<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
----------------------------------
Date of Report (Date of earliest event reported): MARCH 1, 2000
-------------
ANDOVER BANCORP, INC.
(Exact name of Registrant as specified in charter)
<TABLE>
<CAPTION>
<S> <C> <C>
DELAWARE 000-16358 04-2952665
- ---------------------------- ------------------------ -------------------
(State or other jurisdiction (Commission file number) (IRS employer
of incorporation) identification no.)
</TABLE>
61 MAIN STREET, ANDOVER, MASSACHUSETTS 01810
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
(978) 749-2000
----------------------------------------------------
(Registrant's telephone number, including area code)
<PAGE> 2
ITEM 5 - OTHER EVENTS
This Current Report on Form 8-K is filed for the purpose of filing 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, which are attached hereto as
Exhibit 99.1.
2
<PAGE> 3
ITEM 7 - FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
23.1 Consent of KPMG LLP
27.1 Financial data schedule
99.1 Andover Bancorp, Inc. audited consolidated financials for the fiscal
year ended December 31, 1999.
3
<PAGE> 4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Company has duly caused this report to be filed on its behalf by
the undersigned thereunto duly authorized.
ANDOVER BANCORP, INC.
Dated: March 1, 2000 By: /s/ Joseph F. Casey
-------------------------------
Name: Joseph F. Casey
Title: Chief Financial Officer
and Treasurer
4
<PAGE> 5
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
23.1 Consent of KPMG LLP
27.1 Financial data schedule
99.1 Andover Bancorp, Inc. audited consolidated financials for the fiscal
year ended December 31, 1999.
5
<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 No. 33-21975
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
February 28, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 8K
FINANCIAL STATEMENTS DATED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH 8K 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>
<PAGE> 1
Exhibit 99.1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.................................................................... 2
Consolidated Balance Sheets as of December 31, 1999 and 1998.................................... 3
Consolidated Statements of Operations for each of the years ended
December 31, 1999, 1998 and 1997.............................................................. 4
Consolidated Statements of Changes in Stockholders' Equity for each of the
years ended December 31, 1999, 1998 and 1997.................................................. 5
Consolidated Statements of Cash Flows for each of the years ended
December 31, 1999, 1998 and 1997............................................................... 6-7
Notes to Consolidated Financial Statements........................................................ 8-33
</TABLE>
1
<PAGE> 2
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/KPMG LLP
Boston, Massachusetts
January 13, 2000
2
<PAGE> 3
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.
3
<PAGE> 4
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.
4
<PAGE> 5
ANDOVER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE STOCKHOLDERS'
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.
5
<PAGE> 6
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.
6
<PAGE> 7
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.
7
<PAGE> 8
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.
8
<PAGE> 9
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 and 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 and 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
generally 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 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.
9
<PAGE> 10
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.
10
<PAGE> 11
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.
11
<PAGE> 12
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>
12
<PAGE> 13
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>
Adjustable rate investments....... $ 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.
13
<PAGE> 14
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>
14
<PAGE> 15
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 follow:
<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>
15
<PAGE> 16
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.
16
<PAGE> 17
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.
17
<PAGE> 18
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> <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.
18
<PAGE> 19
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> <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> <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.
19
<PAGE> 20
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> <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>
20
<PAGE> 21
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.
21
<PAGE> 22
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.
22
<PAGE> 23
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.
23
<PAGE> 24
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
---- ---- ---- ---- ----
(IN THOUSANDS)
<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>
24
<PAGE> 25
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>
25
<PAGE> 26
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 [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.
26
<PAGE> 27
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>
27
<PAGE> 28
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 $1,093,782 $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.
28
<PAGE> 29
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.
29
<PAGE> 30
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.
30
<PAGE> 31
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 .......... 74,248 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.
31
<PAGE> 32
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, Inc. ("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 has a total
value of approximately $16.2 million. The estimated portion of goodwill
attributed to this transaction is approximately $8.1 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>
32
<PAGE> 33
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.
33
