THE FUNDING STATUS
Transition assets ..................... $ 168 $ 182 $ -- $ -- $ --
Deferred gain (loss) .................. (149) 426 32 7 13
Prepaid (accrued) expense ............. (1,519) (1,360) (393) (367) (346)
------- ------- ------- ------- -------
Funded status ......................... $(1,500) $ (752) $ (361) $ (360) $ (333)
======= ======= ======= ======= =======
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost .......................... $ 702 $ 564 $ -- $ -- $ --
Interest cost ......................... 418 364 25 21 22
Expected return on plan assets ........ (467) (384) -- -- --
Transition obligation ................. (14) (14) -- -- --
Actuarial loss (gain) ................. 2 (4) -- -- (1)
------- ------- ------- ------- -------
Net periodic benefit cost ............. $ 641 $ 526 $ 25 $ 21 $ 21
======= ======= ======= ======= =======
</TABLE>
Assumptions used to develop the net periodic benefit obligation follow:
<TABLE>
<CAPTION>
PENSION PLAN OTHER BENEFITS PLAN
-------------------- -----------------------------------
1998 1997 1999 1998 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Discount rate .............................................. 6.50% 7.00% 7.00% 6.00% 7.00%
Rate of increase in compensation levels .................... 4.75% 4.75% -- -- --
Assumptions used to develop the net periodic benefit cost follow:
Discount rate .............................................. 6.50% 7.00% 7.00% 6.00% 7.00%
Rate of increase in compensation levels .................... 4.75% 4.75% -- -- --
Expected long-term rate of return on assets ................ 9.00% 9.00% -- -- --
</TABLE>
59
<PAGE> 66
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
Stock Option Plans
The Company has stock options issued under two separate plans for the
benefit of certain officers and non-employee directors. The first plan, the 1986
Stock Option Plan, had 750,000 shares of authorized but unissued common stock.
All but 4,500 shares were granted prior to the Plan's expiration in 1996. A
second plan, the Stock Incentive Plan, was adopted in 1995 with 311,418 shares
of authorized but unissued common stock. The exercise price of any option
granted will be equal to the fair market value of the Common Stock on the date
the option is granted. Stock options are exercisable over various periods
commencing on the date of the grant and in no event later than ten years after
the date of the grant.
A summary of stock option activity for the years ended December 31,
follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- --------------------- ---------------------
WTD. AVG. WTD. AVG. WTD. AVG.
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year....... 512,599 $17.91 505,388 $14.92 488,370 $12.59
Granted........................... 68,050 28.21 69,575 34.50 59,750 30.50
Exercised......................... (14,060) 10.66 (60,114) 11.64 (42,732) 10.05
Forfeited......................... (500) 28.00 (2,250) 27.67 -- --
------- ------- -------
Outstanding at end of year............. 566,089 $19.32 512,599 $17.91 505,388 $14.92
------- ======= =======
Exercisable at end of year............. 560,089 $19.36 495,098 $18.00 475,637 $14.89
======= ======= =======
Shares reserved for future grants...... 102,531 170,081 237,406
======= ======= =======
</TABLE>
A summary of options outstanding and exercisable by price range as of
December 31 follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------ -------------------------------
OUTSTANDING WTD. AVG. EXERCISABLE
RANGE OF AS OF REMAINING WTD. AVG. AS OF WTD. AVG.
EXERCISE PRICES 12/31/99 CONTRACTUAL LIFE EXERCISE PRICE 12/31/99 EXERCISE PRICE
--------------- -------- ---------------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C>
$ 2.1667 -$ 6.7500.......... 37,647 2.7 $ 5.53 37,647 $ 5.53
$ 6.7600 -$11.7500.......... 69,642 4.5 10.02 69,642 10.02
$11.7600 -$14.2500.......... 149,850 5.2 14.00 149,850 14.00
$14.2600 -$22.0000.......... 123,700 6.4 16.77 117,700 16.86
$28.0000 -$34.8000.......... 185,250 9.0 31.62 185,250 31.62
------- -------
566,089 6.4 $19.32 560,089 $19.36
======= === ====== ======= ======
</TABLE>
The Company applies APB Opinion No. 25 in accounting for stock options and,
accordingly, no compensation expense has been recognized in the financial
statements. Had the Company determined compensation expense based on the fair
value at the grant date for its stock options under SFAS 123, the Company's net
income would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income as reported................................. $18,885 $17,386 $13,206
Pro forma net income................................... 18,393 16,807 12,803
Basic earnings per share as reported................... 2.89 2.68 2.05
Basic pro forma earnings per share..................... 2.82 2.59 1.99
Diluted earnings per share as reported................. 2.82 2.60 1.99
Diluted pro forma earnings per share................... 2.74 2.51 1.93
</TABLE>
60
<PAGE> 67
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
The per share weighted average fair value of stock options granted during
1999, 1998 and 1997 was $8.32, $10.07, and $8.28, respectively, on the date of
grant. These fair values were determined using the Black Scholes option pricing
model with the following weighted average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Expected dividend yield....................................... 3.50% 2.75% 3.00%
Risk-free interest rate....................................... 6.56 4.87 5.84
Expected volatility........................................... 30.00 30.00 25.00
Expected life (years)......................................... 6.50 6.70 7.00
</TABLE>
Employee Stock Ownership Plan
The Company maintains an Employee Stock Ownership Plan (the "ESOP") that
covers all employees who meet specified age and length of service requirements.
Contributions are made for the purchase of additional shares of Company stock
and accordingly, a charge to salaries and employee benefits expense is recorded.
In 1999, 11,566 shares of common stock were purchased in the open market at an
average price of $30.63 per share, which when combined with forfeited shares are
allocated to participants proportionately to their gross wages. In 1998 and
1997, 11,552 and 15,316 shares were purchased at an average price of $32.32 and
$24.45 per share, respectively. Contributions by the Bank to the ESOP for
participants for the years ended December 31, 1999, October 31, 1998 and 1997
were $355,000, $375,000 and $385,000, respectively.
Thrift Incentive Plan
The Company has an employee tax deferred thrift incentive plan (the
"401(k)") under which individual employee contributions to the plan are matched
within certain limitations by the Bank. All employees who meet specified age and
length of service requirements are eligible to participate in the 401(k) plan.
The amounts matched by the Bank are included in salaries and employee benefits
expense. The amounts matched for the years ended December 31, 1999, 1998 and
1997 were $91,000, $94,000 and $71,000, respectively.
Officers Incentive Compensation Plan
The Incentive Compensation Plan provides for the payment of bonuses to
officers under certain circumstances based upon the Company's pre-tax earnings
adjusted for gains or losses from sales of assets, targeted returns on assets
and the individual's accomplishment of established goals and objectives. Amounts
are to be allocated to participants as determined by the Company's Compensation
and Option Committee based on the recommendation of the President and subject to
approval by its Board of Directors.
In 1999, 1998 and 1997 $620,000, $490,000 and $318,000, respectively, was
charged to salaries and employee benefits expense under this plan.
Executive Officer Employment and Termination Agreements
The Company maintains an employment agreement with its President and Chief
Executive Officer, The employment agreement generally provides for the continued
payment of specified compensation and benefits for specified periods after
termination, unless the termination is for "cause" as defined in the employment
agreement. In addition, the Company has entered into special termination
agreements with its President and Chief Executive Officer and certain other
executives which provide for the payment, under certain circumstances, of
lump-sum amounts upon termination following a "change of control" which is
generally defined to mean a person or group acquiring ownership of 25% or more
of the shares of the Company.
61
<PAGE> 68
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
Deferred Compensation Plan
The Company has adopted a deferred compensation plan for its directors
whereby a non-employee director can elect to defer earned fees to future years
with benefits commencing at retirement. In 1996, this unfunded plan was amended
to allow the directors to change their deferred compensation account to
equivalent stock units in the Company's common stock, permit distribution upon
retirement to be paid in shares of common stock, or to choose to receive
interest credits based on an equivalent rate on a term certificate of deposit.
The amended deferred compensation plan reserved 75,000 shares of common stock,
approximately 50,000 shares remain unallocated. The deferred compensation
attributed to the directors for the years ended December 31, 1999, 1998 and 1997
totaled $159,000, $108,000 and $89,000, respectively. In 1999, 5,553 equivalent
stock units were allocated at an average price of $30.81. In 1998 and 1997,
3,295 and 4,277 equivalent stock units were allocated at an average price of
$32.79 and $23.93 per stock unit, respectively.
(15) FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Other significant assets and liabilities that are not
considered financial assets or liabilities include real estate acquired by
foreclosure, the deferred income tax asset, office properties and equipment,
core deposits and other intangibles. In addition, the tax ramifications related
to the realization of the unrealized gains and losses can have a significant
effect on fair value estimates and have not been considered in any of the
estimates. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company. The estimated fair value amounts
have been determined by using available quoted market information or other
appropriate valuation methodologies.
The fair value estimates provided are made at a specific point in time,
based on relevant market information and the characteristics of the financial
instrument. The estimates do not provide for any premiums or discounts that
could result from concentrations of ownership of a financial instrument. Because
no active market exists for a portion of the Company's financial instruments,
certain fair value estimates are based on subjective judgments regarding current
economic conditions, risk characteristics of the financial instruments, future
expected loss experience, prepayment assumptions, and other factors. The
resulting estimates involve uncertainties and therefore cannot be determined
with precision. Changes made to any of the underlying assumptions could
significantly affect the estimates.
Financial instruments actively traded in a secondary market have been
valued at December 31 using quoted available market prices follow:
<TABLE>
<CAPTION>
1999 1998
------------------------- ------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------ ---------- ------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets held for sale........................... $ 1,494 $ 1,494 $ 11,282 $ 11,314
Investments available for sale................. 221,370 221,370 166,028 166,028
Investments held to maturity................... 63,752 62,557 100,920 102,512
</TABLE>
62
<PAGE> 69
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
The fair values at December 31 of financial instruments with stated
maturities have been estimated by discounting cash flows with a discount rate
approximately equal to the current market rate for similar instruments follow:
<TABLE>
<CAPTION>
1999 1998
-------------------------- ------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Loans receivable, net...................... $1,121,717 $1,099,568 $1,040,279 $1,059,566
Mortgage servicing assets.................. 10,635 11,917 8,956 10,036
Fixed rate certificates.................... 470,611 470,652 482,893 487,410
Federal Home Loan Bank advances............ 305,722 305,327 267,492 277,184
</TABLE>
The fair values at December 31 of financial instruments with no maturity or
short-term maturities that approximate their carrying amounts are as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------- ------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and due from banks....................... $ 26,913 $ 26,913 $ 29,337 $ 29,337
Short-term investments........................ 1,600 1,600 16,100 16,100
Accrued interest receivable................... 8,236 8,236 7,432 7,432
Stock in FHLB................................. 17,737 17,737 15,747 15,747
Demand deposit accounts....................... 86,871 86,871 103,029 103,029
NOW accounts.................................. 99,040 99,040 102,635 102,635
Savings accounts.............................. 213,286 213,286 199,304 199,304
Money market deposit accounts................. 95,291 95,291 96,332 96,332
Variable rate certificates.................... 3,434 3,434 4,463 4,463
Other borrowings.............................. 73,662 73,662 16,332 16,332
Mortgagors' escrow accounts.................. 3,412 3,412 2,819 2,819
</TABLE>
The following methods and assumptions were used to estimate fair value of
each class of financial instrument for which it is practicable to estimate fair
value. The fair values for investments available for sale and held to maturity
are based on quoted bid prices received from securities dealers or third party
pricing services. Commitments to originate loans and forward commitments to sell
loans have been considered in the value of assets held for sale. Loans are
estimated by discounting contractual cash flows adjusted for prepayment
estimates and using discount rates approximately equal to current market rates
on loans with similar characteristics and maturities. The incremental credit
risk for non-performing loans has been considered in the determination of the
fair value of loans. Excess servicing is based on the present value of the
estimated cash flows using a current risk rate and taking into consideration
estimated prepayments. Fixed rate certificates and Federal Home Loan Bank
advances are based on the discounted value of contractual cash flows. The
discount rates used are representative of approximate rates currently offered on
instruments with similar remaining maturities. The fair values for cash and
short-term investments approximate their carrying amounts because of the short
maturity of these instruments. The fair values of accrued interest receivable,
variable rate certificates, securities sold under agreements to repurchase and
mortgagors' escrow accounts approximate their carrying amounts because of the
short-term nature of these financial instruments. The fair value of stock in the
Federal Home Loan Bank of Boston equals its carrying amount as reported in the
balance sheet because this stock is redeemable only at full par by the FHLB. The
fair values of demand deposit accounts, NOW accounts, regular savings accounts
and money market accounts are equal to their respective carrying amounts since
they are equal to the amounts payable on demand at the reporting date. The
majority of the Company's commitments for unused lines and outstanding standby
letters of credit and unadvanced portions of loans are at floating rates and,
therefore, there is no fair value adjustment.
63
<PAGE> 70
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
(16) CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
The following are the condensed financial statements for Andover Bancorp,
Inc., referred to as the "Parent Company" for purposes of this Note only, as of
December 31 follow:
BALANCE SHEETS
<TABLE>
<CAPTION>
1999 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and interest-bearing deposits in subsidiaries ........... $ 10,041 $ 9,348
Investments available for sale, at market .................... 996 361
Investment in subsidiaries, at equity ........................ 119,269 111,573
Other assets ................................................. 91 16
-------- --------
Total assets ....................................... $130,397 $121,298
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accrued income taxes .................................... $ 2 $ 2
Accrued expenses ........................................ 132 154
-------- --------
Total liabilities .................................. 134 156
-------- --------
Total stockholders' equity ................................... 130,263 121,142
-------- --------
Total liabilities and stockholders' equity.......... $130,397 $121,298
======== ========
</TABLE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Dividends from bank subsidiaries ......................... $ 7,000 $ 9,500 $ 7,000
Interest income from deposits in subsidiaries ............ 323 166 94
Dividends on equity securities ........................... 15 7 --
------- ------- -------
Total operating income .............................. 7,338 9,673 7,094
Non-interest expenses .................................... 374 402 334
------- ------- -------
Income before income tax expense and
equity in net income of subsidiaries .................. 6,964 9,271 6,760
Income tax expense ....................................... 33 48 21
------- ------- -------
Income before equity in net income of subsidiaries........ 6,931 9,223 6,739
Equity in net income of subsidiaries ..................... 11,954 8,163 6,467
------- ------- -------
Net income ............................................... $18,885 $17,386 $13,206
======= ======= =======
</TABLE>
The Parent Company's statements of changes in stockholders' equity are
identical to the consolidated statements of changes in stockholders' equity and
therefore are not presented here.
64
<PAGE> 71
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ........................................... $ 18,885 $ 17,386 $ 13,206
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of subsidiaries.... (11,954) (8,163) (6,467)
(Increase) decrease in other assets .................. (75) 163 (177)
Increase (decrease) in other liabilities ............. (22) 3 5
-------- -------- --------
Net cash provided by operating activities ....... 6,834 9,389 6,567
-------- -------- --------
Cash flows from investing activities:
Purchases of investments available for sale .......... (703) (191) (170)
Investments in subsidiary ............................ -- -- (3,000)
-------- -------- --------
Net cash used by investing activities ........... (703) (191) (3,170)
-------- -------- --------
Cash flows from financing activities:
Stock options exercised .............................. 239 1,023 700
Dividends paid to stockholders ....................... (5,677) (4,484) (3,501)
-------- -------- --------
Net cash used by financing activities ........... (5,438) (3,461) (2,801)
-------- -------- --------
Net increase in cash and interest-bearing
deposit in subsidiaries ................................ 693 5,737 596
Cash and interest-bearing deposits in subsidiaries at
beginning of year ...................................... 9,348 3,611 3,015
-------- -------- --------
Cash and interest bearing deposits in subsidiaries at
end of year ............................................ $ 10,041 $ 9,348 $ 3,611
======== ======== ========
Supplemental cash flow information:
Cash paid during the year for:
Income taxes .................................... $ 33 $ 48 $ 21
</TABLE>
(17) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK, COMMITMENTS AND
CONTINGENCIES
The Company is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments include commitments to originate loans, standby letters of
credit, recourse arrangements on assets sold, and forward commitments to sell
loans. The instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amounts recognized in the Consolidated
Balance Sheets. The contract or notional amounts of those instruments reflect
the extent of involvement the Company has in particular classes of financial
instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments, standby letters of
credit and recourse arrangements is represented by the contractual amount of
those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments. For forward commitments to sell loans and mortgage-backed
securities, the contract or notional amounts do not represent exposure to credit
loss. The Company monitors the credit risk of its forward commitments through
credit approvals, limits, and monitoring procedures.
65
<PAGE> 72
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
Financial instruments with off-balance sheet credit risk at December 31 follow:
<TABLE>
<CAPTION>
CONTRACT OR
NOTIONAL AMOUNT
---------------
1999 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
Commitments to originate loans:
Fixed rate loans........................................................ $12,574 $23,326
Adjustable rate loans................................................... 41,120 18,164
------- -------
Total commitments to originate loans................................. 53,694 41,490
Unadvanced lines of home equity and reserve lines of credit............. 79,382 76,343
Unadvanced lines on commercial loans.................................... 22,369 15,354
Unadvanced portions of construction and land loans...................... 26,510 28,602
Standby letters of credit............................................... 3,226 2,860
Loans sold with recourse................................................ 1,170 1,892
Forward commitments to sell loans and mortgage-backed securities........ 1,000 10,000
</TABLE>
Commitments to originate loans, unused lines of credit, and unadvanced
portions of loans are agreements to lend to a customer provided there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since a portion of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Company evaluates each customer's creditworthiness
on a case-by-case basis. The amount of collateral obtained, if deemed necessary
by the Company upon extension of credit, is based on management's credit
evaluation of the borrower. Collateral held varies but may include accounts
receivable, inventory, equipment and real estate. Standby letters of credit are
conditional commitments issued by the Company to guarantee the performance by a
customer to a third party. The credit risk in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Company has retained credit risk on certain residential mortgage loans
sold with recourse prior to June, 1990. Accordingly, the Company has retained
the risk of loss resulting from any foreclosures on such loans.
Forward commitments to sell loans or mortgage-backed securities are
contracts which the Company enters into for the purpose of reducing the interest
rate risk associated with originating loans for sale. In order to fulfill a
forward commitment, the Company typically exchanges its current production of
loans for mortgage-backed securities through FNMA or FHLMC which are then
delivered to a national securities firm at a future date at prices or yields
specified by the contracts. Risks may arise from the possible inability of the
Company to originate loans to fulfill these contracts, in which case the Company
would normally purchase securities in the open market to deliver against the
contract. Unrealized gains and losses on contracts used for the Company's closed
loans and pipeline of loans expected to close are considered in adjusting
carrying values of the loans held for sale to the lower of cost or market.
As a nonmember of the Federal Reserve System, the Company is required to
maintain certain reserve requirements or vault cash and/or deposits with the
Federal Reserve Bank of Boston. The amount of this reserve requirement, included
in "Cash and due from banks", was $992,000 and $1,141,000 at December 31, 1999
and 1998, respectively.
A number of legal claims against the Company arising in the normal course
of business were outstanding at December 31, 1999. Management, after reviewing
these claims with legal counsel, is of the opinion that the resolution of these
claims will not have a material effect on the Company's financial position.
66
<PAGE> 73
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
(18) SUBSEQUENT EVENT (UNAUDITED)
On January 26, 2000, the Company entered into a definitive agreement to
acquire GBT Bancorp ("GBT") and its wholly-owned subsidiary, Gloucester Bank and
Trust Company, a Massachusetts-chartered trust company with two banking offices
in Gloucester, Massachusetts. This agreement is subject to a number of
conditions, including regulatory approval. Under the terms of the agreement,
Gloucester Bank and Trust Company will continue to operate under its own name as
a subsidiary of Andover Bancorp, Inc.
At December 31, 1999, GBT had $130.9 million in assets, primarily
commercial real estate loans and investment securities, and deposits of $103.5
million. The acquisition will be accounted for as a purchase and had a total
value of approximately $16.2 million on the date announced. The estimated
portion of goodwill attributed to this transaction is approximately $9.2
million.
The following presentation reflects the key line items on a historical
basis, as reported, for GBT and Andover, and on a proforma combined basis
assuming the merger was in effect for the year ended December 31, 1999:
<TABLE>
<CAPTION>
AS REPORTED
AS REPORTED ANDOVER PRO FORMA
GBT BANCORP, INC. COMBINED
----------- ------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Total assets....................................... $130,914 $1,491,054 $1,623,035
Total deposits..................................... 103,536 968,533 1,072,321
Total stockholders' equity......................... 8,422 130,263 138,375
Net income......................................... 724 18,885 18,774
Basic earnings per share........................... 0.91 2.89 2.75
Diluted earnings per share......................... 0.91 2.82 2.68
Book value per share............................... 11.50 20.40 20.80
</TABLE>
67
<PAGE> 74
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
(19) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Quarterly earnings per share is calculated by dividing quarterly net income
by the average shares outstanding each quarter. Therefore, the sum of the
quarters may not equal the net earnings per common share for the year. A
discussion of the difference between basic and diluted earnings per share is
presented in footnote 1.
Summaries of consolidated operating results on a quarterly basis for the
years ended December 31, follow:
<TABLE>
<CAPTION>
1999 QUARTERS
--------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
<S> <C> <C> <C> <C>
Interest and dividend income .................. $ 24,262 $ 24,574 $ 25,351 $ 25,823
Interest expense .............................. 12,828 12,816 13,496 13,561
-------- -------- -------- --------
Net interest and dividend income .............. 11,434 11,758 11,855 12,262
Provision for loan losses ..................... -- -- -- 400
Gains (losses) on real estate operations....... (14) (20) (18) 47
Non-interest income ........................... 1,213 1,182 644(b) 1,206
Non-interest expense .......................... 5,221(a) 5,444 5,719 5,593(a)
-------- -------- -------- --------
Income before income tax expense .............. 7,412 7,476 6,762 7,522
Income tax expense ............................ 2,620 2,727 2,240 2,700
-------- -------- -------- --------
Net income .................................... $ 4,792 $ 4,749 $ 4,522 $ 4,822
======== ======== ======== ========
Basic earnings per common share ............... $ 0.73 $ 0.73 $ 0.69 $ 0.74
======== ======== ======== ========
Diluted earnings per common share ............. $ 0.71 $ 0.71 $ 0.67 $ 0.72
======== ======== ======== ========
Dividends declared per share .................. $ 0.21 $ 0.21 $ 0.21 $ 0.24
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1998 QUARTERS
--------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
<S> <C> <C> <C> <C>
Interest and dividend income .................. $ 24,147 $ 24,487 $ 24,430 $ 24,182
Interest expense .............................. 13,827 14,133 13,917 13,138
-------- -------- -------- --------
Net interest and dividend income .............. 10,320 10,354 10,513 11,044
Provision (credit) for loan losses ............ 45 (2,250)(c) 400 100
Gains(losses) on real estate operations........ (76) 100 13 (23)
Non-interest income ........................... 1,109 1,319 850 894
Non-interest expense .......................... 5,680 5,703 5,625 5,569
-------- -------- -------- --------
Income before income tax expense .............. 5,628 8,320 5,351 6,246
Income tax expense ............................ 1,926 3,070 878(d) 2,285
-------- -------- -------- --------
Net income .................................... $ 3,702 $ 5,250 $ 4,473 $ 3,961
======== ======== ======== ========
Basic earnings per common share ............... $ 0.57 $ 0.81 $ 0.69 $ 0.61
======== ======== ======== ========
Diluted earnings per common share ............. $ 0.55 $ 0.78 $ 0.67 $ 0.59
======== ======== ======== ========
Dividends declared per share .................. $ 0.15 $ 0.18 $ 0.18 $ 0.18
======== ======== ======== ========
</TABLE>
(a) Includes a pre-tax gain of $1.1 million and $500,000 in the first and
fourth quarters of 1999, respectively, due to the curtailment and
settlement of the defined benefit plan.
(b) Includes losses on sales of investment available for sale of $385,000.
(c) Includes a credit for loan losses due to significant improvement in
non-performing assets and loan delinquencies.
(d) Includes a tax benefit of $1.1 million due to the favorable resolution of
several tax issues.
68
<PAGE> 75
FORM 10-K
CROSS REFERENCE INDEX
PART 1
<TABLE>
<CAPTION>
<S> <C> <C>
Item 1 Business............................................................................... 3
Item 2 Properties............................................................................. 10
Item 3 Legal Proceedings...................................................................... 11
Item 4 Submission of Matters to a Vote of Security Holders.................................... 11
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters................. 11
Item 6 Selected Consolidated Financial Data.................................................. 12
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................. 13
Item 7A Quantitative and Qualitative Disclosures About Market Risk............................ 30
Item 8 Financial Statements and Supplementary Data......................................... (See Item
14 below)
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................................... Non-Applicable
</TABLE>
PART III
The information called for by Part III (Items 10 through 13) is incorporated
herein by reference from Andover's Definitive Notice of Annual Meeting and Proxy
Statement for the 2000 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission.
PART IV
<TABLE>
<CAPTION>
<S> <C> <C>
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements-
Independent Auditors' Report....................................................... 37
Consolidated Balance Sheets as of December 31, 1999 and 1998....................... 38
Consolidated Statements of Operations for each of the years ended
December 31, 1999, 1998 and 1997................................................... 39
Consolidated Statements of Changes in Stockholders' Equity
for each of the years ended December 31, 1999, 1998 and 1997....................... 40
Consolidated Statements of Cash Flows for each of the years ended
December 31, 1999, 1998 and 1997..................................................... 41-42
Notes to Consolidated Financial Statements........................................... 43-68
</TABLE>
69
<PAGE> 76
(2) All financial statement schedules are omitted because they are
not applicable, the data is not significant, or the required
information is shown elsewhere in this report.
(b) Reports on Form 8-K. There were no reports filed on Form 8-K
during the three months ended December 31, 1999. However, there
were two current reports on Form 8-K filed subsequent to December
31, 1999; one filed on February 9, 2000 and another filed on
March 1, 2000.
(c) List of Exhibits
Exhibits to the Form 10-K have been included only with the copies
of the Form 10-K filed with the SEC. Upon request to Shareholder
Relations, Andover Bancorp, Inc., 61 Main Street, Andover,
Massachusetts 01810, copies of the individual exhibits will be
furnished upon payment of a reasonable fee.
EXHIBIT NO. DESCRIPTION OF EXHIBITS
2.1 Agreement and Plan of Merger by and between Andover Bancorp, Inc.
and GBT Bancorp, dated January 26, 2000 (incorporated herein by
reference to Exhibit 2.1 to Andover's Current Report on Form 8-K
filed February 9, 2000).
3.1 Restated Certificate of Incorporation of Andover (incorporated
herein by reference to Exhibit 3.1 to Post-Effective Amendment
No. 1 to Andover's Registration Statement on Form S-4 No.
33-11891 filed on March 5, 1987).
3.2 By-laws of Andover, as amended and restated, January 23, 1997
(incorporated herein by reference to Exhibit 3.2 to Andover's
Form 10-K for the fiscal year ended December 31, 1996).
4.1 Specimen of Andover Bancorp, Inc. common stock certificate
(incorporated herein by reference to Exhibit 4 to Andover's
Registration Statement on Form S-4, Registration No. 33-11891,
filed on February 11, 1987).
4.2 Shareholder Rights Agreement between Andover Bancorp, Inc. and
BankBoston (incorporated herein by reference to an Exhibit to
Andover's Current Report on Form 8-K filed January 22, 1999).
10.1 Employment Agreement between Andover, Andover Bank and Gerald T.
Mulligan, dated May 16, 1991.
10.2 Special Termination Agreement between Andover, Andover Bank and
Gerald T. Mulligan, dated May 16, 1991, as amended and restated
through January 23, 1997 (incorporated herein by reference to
Exhibit 10.2 to Andover's Form 10-K for the fiscal year ended
December 31, 1996).
10.3 Special Termination Agreement between Andover, Andover Bank and
Joseph F. Casey, dated December 17, 1992, as amended and restated
through January 23, 1997 (incorporated herein by reference to
Exhibit 10.3 to Andover's Form 10-K for the fiscal year ended
December 31, 1996).
10.4 Special Termination Agreement between Andover, Andover Bank and
Michael J. Ecker, dated December 17, 1992, as amended and
restated through January 23, 1997 (incorporated herein by
reference to Exhibit 10.4 to Andover's Form 10-K for the fiscal
year ended December 31, 1996).
10.5 Special Termination Agreement between Andover, Andover Bank and
John R. Heerwagen, dated December 17, 1992, as amended and
restated through January 23, 1997 (incorporated herein by
reference to Exhibit 10.5 to Andover's Form 10-K for the fiscal
year ended December 31, 1996).
70
<PAGE> 77
10.6 Special Termination Agreement between Andover, Andover Bank and
Octavio C. Bolivar dated January 24, 1994, as amended and
restated, January 23, 1997 (incorporated herein by reference to
Exhibit 10.6 to Andover's Form 10-K for the fiscal year ended
December 31, 1996).
10.7 Andover Savings Bank Employees' Stock Ownership Plan and Trust
Agreement and Amendment No. 1.
10.8 Andover Bancorp, Inc. Stock Option Plan dated May 8, 1986, as
amended May 22, 1986, January 29, 1987, and November 2, 1987.
10.9 Special Termination Agreement between Andover, Andover Bank and
Raymond P. Smith, dated December 12, 1995, as amended and
restated, January 23, 1997 (incorporated herein by reference to
Exhibit 10.9 to Andover's Form 10-K for the fiscal year ended
December 31, 1996).
10.10 Andover Bancorp, Inc. 1995 Stock Incentive Plan, dated February
16, 1995 (incorporated herein by reference to Exhibit 10.11 to
Andover's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995).
10.11 Deferred Compensation Plan for Directors of Andover Bancorp, Inc.
and its Subsidiaries, effective July 1, 1993, as amended and
restated, February 22, 1996 (incorporated herein by reference to
Exhibit 10.12 to Andover's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995).
10.12 Andover Bancorp, Inc. Special Termination Plan, effective January
23, 1997 (incorporated herein by reference to Exhibit 10.12 to
Andover's Form 10-K for the fiscal year ended December 31, 1996).
10.13 Stock Option Agreement, dated January 26, 2000, by and between
Andover Bancorp, Inc. and GBT Bancorp (incorporated herein by
reference to Exhibit 10.1 to Andover's Current Report on Form 8-K
filed February 9, 2000).
11 The computation of per share earnings can be readily determined
from the material contained in the Annual Report on Form 10-K for
the fiscal year ended December 31, 1999.
12 As the Company does not have any debt securities registered under
Section 12 of the Securities Act of 1933, no ratio of earnings to
fixed charges appears in this Annual Report on Form 10-K.
13 Andover Bancorp, Inc. 1999 Annual Report, which, except for those
portions expressly incorporated herein by reference, is furnished
only for the information of the Securities and Exchange
Commission and is not deemed to be filed.
21 The Company's sole subsidiary is Andover Bank, a Massachusetts
savings bank in stock form, which is included in the Consolidated
Financial Statements filed in the Annual Report on Form 10-K for
the fiscal year ended December 31, 1999.
23.1 Consent of KPMG LLP.
71
<PAGE> 78
NOTES
72
<PAGE> 79
SHAREHOLDER INFORMATION
TRANSFER AGENT AND REGISTRAR - EQUISERVE LP
Our Transfer Agent is responsible for our shareholder records, issuance of stock
certificates, distribution of our dividends and the IRS Form 1099-DIV and
administration of our dividend reinvestment and stock purchase program. Your
requests as shareholders concerning these matters, are most efficiently answered
by corresponding directly with EquiServe LP at the following address:
EquiServe Limited Partnership
c/o Shareholder Services Department
PO Box 8040
Boston, MA 02266-8040
800-730-4001
equiserve.com
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN/GENERAL INFORMATION
Shareholders may obtain a brochure containing a detailed description of the Plan
or other general shareholder information by corresponding directly with Andover
Bancorp, Inc. at the following address:
Andover Bancorp, Inc., Shareholder Relations
PO Box 2005
Andover, MA 01810
978-749-2216
andoverbank.com
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
KPMG LLP
99 High Street
Boston, MA 02110
FORM 10-K
An additional copy of Andover's 1999 Annual Report on Form 10-K, as filed with
the Securities and Exchange Commission pursuant to the Securities and Exchange
Act of 1934 may be obtained without charge by contacting:
Andover Bancorp, Inc., Shareholder Relations
PO Box 2005
Andover, MA 01810
978-749-2216
andoverbank.com
FDIC COMPLIANCE
A copy of this report is being made available to the public on request as
required by the Federal Deposit Insurance Corporation ("FDIC"). The contents of
this report have not been reviewed or confirmed for accuracy or relevance by the
FDIC. A copy of Management's Report on the effectiveness of the Company's
internal control over financial reporting, and the Independent Accountant's
Report of KPMG LLP thereon, may be obtained without charge by contacting:
Andover Bancorp, Inc., Shareholder Relations
PO Box 2005
Andover, MA 01810
978-749-2216
andoverbank.com
ANNUAL MEETING
The Annual Meeting of the Shareholders of Andover Bancorp, Inc. will be held at
10 a.m. on April 27, 2000 at the Andover Town House, 20 Main Street, Andover,
Massachusetts.
ANDOVER BANCORP, INC.
DIRECTORS*
Thomas F. Caffrey
Paul J. Donahue, Sr.
Clifford E. Elias
John E. Fenton, Jr.
Naomi A. Gardner
Frank D. Goldstein
Cornelius J. McCarthy
Gerald T. Mulligan
Irving E. Rogers, III
Robert J. Scribner
Fred P. Shaheen
*Also Directors of Andover Bank
EXECUTIVE OFFICERS
Gerald T. Mulligan
President and CEO
Joseph F. Casey
CFO and Treasurer
Octavio C. Bolivar
Senior Vice President
Barbara J. Conti
Senior Vice President
Michael J. Ecker
Senior Vice President
John R. Heerwagen
Senior Vice President
Raymond P. Smith
Senior Vice President
Gerald C. Woodworth, Jr.
Senior Vice President
STOCK LISTING
ANDB Andover's Common Stock trades on the NASDAQ Stock Market(R)
- ------ under the symbol "ANDB."
NASDAQ
<PAGE> 80
ANDOVER BANCORP, INC.
ANDOVER BANK
Member FDIC/DIF
MAIN OFFICE:
61 Main Street
Andover, MA 01810
BRANCH OFFICES:
159 River Road
Andover, MA 01810
450 Essex Street
Lawrence, MA 01840
305 South Broadway
Lawrence, MA 08143
547 Broadway
Methuen, MA 01844
228 Haverhill Street
Methuen, MA 01844
91 Pleasant Valley Street
Methuen, MA 01844
108 Main Street
North Andover, MA 01845
995 Main Street
Tewksbury, MA 01876
2345 Main Street
Tewksbury, MA 01876
130 Main Street
Salem, NH 03079
62 Nashua Road
Londonderry, NH 03053
ANDOVER CAPITAL GROUP, INC.
238 Littleton Road
Westford, MA 01886
TELEPHONE SALES & SERVICE CENTER
1 800 2CALL AB
andoverbank.com 0685-AR-00
<PAGE> 1
Exhibit 23.1
Independent Auditors Consent
The Board of Directors and Stockholders
Andover Bancorp, Inc.:
We consent to incorporation by reference in Registration Statement on Form S-8
of Andover Bancorp, Inc. of our report dated January 13, 2000, relating to the
consolidated balance sheets of Andover Bancorp, Inc. and subsidiaries as of
December 31, 1999 and 1998, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1999, which report is included
herein.
/s/ KPMG LLP
Boston, Massachusetts
March 15, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 10K
FINANCIAL STATEMENTS DATED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH 10K FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 26,913
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,494
<INVESTMENTS-CARRYING> 63,752
<INVESTMENTS-MARKET> 62,557
<LOANS> 1,133,101
<ALLOWANCE> 11,384
<TOTAL-ASSETS> 1,491,054
<DEPOSITS> 968,533
<SHORT-TERM> 73,662
<LIABILITIES-OTHER> 12,874
<LONG-TERM> 305,722
0
0
<COMMON> 653
<OTHER-SE> 129,610
<TOTAL-LIABILITIES-AND-EQUITY> 1,491,054
<INTEREST-LOAN> 80,252
<INTEREST-INVEST> 19,758
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 100,010
<INTEREST-DEPOSIT> 34,341
<INTEREST-EXPENSE> 52,701
<INTEREST-INCOME-NET> 47,309
<LOAN-LOSSES> 400
<SECURITIES-GAINS> (368)
<EXPENSE-OTHER> 21,977
<INCOME-PRETAX> 29,172
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,885
<EPS-BASIC> 2.89
<EPS-DILUTED> 2.82
<YIELD-ACTUAL> 3.37
<LOANS-NON> 2,456
<LOANS-PAST> 0
<LOANS-TROUBLED> 413
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 10,486
<CHARGE-OFFS> 748
<RECOVERIES> 1,246
<ALLOWANCE-CLOSE> 11,384
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
