<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended MARCH 31, 2000 or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the transition period from to
------------ ------------
Commission File Number 0-16358
ANDOVER BANCORP, INC.
----------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 04-2952665
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
61 MAIN STREET, ANDOVER, MASSACHUSETTS 01810
- -------------------------------------- -------------------
(Address of principal executive office) (Zip Code)
(978) 749-2000
--------------------------------------------------
(Registrant's telephone number, including area code)
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of each of the issuer's classes of Common
Stock, as of the latest practicable date is:
Class: Common Stock, par value $0.10 per share
Outstanding as of May 3, 2000: 6,356,172 shares
<PAGE> 2
ANDOVER BANCORP, INC.
AND SUBSIDIARIES
Index
PART I - FINANCIAL INFORMATION
ITEM 1 Financial Statements Page
Consolidated Balance Sheets 1
Consolidated Statements of Operations 2
Consolidated Statements of Changes in
Stockholders' Equity 3
Consolidated Statements of Cash Flows 4-5
Notes to Consolidated Financial
Statements 6
Analysis of Net Yield on Earning Assets 7
ITEM 2 Management's Discussion and Analysis of 8-17
Financial Condition and Results of Operations
For the Quarter Ended March 31, 2000
ITEM 3 Quantitative and Qualitative Disclosure About Market Risk 16
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings 18
ITEM 2 Changes in Securities 18
ITEM 3 Defaults upon Senior Securities 18
ITEM 4 Submission of Matters to a Vote of Security Holders 18
ITEM 5 Other Information 18
ITEM 6 Exhibits and Reports on Form 8-K 18
Signatures 19
<PAGE> 3
ANDOVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
(In thousands)
ASSETS
<S> <C> <C>
Cash and due from banks $ 30,752 $ 26,913
Short-term investments 8,900 1,600
---------- ----------
Cash and cash equivalents 39,652 28,513
---------- ----------
Assets held for sale, at lower of
cost or market 2,032 1,494
Investments available for sale (amortized
cost of $264,482 in 2000 and $226,332
in 1999) 258,605 221,370
Investments held to maturity (market value
of $58,617 in 2000 and $62,557 in 1999) 60,017 63,752
Loans 1,149,978 1,133,101
Allowance for loan losses (11,403) (11,384)
---------- ----------
Net loans 1,138,575 1,121,717
---------- ----------
Mortgage servicing assets, net 10,354 10,635
Premises and equipment, net 10,712 10,663
Accrued interest receivable 9,503 8,236
Stock in FHLBB, at cost 20,395 17,737
Net deferred income taxes receivable 4,620 5,259
Other assets 2,221 1,678
---------- ----------
Total assets $1,556,686 $1,491,054
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 997,619 $ 968,533
Other borrowings 42,097 73,662
Federal Home Loan Bank advances 375,702 305,722
Mortgagors' escrow accounts 3,568 3,412
Income taxes payable 5,105 3,817
Accrued expenses and other liabilities 4,626 5,645
---------- ----------
Total liabilities 1,428,717 1,360,791
---------- ----------
Stockholders' equity:
Serial preferred stock, $0.10 par value per share;
3,000,000 shares authorized, none issued --- ---
Common stock, $0.10 par value per share;
15,000,000 shares authorized; 6,534,072
shares issued in 2000 and 1999; shares outstanding
6,356,172 and 6,534,072 in 2000 and 1999, respectively 653 653
Additional paid-in capital 60,745 60,745
Retained earnings 74,934 71,924
Treasury stock (177,900 and -0- shares in 2000
and 1999, respectively, at cost) (4,718) ---
Accumulated other comprehensive loss (3,645) (3,059)
---------- ----------
Total stockholders' equity 127,969 130,263
---------- ----------
Total liabilities and stockholders' equity $1,556,686 $1,491,054
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
1
<PAGE> 4
ANDOVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
QUARTERS ENDED
MARCH 31,
--------------
2000 1999
---- ----
(In thousands, except per share amounts)
<S> <C> <C>
Interest and dividend income:
Loans $21,309 $19,548
Mortgage-backed securities 2,182 2,448
Investment securities 3,280 2,137
Short-term investments 11 132
------- -------
Total interest and dividend income 26,782 24,265
------- -------
Interest expense:
Deposits 8,663 8,794
Federal Home Loan Bank advances 4,356 3,696
Other borrowings 1,250 338
------- -------
Total interest expense 14,269 12,828
------- -------
Net interest and dividend income 12,513 11,437
Provision for loan losses 200 ---
------- -------
Net interest and dividend income
after provision for loan
losses 12,313 11,437
------- -------
Non-interest income:
Net gains from sales of assets held
for sale and investments available for sale 7 93
Mortgage banking income, net 424 217
Other income 858 886
------- -------
Total non-interest income 1,289 1,196
------- -------
Non-interest expense:
Salaries and employee benefits 3,696 2,327
Office occupancy and equipment 850 747
Data processing 648 526
Professional fees 187 483
Marketing 244 212
Mortgage banking expense 23 126
Other operating expense 778 800
------- -------
Total non-interest expense 6,426 5,221
------- -------
Income before income tax expense 7,176 7,421
Income tax expense 2,620 2,620
------- -------
Net income $ 4,556 $ 4,792
======= =======
Basic earnings per share $0.71 $0.73
===== =====
Diluted earnings per share $0.69 $0.71
===== =====
Weighted average shares outstanding - basic 6,434,357 6,521,968
Dilutive impact of stock options 159,158 183,167
--------- ---------
Weighted average shares outstanding - diluted 6,593,515 6,705,135
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE> 5
ANDOVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Year Ended December 31, 1999 and Three Months Ended March 31, 2000
(Unaudited)
<TABLE>
<CAPTION>
ACCUMULATED TOTAL
ADDITIONAL OTHER STOCK-
COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE HOLDERS'
STOCK CAPITAL EARNINGS STOCK INCOME (LOSS) EQUITY
------ ---------- -------- -------- ------------- ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $652 $60,507 $58,716 $ --- $ 1,267 $121,142
Comprehensive income:
Net income --- --- 18,885 --- --- 18,885
Other comprehensive income (loss):
Unrealized holding losses arising
during the period, net of tax benefit
of $2,592 --- --- --- --- (4,077) (4,077)
Realized losses included in net
income, net of tax benefit of $136 --- --- --- --- (249) (249)
---------
Total comprehensive income 14,559
Dividends declared and
paid ($0.87 per share) --- --- (5,677) --- --- (5,677)
Stock options exercised 1 238 --- --- --- 239
---- ------- ------- ------ ------- --------
Balance at December 31, 1999 653 60,745 71,924 --- (3,059) 130,263
Comprehensive income:
Net income --- --- 4,556 --- --- 4,556
Other comprehensive income (loss):
Unrealized holding losses arising
during the period, net of tax
benefit of $329 --- --- --- --- (586) (586)
-------
Total comprehensive income 3,970
Dividends declared and
paid ($0.24 per share) --- --- (1,546) --- --- (1,546)
Purchase of treasury stock --- --- --- (4,718) --- (4,718)
---- ------- ------- ------- ------- --------
Balance at March 31, 2000 $653 $60,745 $74,934 $(4,718) $(3,645) $127,969
==== ======= ======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE> 6
ANDOVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED,
MARCH 31,
-------------------
2000 1999
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,556 $ 4,792
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 200 ---
Net gains on sales and provisions
for other real estate owned --- (9)
Net gains from sales of assets held for sale (7) (93)
Depreciation and amortization 363 356
Amortization of fees, discounts and premiums, net 22 149
Deferred income taxes 968 (245)
(Increase) decrease in:
Assets held for sale (531) 7,575
Accrued interest receivable (1,267) (593)
Mortgage servicing assets 376 467
Other assets (390) 59
Increase (decrease) in:
Mortgagors' escrow accounts 156 359
Accrued income taxes payable 1,288 (1,307)
Accrued expenses and other liabilities (1,019) (1,435)
------- -------
Net cash provided by operating activities 4,715 10,075
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment and mortgage-backed securities available for sale:
Purchases (39,983) (28,677)
Proceeds from maturities and redemptions --- 500
Principal repayments 1,791 6,962
Investment and mortgage-backed securities held to maturity:
Proceeds from maturities and redemptions 1,000 1,000
Principal repayments 2,721 9,373
Net change in FHLB stock (2,658) ---
Purchases of whole loans (5,282) (10,461)
Purchased and capitalized mortgage servicing assets (95) (353)
Net (increase) decrease in loans (11,900) 5,808
Capital expenditures on premises and equipment, net (412) (244)
Proceeds from sales of other real estate owned 5 207
------- -------
Net cash used by investing activities (54,813) (27,501)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 29,086 (18,108)
Net increase (decrease) in other borrowings (31,565) 1,369
Proceeds from issuance of FHLB advances 495,000 136,100
Principal repayments of FHLB advances (425,020) (107,061)
Net increase in treasury stock (4,718) ---
Dividends paid (1,546) (1,369)
Stock options exercised --- 18
------- -------
Net cash provided by financing activities 61,237 10,949
------- -------
Net increase (decrease) in cash and cash equivalents 11,139 (6,477)
Cash and cash equivalents, at beginning of period 28,513 45,437
------- -------
Cash and cash equivalents, at end of period $39,652 $38,960
======= =======
</TABLE>
Statement continued on next page.
4
<PAGE> 7
ANDOVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED,
MARCH 31,
-------------------
2000 1999
(In thousands)
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $14,547 $12,896
Income taxes 363 4,173
Supplemental noncash investing and financing activities:
Conversion of real estate loans to mortgage-backed securities
held for sale or investments available for sale 2,005 14,057
Transfer of loans to other real estate owned 158 167
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE> 8
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) BASIS OF PRESENTATION
The unaudited consolidated financial statements of Andover Bancorp,
Inc. (the "Company") and its principal subsidiary, Andover Bank (the
"Bank"), presented herein, should be read in conjunction with the
consolidated financial statements of the Company as of and for the
year ended December 31, 1999. Andover Bank is a state chartered
savings bank with its headquarters located in Andover, Massachusetts.
In the opinion of management, the unaudited consolidated financial
statements presented herein reflect all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation.
Interim results are not necessarily indicative of results to be
expected for the entire year.
2) SUBSEQUENT EVENT
On 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. The
Company has since received approval from the Federal Reserve Bank of
Boston to acquire GBT. Consummation of the acquisition is subject to
the receipt of additional regulatory and GBT shareholder approvals.
The Company expects to complete the purchase in July, 2000. 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 March 31, 2000, GBT had $127.3 million in assets, primarily
commercial real estate loans and investment securities, and deposits
of $101.9 million. The acquisition will be accounted for as a purchase
and had a total value of approximately $16.2 million on the date the
agreement was announced. The estimated portion of goodwill attributed
to this transaction is approximately $9.2 million.
6
<PAGE> 9
ANDOVER BANCORP, INC. AND SUBSIDIARIES
NET YIELD ON EARNING ASSETS
(Unaudited)
<TABLE>
<CAPTION>
QUARTERS ENDED MARCH 31,
------------------------
2000 1999
---- ----
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/
BALANCE PAID RATE(3) BALANCE PAID RATE(3)
------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Short-term investments $ 782 $ 11 5.66% $ 11,263 $ 132 4.75%
Investment securities (1)(2) 198,763 3,280 6.64 136,503 2,137 6.35
Mortgage-backed securities (1) 127,555 2,182 6.88 150,249 2,448 6.61
---------- ------ ---------- ------
Total investments 327,100 5,473 6.73 298,015 4,717 6.42
---------- ------ ---------- ------
Residential loans 747,495 12,827 6.90 756,156 12,776 6.85
Commercial real estate loans 207,765 4,513 8.74 153,704 3,459 9.13
Construction and land loans 65,082 1,552 9.59 55,450 1,260 9.22
---------- ------ ---------- ------
Total real estate loans (1) (3) 1,020,342 18,892 7.45 965,310 17,495 7.35
---------- ------ ---------- ------
Consumer loans (3) 62,679 1,285 8.25 60,928 1,196 7.96
---------- ------ ---------- ------
Commercial and lease loans (3) 26,042 589 9.10 31,762 672 8.58
Lease financing (3) 29,998 543 7.28 10,120 185 7.41
---------- ------ ---------- ------
Total commercial loans 56,040 1,132 8.12 41,882 857 8.30
---------- ------ ---------- ------
Total loans 1,139,061 21,309 7.52 1,068,120 19,548 7.42
---------- ------ ---------- ------
Total interest-earning assets 1,466,161 26,782 7.35% 1,366,135 24,265 7.20%
------ ------
Allowance for loan losses (11,399) (11,050)
Other assets 56,375 49,330
---------- ----------
Total assets $1,511,137 $1,404,415
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts $ 96,170 $ 196 0.82% $ 92,081 $ 181 0.80%
Money market deposit accounts 96,839 680 2.82 96,088 656 2.77
Savings accounts 213,479 1,747 3.29 201,860 1,597 3.21
Certificates of deposit 480,198 6,040 5.06 481,846 6,360 5.35
---------- ------ ---------- -------
Total interest-bearing deposits 886,686 8,663 3.93 871,875 8,794 4.09
---------- ------ ---------- -------
Borrowed funds:
Other borrowings 88,292 1,250 5.69 29,683 338 4.62
Federal Home Loan Bank advances 309,116 4,356 5.67 274,614 3,696 5.46
--------- ------- ---------- -------
Total borrowed funds 397,408 5,606 5.67 304,297 4,034 5.38
--------- ------ ---------- -------
Total interest-bearing liabilities 1,284,094 14,269 4.47% 1,176,172 12,828 4.42%
------ -------
Demand deposits 86,926 95,297
Other liabilities 9,234 13,067
---------- ----------
Total liabilities 1,380,254 1,284,536
Stockholders' equity 130,883 119,879
---------- ----------
Total liabilities and stock-
holders' equity $1,511,137 $1,404,415
========== ==========
Net interest income $12,513 $11,437
======= =======
Interest rate spread 2.88% 2.78%
==== ====
Net yield on earning assets 3.43% 3.40%
==== ====
</TABLE>
(1) Included in the average balance amounts are the corresponding components of
the assets held for sale, available for sale and held to maturity. The yield has
been calculated using interest income divided by the average balance of the
amortized historical cost.
(2) Included in the average balance and interest earned amounts is the stock in
FHLB of Boston.
(3) Interest on nonaccruing loans has been included only to the extent reflected
in the statement of operations. However, the loan balances are included in the
average amounts outstanding.
7
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE QUARTER ENDED MARCH 31, 2000
PRELIMINARY NOTE IN REGARD TO FORWARD-LOOKING STATEMENTS. This quarterly report
on Form 10-Q contains forward-looking statements. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes", "anticipates", "plans", "expects", "intends" and similar
expressions are intended to identify forward-looking statements. You should not
rely on forward-looking statements, because they involve known and unknown
risks, uncertainties and other factors, some of which are beyond the control of
the Company. These expressed or implied important risks, uncertainties and other
factors may cause the Company's actual results, performance or achievements to
differ materially from those expressed or implied by such forward-looking
statements. These factors include, without limitation, those set forth below
under the caption "Certain Factors That May Affect Future Results".
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS. The following important factors,
among others, could cause actual results, performance or achievements of the
Company to differ materially from those expressed or implied by forward-looking
statements made in this quarterly report on Form 10-Q or presented elsewhere by
management from time to time. Defined terms used elsewhere in this quarterly
report have the same meanings herein as therein. A number of uncertainties exist
that could affect the Company's future operating results, performance or
achievements including, without limitation, the Company's ability to integrate
systems and other back-office operations of GBT and Gloucester Bank and Trust
Company following the proposed acquisition of GBT, unanticipated costs in
connection with the proposed acquisition, the Bank's continued ability to
originate quality loans, fluctuations of interest rates, real estate market
conditions in the Bank's lending area, general and local economic conditions,
the Bank's continued ability to attract and retain deposits, the Company's
ability to control costs, new accounting pronouncements, and changing regulatory
requirements. You should carefully review all of these factors, and you should
be aware that there may be other factors that could cause these differences.
These forward-looking statements were based on information, plans and estimates
at the date of this report and the Company does not promise to update any
forward-looking statements to reflect changes in underlying assumptions or
factors, new information, future events or other changes.
RESULTS OF OPERATIONS
GENERAL. Net income amounted to $4.6 million, or $0.69 per diluted share, for
the quarter ended March 31, 2000 as compared to net income of $4.8 million, or
$0.71 per diluted share, for the first quarter of 1999. The first quarter of
1999 was positively impacted by a pre-tax gain of $1.1 million from the
curtailment of the Company's defined benefit plan. Andover's annualized return
on average assets decreased to 1.21% for the first quarter of 2000 compared to
1.38% in the first quarter of 1999. The annualized return on average
stockholders' equity decreased to 14.00% in the first quarter of 2000 from
16.21% in the first quarter of 1999.
NET INTEREST AND DIVIDEND INCOME. Net interest and dividend income totaled $12.5
million for the first quarter of 2000 as compared to $11.4 million for the same
period in 1999. This increase resulted primarily from a 7% increase in average
earning assets as well as an improved net interest margin. The 3 basis point
increase in the net yield on earning assets to 3.43% for the first quarter of
2000, as compared to 3.40% in the corresponding quarter of 1999, was due
primarily to a 15 basis point increase in the yield on the interest-earning
assets, partially offset by a 5 basis point rise in the rates paid on the
interest-bearing liabilities.
PROVISION FOR LOAN LOSSES. The allowance for loan losses is established through
a provision for loan losses charged to the statement of operations. The
allowance is
8
<PAGE> 11
reduced by a credit for loan losses as well as loan charge-offs. Assessing the
adequacy of the allowance for loan losses involves substantial uncertainties and
is based upon management's evaluation of the amount required to meet possible
loan losses after weighing various factors. Among the factors that management
may consider are the quality of specific loans, risk characteristics of the loan
portfolio generally, the level of nonaccruing loans, current economic
conditions, trends in delinquencies, actual charge-off experience, and
collateral values of the underlying security. Because the allowance for loan
losses is based on various estimates, and includes a high degree of judgment by
management, subsequent changes in the general economic prospects of the
borrowers may require changes in those estimates. In addition, regulatory
agencies, as an integral part of the examination process, review the Bank's
allowance and may require the Bank to provide additions to the allowance based
on their assessment, which may differ from management's assessment.
There was a provision for loan losses of $200,000 for the first quarter of 2000
and no provision taken in the comparative quarter in 1999. In addition to the
factors mentioned above, management considered several other factors in
determining that a provision was needed in the first quarter of 2000. These
factors include, without limitation, the level and mix of loan growth, the level
of nonaccrual and delinquent loans, the ratio of the allowance to total loans,
as well as charge-offs and recoveries. Net charge-offs totaled $181,000 for the
first quarter of 2000 as compared to net recoveries of $668,000 in 1999.
Management also believes that the allowance for loan losses will be adequate to
absorb possible credit losses inherent in the loan portfolio.
NON-INTEREST INCOME. Net gains from sales of loans, investments and
mortgage-backed securities held for sale and available for sale totaled $7,000
in the first quarter of 2000 as compared to $93,000 in the first quarter of
1999.
Mortgage banking income totaled $424,000 in the first quarter of 2000 versus
$217,000 in the comparable quarter in 1999. In the first quarter of 2000, there
was a credit to the valuation allowance of $250,000 as compared to no provision
for the valuation allowance in the comparable quarter of 1999. The mortgage
servicing assets are assessed for impairment on a quarterly basis. During the
first quarter of 2000, mortgage interest rates continued to rise, thereby
increasing the value of the servicing rights and reducing the need for the same
level of valuation allowance. The first quarter of 1999 was marked by high
prepayment levels and declining mortgage interest rates which negatively
impacted the value of the mortgage servicing assets. Amortization expense
totaled $626,000 and $647,000, respectively, for the quarters ended March 31,
2000 and 1999. While there were no mortgage servicing asset write-downs in the
first quarter of 2000, write-downs totaled $290,000 for the first quarter of
1999. However, if mortgage interest rates decline from their current levels, it
is possible that provisions or write-downs of the valuation allowance may be
necessary due to the mortgage prepayment risk inherent in the servicing
portfolio. This mortgage prepayment risk is the result of loans repaying faster
than expected, causing the fair value of the mortgage servicing asset to
decline. Loans serviced for investors totaled $938.8 million and $852.6 million,
respectively, at March 31, 2000 and 1999.
9
<PAGE> 12
The following table summarizes the activity in the valuation allowance for
mortgage servicing assets for the quarters ended March 31, 2000 and 1999:
Quarters Ended
March 31,
--------------
2000 1999
---- ----
(In thousands)
Balance at beginning of period $500 $1,125
Provision (credit) for valuation
allowance (250) ---
Charge-offs --- (290)
---- ------
Balance at end of period $250 $ 835
==== ======
Other income totaled $858,000 in the first quarter of 2000 as compared to
$886,000 in the first quarter of 1999 primarily due to lower loan fees due to a
lower level of delinquent loans, partially offset by an increase in deposit fee
income.
NON-INTEREST EXPENSE. Non-interest expenses increased by $1.2 million, or 23.1%,
to $6.4 million in the first quarter of 2000 from $5.2 million in the first
quarter of 1999. The efficiency ratio (a ratio that measures operating expenses
as a percentage of operating income) increased from 41.6% in the first quarter
of 1999 to 46.5% in the comparable period of 2000 primarily due to higher
general and administrative costs. The increase in non-interest expense during
the first quarter of 2000 was attributable to a rise in both salaries and
employee benefits and data processing expenses, partially offset by a decrease
in professional fees and mortgage banking expenses.
Salaries and employee benefits, the largest component of non-interest expense,
increased $1.4 million, or 58.8%, in the first quarter of 2000 to $3.7 million
primarily due to the pre-tax gain of $1.1 million from the curtailment of the
Company's defined benefit pension plan recorded in 1999's first quarter. In
addition, the introduction of a money purchase plan and an increase in the
corporate match to the existing 401(k) plan added approximately $170,000 in
benefit costs during the first quarter of 2000.
Office occupancy and equipment expenses increased 13.8% from $747,000 in the
first quarter of 1999 mainly attributable to increased depreciation of equipment
and buildings as well as increased rental expenses from more branch and ATM
locations.
Data processing expenses increased from the first quarter of 1999 to the
corresponding quarter in 2000 by 23.2% or $122,000. This was primarily due to an
increase in the number of loans serviced by the Company as well as increased
costs associated with alternative delivery systems such as the internet, debit
cards and automated services. In addition, as the size and complexity of the
Company increases, information systems needed to support the decisions and the
costs related thereto will increase.
Professional fees decreased $296,000 to $187,000 in the first quarter of 2000
from $483,000 in the first quarter of 1999 due to decreased corporate legal
fees, recruiting expenses and other professional fees.
Marketing expenses increased 15.1% to $244,000 for the first quarter of 2000
compared to 1999's first quarter due to increased advertising for the Bank's
deposit products in light of the large bank divestitures occurring in the
Company's market area.
Mortgage banking expenses decreased 81.7% or $103,000 in the first quarter of
2000 versus 1999's first quarter due to reduced costs incurred in conjunction
with the serviced loan portfolio as well as a significant reduction in the costs
incurred on the refinancing activity experienced in 1999.
10
<PAGE> 13
Other operating expenses decreased 2.8% from the first quarter of 1999 to
$778,000 in the corresponding quarter in 2000 due to a reduction in corporate
banking insurance and other cost saving measures.
INCOME TAX EXPENSE. The Company recorded an income tax expense of $2.6 million
on its financial statement earnings for both the first quarters of 2000 and
1999, respectively. The effective tax rate for the first quarter of 2000 was
36.5%, as compared to 35.3% for the corresponding period in 1999. The lower tax
rate in the first quarter of 1999 was due to a state tax credit.
FINANCIAL CONDITION
Total assets increased from $1,491.1 million at December 31, 1999 to $1,556.7
million at March 31, 2000. Increases in investments available for sale and the
loan portfolio were funded primarily by borrowings during the first three months
of 2000.
LOANS. The following table shows the composition of the Company's loan portfolio
at March 31, 2000 and December 31, 1999. The balances shown in the table are net
of unadvanced funds and deferred loan origination fees and costs.
3/31/00 12/31/99
------- --------
(In thousands)
Real estate loans:
Residential $ 746,951 $ 743,747
Commercial 210,115 207,364
Construction and land 73,030 63,660
---------- ----------
Total real estate loans 1,030,096 1,014,771
---------- ----------
Consumer loans 63,263 61,831
---------- ----------
Commercial loans:
Commercial and lease loans 26,103 27,378
Lease financing 30,516 29,121
---------- ----------
Total commercial loans 56,619 56,499
---------- ----------
Total loans $1,149,978 $1,133,101
========== ==========
Total loans increased $16.9 million during the first three months of 2000 to
$1,150.0 million at March 31, 2000, primarily due to an increase in the
construction and land portfolios as a result of continued demand for new
housing.
Originations of all loan types are sensitive to the interest rate environment,
the capacity for borrowing and real estate values, current and anticipated
economic conditions as well as the competitive landscape. Due to the favorable
interest rates experienced in the first three months of 1999, mortgage
refinancing volume was very heavy and resulted in residential loan originations
totaling $73.8 million. Conversely in 2000, residential loan originations
totaled only $20.1 million due to a decrease in refinancing activity caused by a
rise in interest rates. Residential loan balances increased only $3.2 million
during the first three months of 2000 primarily due the securitization of
certain fixed-rate loans as well as regular amortization and loan prepayments.
Outstanding corporate loans, comprised of commercial real estate, commercial,
construction and land loans and leases, increased $12.2 million during the first
three months of 2000. The volume of corporate loan originations reflects the
Company's increased interest for this type of loan, however, real estate values,
current and anticipated economic conditions and a customer's capacity for
borrowing have a more critical role. Corporate loan originations totaled $39.6
million and $37.7 million, respectively, for the three months ended March 31,
2000 and 1999. The loan balances do not reflect the full impact of the total
originations due to loan prepayments and certain amounts that remain unadvanced
as of March 31, 2000.
11
<PAGE> 14
Consumer loan balances increased by approximately 2.3% on an annualized basis,
to $63.3 million at March 31, 2000, primarily due to an increase in the second
mortgage portfolio.
RISK ELEMENTS. The following table shows the composition of non-performing
assets at March 31, 2000 and December 31, 1999:
3/31/00 12/31/99
------- --------
(Dollars in thousands)
Nonaccruing loans $2,077 $2,456
Other real estate owned 194 41
------ ------
Total non-performing assets $2,271 $2,497
====== ======
Total non-performing assets as a
percentage of total assets 0.15% 0.17%
At March 31, 2000, total impaired loans were $2.1 million, of which $843,000 had
related allowances of $143,000 and $1.3 million which did not require a related
allowance. All of the $2.1 million in impaired loans have been measured using
the fair value of the collateral method. During the three months ended March 31,
2000, the average recorded value of impaired loans was $2.3 million.
NONACCRUING LOANS. Management places loans on nonaccrual status when loan
payments are past due 90 days or more, regardless of collateral values. All
previously accrued but uncollected interest is reversed against current period
interest income when a loan is placed on nonaccrual status. Loans for which
payments are less than 90 days past due are placed on nonaccrual status when
concern exists as to the ultimate collectibility of the loan. Nonaccrual loans
are generally not returned to performing status until the obligation is brought
current and when concern no longer exists as to the collectibility of principal
or interest.
The following table shows the composition of nonaccruing loans at March 31,
2000, and December 31, 1999:
3/31/00 12/31/99
------- --------
(Dollars in thousands)
Residential real estate $ 520 $ 588
Commercial real estate 1,196 1,308
Construction and land 60 ---
Commercial and lease loans 12 101
Lease financing 277 435
Consumer 12 24
------- -------
Total nonaccrual loans $ 2,077 $ 2,456
======= =======
Allowance for loan losses $11,403 $11,384
======= =======
Allowance for loan losses as a
percentage of total loans 1.0% 1.0%
12
<PAGE> 15
ALLOWANCE FOR LOAN LOSSES. The following table summarizes the activity in the
Company's allowance for loan losses for the quarters ended March 31, 2000 and
1999:
Quarters Ended
March 31,
--------------
2000 1999
---- ----
(Dollars in thousands)
Balance at beginning of period $11,384 $10,486
Provision for loan losses 200 ---
Charge-offs:
Residential real estate --- (88)
Commercial real estate --- (20)
Construction and land --- ---
Commercial and lease loans (75) (15)
Lease financings (166) ---
Consumer (1) (1)
------- -------
Total charge-offs (242) (124)
------- -------
Recoveries:
Residential real estate 4 4
Commercial real estate 34 539
Construction and land --- ---
Commercial and lease loans 19 106
Lease financings --- 130
Consumer 4 13
------- -------
Total recoveries 61 792
------- -------
Net (charge-offs)recoveries (181) 668
------- -------
Balance at end of period $11,403 $11,154
======= =======
Ratio of annualized net
(charge-offs) recoveries to average
loans outstanding (0.06)% 0.25%
Management analyzes the adequacy of the allowance for loan losses on a quarterly
basis. See "Results of Operations - Provision for Loan Losses".
INVESTMENTS. As of March 31, 2000, the Company's total investment portfolio
amounted to $327.5 million for an increase of $40.8 million from December 31,
1999. The increase in the first three months of 2000 was primarily due to
purchases of various investments available for sale, including mortgage-backed
securities, corporate bonds, U.S. government and federal agency obligations.
However, these purchases were partially offset by principal repayments in the
mortgage-backed portfolio.
Management continually evaluates its investment alternatives in order to
properly manage the overall balance sheet mix. The timing of purchases, sales
and reinvestment, if any, will be based on various factors including expectation
of movements in market interest rates and loan demand. Notwithstanding these
events, it is the intent of management to grow the earning asset base through
loan originations, loan purchases or investment acquisitions while funding this
growth through a mix of retail deposits, FHLB advances and other borrowings.
13
<PAGE> 16
The following table presents the composition and carrying values of the
investment portfolio at March 31, 2000 and December 31, 1999:
3/31/00 12/31/99
------- --------
(In thousands)
SHORT-TERM INVESTMENTS $ 8,900 $ 1,600
======== ========
INVESTMENTS AVAILABLE FOR SALE (AT MARKET):
Common stocks $ 2,229 $ 1,248
-------- --------
U.S. government and federal agency obligations 74,973 65,191
Other bonds and obligations 98,607 84,336
-------- --------
Total bonds and obligations 173,580 149,527
-------- --------
GNMA mortgage-backed securities 31,870 27,381
FHLMC participation certificates 22,638 19,118
FNMA pass-through certificates 15,843 11,433
Collateralized mortgage obligations 12,445 12,663
-------- --------
Total mortgage-backed securities 82,796 70,595
-------- --------
Total investments available for sale $258,605 $221,370
======== ========
INVESTMENTS HELD TO MATURITY (AT AMORTIZED COST):
U.S. government and federal agency obligations $ 8,502 $ 8,507
Other bonds and obligations 1,510 2,514
-------- --------
Total bonds and obligations 10,012 11,021
-------- --------
FNMA pass-through certificates 22,930 24,082
FHLMC participation certificates 16,882 18,073
GNMA mortgage-backed securities 1,858 1,923
Collateralized mortgage obligations 7,977 8,268
Other asset-backed securities 358 385
-------- --------
Total mortgage-backed securities 50,005 52,731
-------- --------
Total investments held to maturity $ 60,017 $ 63,752
======== ========
Total investments $327,522 $286,722
======== ========
The following table shows the gross unrealized gains and losses by major
categories of securities as of March 31, 2000:
Unrealized Unrealized
Gains Losses
---------- ----------
(In thousands)
INVESTMENTS AVAILABLE FOR SALE:
Common stocks $104 $ (178)
U.S. government and federal agency obligations 10 (1,396)
Other bonds and obligations 31 (2,984)
Mortgage-backed securities 122 (1,586)
---- -------
Total investments available for sale $267 $(6,144)
==== =======
INVESTMENTS HELD TO MATURITY:
U.S. government and federal agency obligations $--- $ (122)
Other bonds and obligations 17 ---
Mortgage-backed securities 85 (1,380)
---- -------
Total investments held to maturity $102 $(1,502)
==== =======
Total unrealized gains and losses $369 $(7,646)
==== =======
At March 31, 2000, the Company's net unrealized loss on investments available
for sale amounted to $5.9 million, a fair value decline of $915,000 from $5.0
million at December
14
<PAGE> 17
31, 1999. At March 31, 2000, the Company's net unrealized loss on investments
held to maturity totaled $1.4 million, for a decline of $205,000 from $1.2
million at December 31, 1999. The changes in the net unrealized loss on the
total investment portfolio from year-end 1999 were primarily due to an increase
in market interest rates during the first three months of 2000.
DEPOSITS AND BORROWED FUNDS. Total deposits increased $29.1 million to $997.6
million at March 31, 2000 from $968.5 million at December 31, 1999. This
increase was most pronounced in NOW accounts which increased by $11.4 million
during the first three months of 2000. In addition, demand deposit accounts rose
by $10.4 million and certificates of deposit rose $8.1 million during this
period. Partially offsetting these increases, however, were modest declines of
$526,000 and $266,000 in money market deposit accounts and savings accounts,
respectively, during the first three months of 2000.
The following table shows the composition of the Company's deposits at March 31,
2000 and December 31, 1999:
3/31/00 12/31/99
------- --------
(In thousands)
Demand deposit accounts $ 97,231 $ 86,871
NOW accounts 110,416 99,040
Money market deposit accounts 94,765 95,291
Savings accounts 213,020 213,286
Certificates of deposit 482,187 474,045
-------- --------
Total deposits $997,619 $968,533
======== ========
In order to fund the growth in total assets experienced during the first three
months of 2000, the Bank augmented the rise in deposits with an increase in
borrowed funds. Federal Home Loan Bank advances increased $70.0 million from
December 31, 1999 to $375.7 million at March 31, 2000. Other borrowings
decreased $31.6 million to $42.1 million at March 31, 2000. The decline in other
borrowings was offset by the increase in the FHLB advances and together, fueled
the increase in total assets for the first quarter of 2000.
LIQUIDITY. The goal of the Company's liquidity management process is to assess
its funding requirements so as to efficiently meet the cash needs of borrowers
and depositors, while also providing funds for attractive investment
opportunities. Liquidity involves the Company's ability to raise or gain access
to funds in order to fulfill its existing and anticipated financial obligations.
The Company's primary source of funds is dividends from its bank subsidiary.
Dividends from the Bank to the Company totaled $4.0 million in the first quarter
of 2000. The Company made payments of dividends to stockholders in the amount of
$1.5 million in the first quarter of 2000. In April, 2000, the Company declared
a dividend in the amount of $1.5 million, payable in the second quarter of 2000.
The Bank has a diverse base of funding. Sources of liquidity include increasing
customer deposits, borrowed funds, repayments, prepayments and amortization of
the investment and loan portfolios as well as sales of securities in the
investments available for sale portfolio. Sources of borrowed funds include
funds purchased from other banks, customer repurchase agreements, the sale of
securities under repurchase agreements and borrowings from the FHLB, of which
the Bank is a voluntary member. The Bank may also obtain funds from the discount
window of the Federal Reserve Bank of Boston by pledging certain assets.
Cash flows provided by operations decreased $5.4 million to $4.7 million in the
first three months of 2000, as compared to $10.1 million in the corresponding
period of 1999
15
<PAGE> 18
primarily due to an increase in assets held for sale partially offset by an
increase in accrued income taxes payable. Cash flows used by investing
activities increased by $27.3 million to $54.8 million for the three months
ended March, 2000, as compared to $27.5 million during the equivalent period
last year. This increase was mainly attributable to a higher level of purchases
of securities available for sale as well as an increase in the loan portfolio.
Cash flows provided by financing activities increased $50.3 million for the
three months ended March 31, 2000 to $61.2 million, as compared to $10.9 million
in the equivalent period in 1999. The financing activity increase was due to a
change in the mix of financing sources, with a rise in deposits and FHLB
advances offset by a decrease in other borrowings and an increase in the
payments to acquire treasury stock.
During the first quarter of 2000, the Company repurchased 177,900 common shares
in connection with its previously announced stock repurchase plan. Approximately
146,000 shares remain eligible for repurchase under the existing 5% program
limitation.
At March 31, 2000, the Company had home equity, reserve credit and commercial
unadvanced lines of credit totaling $105.7 million. Outstanding commitments to
originate loans totaled $53.0 million. Unadvanced portions of construction and
land loans amounted to $35.6 million. Standby letters of credit were $3.5
million. Loans sold with recourse totaled $1.1 million. Management believes that
its sources of liquidity are sufficient to meet these commitments if and as
called upon.
CAPITAL RESOURCES. The following table presents regulatory capital ratios under
current regulatory and risk-based capital requirements as of March 31, 2000:
Regulatory Andover Andover
Minimum Bancorp, Inc. Bank
---------- ------------- -------
Leverage Capital Ratio Tier 1 4.00% 8.71% 8.14%
Risk Based Capital Ratio:
Tier 1 4.00 12.74 11.93
Total 8.00 13.85 13.04
As of March 31, 2000, the most recent notification from the FDIC categorized the
Bank as well capitalized under the prompt corrective action provisions.
Therefore, the Bank is entitled to pay the lowest deposit premium possible.
ASSET AND LIABILITY MANAGEMENT AND MARKET RISK. The Bank's primary source of
revenue is net interest income, which is the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities. The
Company seeks to manage its exposure to interest rate risk or market risk,
through active monitoring and management of its interest rate risk exposure,
which is inherent in its lending and deposit taking activities. The policies and
procedures for managing both on and off balance sheet activities are established
by Andover's Asset/Liability Management Committee (ALCO), who reports its
findings to the Board of Directors on a regular basis.
The main objective in managing interest rate risk is to minimize the adverse
impact of changes in interest rates on the Company's net interest income and to
preserve capital, while adjusting the Company's asset/liability structure to
obtain the maximum yield-cost spread on that structure. However, a sudden and
substantial increase in interest rates may adversely impact earnings to the
extent that the interest rates borne by assets and liabilities do not change at
the same speed, to the same extent, or on the same basis.
For further information regarding quantitative and qualitative disclosures about
market risk, please refer to the Company's Form 10-K as of and for the year
ended December 31, 1999.
16
<PAGE> 19
RECENT ACCOUNTING DEVELOPMENTS. In June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS 133"), which
establishes new accounting and reporting standards for derivative instruments.
SFAS 133 requires that an entity recognize all derivatives as either assets or
liabilities and measure those instruments at fair value. This statement, as
amended by SFAS 137, is effective for financial statements issued for all fiscal
quarters of fiscal years beginning after June 15, 2000. Early application is
encouraged but restatement of prior periods is prohibited. SFAS 133 is not
expected to have a material impact on the consolidated financial statements of
the Company.
17
<PAGE> 20
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings
Not Applicable
ITEM 2 Changes in Securities and Use of Proceeds
Not Applicable
ITEM 3 Defaults Upon Senior Securities
Not Applicable
ITEM 4 Submission of Matters to a Vote of Security Holders
The 2000 Annual Meeting of Shareholders of the Andover
Bancorp, Inc. was held on April 27, 2000. John P. Bachini
was newly elected while the two remaining nominees of the
Board of Directors of the registrant were re-elected, each
for a three-year term. In addition, the following
individuals continued to remain members of the Board of
Directors following the meeting: Paul J. Donahue, Sr.,
Clifford E. Elias, John E. Fenton, Jr., Naomi A. Gardner,
Frank D. Goldstein, Gerald T. Mulligan, Irving E. Rogers
III, Robert J. Scribner and Fred P. Shaheen. The only other
matter voted on at the meeting included ratification of the
appointment of KPMG LLP as Andover's independent auditors.
Votes were cast as follows:
I. Election of three Class I Directors
Nominee For Withheld
------- --- --------
John P. Bachini 5,291,340 89,682
Thomas F. Caffrey 5,308,097 72,925
Cornelius J. McCarthy 5,307,661 73,361
II. Ratification of KPMG LLP as Independent Auditors
For Against Abstain
--- ------- -------
5,346,171 9,774 25,077
ITEM 5 Other Information
None
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
A Form 8-K was filed with the Securities and Exchange
Commission on February 9, 2000, regarding the proposed
acquisition of GBT Bancorp by Andover Bancorp, Inc.
Information contained in the Form 8-K included the
Agreement and Plan of Merger by and between Andover
Bancorp, Inc. and GBT Bancorp, dated January 26, 2000.
A Form 8-K was filed with the Securities and Exchange
Commission on March 1, 2000. Information contained in the
Form 8-K included audited 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.
18
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ANDOVER BANCORP, INC.
May 9, 2000 /s/ Gerald T. Mulligan
----------------------
Gerald T. Mulligan
President and
Chief Executive Officer
May 9, 2000 /s/ Joseph F. Casey
-------------------
Joseph F. Casey
Chief Financial Officer
and Treasurer
19
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE 10 Q FINANCIAL
STATEMENTS DATED AS OF AND FOR THE QUARTER ENDED MARCH 31, 1999 AND IS QUALIFIED
IN REFERENCE TO SUCH 10 Q FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 30,752
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 8,900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,032
<INVESTMENTS-CARRYING> 60,017
<INVESTMENTS-MARKET> 58,617
<LOANS> 1,149,978
<ALLOWANCE> 11,403
<TOTAL-ASSETS> 1,556,686
<DEPOSITS> 997,619
<SHORT-TERM> 0
<LIABILITIES-OTHER> 13,299
<LONG-TERM> 417,799
0
0
<COMMON> 653
<OTHER-SE> 127,316
<TOTAL-LIABILITIES-AND-EQUITY> 1,556,686
<INTEREST-LOAN> 21,309
<INTEREST-INVEST> 5,473
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 26,782
<INTEREST-DEPOSIT> 8,663
<INTEREST-EXPENSE> 14,269
<INTEREST-INCOME-NET> 12,513
<LOAN-LOSSES> 200
<SECURITIES-GAINS> 7
<EXPENSE-OTHER> 6,426
<INCOME-PRETAX> 7,176
<INCOME-PRE-EXTRAORDINARY> 4,556
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,556
<EPS-BASIC> .71
<EPS-DILUTED> .69
<YIELD-ACTUAL> 3.43
<LOANS-NON> 2,077
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 11,384
<CHARGE-OFFS> 242
<RECOVERIES> 61
<ALLOWANCE-CLOSE> 11,403
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
