10-Q 1 b40008abe10-q.txt ANDOVER BANCORP INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------------------- FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended June 30, 2001 or ------------- [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from to ------------ ------------ Commission File Number 0-16358 ----------------- ANDOVER BANCORP, INC. ---------------------------------------------------- (Exact name of Registrant as specified in its charter) Delaware 04-2952665 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 61 Main Street, Andover, Massachusetts 01810 -------------------------------------- ------------------- (Address of principal executive office) (Zip Code) (978) 749-2000 -------------------------------------------------- (Registrant's telephone number, including area code) Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date is: Class: Common Stock, par value $0.10 per share Outstanding as of August 8, 2001: 6,782,058 shares 2 ANDOVER BANCORP, INC. AND SUBSIDIARIES INDEX PART I - FINANCIAL INFORMATION ITEM 1 Financial Statements Page Consolidated Balance Sheets 1 Consolidated Statements of Operations 2 Consolidated Statements of Changes in Stockholders' Equity 3 Consolidated Statements of Cash Flows 4-5 Notes to Consolidated Financial Statements 6 Analysis of Net Yield on Earning Assets 7 ITEM 2 Management's Discussion and Analysis of 8-19 Financial Condition and Results of Operations For the Three Months Ended June 30, 2001 For the Six Months Ended June 30, 2001 ITEM 3 Quantitative and Qualitative Disclosure About Market Risk 16 PART II - OTHER INFORMATION ITEM 1 Legal Proceedings 20 ITEM 2 Changes in Securities 20 ITEM 3 Defaults upon Senior Securities 20 ITEM 4 Submission of Matters to a Vote of Security Holders 20 ITEM 5 Other Information 20 ITEM 6 Exhibits and Reports on Form 8-K 20 Signatures 21 3 ANDOVER BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS --------------------------- (Unaudited)

~~MARCH~~JUNE 3130, 2001 DECEMBER 31, 2000 -------------- ----------------- (In thousands) ASSETS Cash and due from banks $ 3952,~~608~~953 $ 40,256 Short-term investments 193,~~000~~400 29,300 ----------- ----------- Cash and cash equivalents 5856,~~608~~353 69,556 ----------- ----------- Assets held for sale, at lower of cost or market 1127,~~667~~008 5,037 Investments available for sale (amortized cost $~~267~~263,~~290~~189 in 2001 and $283,902 in 2000) ~~277~~272,~~425~~591 289,155 Investments held to maturity (market value $3633,~~573~~321 in 2001 and $49,014 in 2000) 3532,~~841~~754 48,533 Loans 1,~~362~~339,~~921~~443 1,356,181 Allowance for loan losses (15,~~080~~310) (14,640) ----------- ----------- Net loans 1,~~347~~324,~~841~~133 1,341,541 ----------- ----------- Mortgage servicing assets, net 98,~~112~~948 9,842 Premises and equipment, net 1312,~~022~~859 13,422 Accrued interest receivable 1110,~~175~~664 11,366 Stock in FHLBB, at cost 23,366 23,366 Net deferred income taxes receivable -- 318 Goodwill, net of amortization 8,~~593~~443 8,743 Other assets 21,~~351~~878 2,354 ----------- ----------- Total assets $ 1,~~799~~778,~~001~~997 $ 1,823,233 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits $ 1,254,~~322~~875 $ 1,221,189 Other borrowings 1718,~~205~~236 18,941 Federal Home Loan Bank advances ~~350~~330,~~755~~700 417,277 Mortgagors' escrow accounts 3,~~770~~294 3,634 Current income taxes payable 31,~~513~~270 -- ~~Deferred income taxes payable 897 --~~ Accrued expenses and other liabilities 87,~~182~~308 8,571 ----------- ----------- Total liabilities 1,~~638~~615,~~644~~683 1,669,612 ----------- ----------- Stockholders' equity: Serial preferred stock, $0.10 par value per share; 3,000,000 shares authorized, none issued -- -- Common stock, $0.10 par value per share; 15,000,000 shares authorized; 6,837,133 shares issued in 2001 and 2000; shares outstanding 6,~~701~~707,~~244~~994 and 6,669,180 in 2001 and 2000, respectively 684 684 Additional paid-in capital 68,~~135~~106 68,615 Retained earnings 8892,~~989~~207 85,646 Treasury stock (~~135~~129,~~889~~139 and 167,953 shares in 2001 and 2000, respectively, at cost) (3,~~604~~425) (4,454) Accumulated other comprehensive income 65,~~153~~742 3,130 ----------- ----------- Total stockholders' equity ~~160~~163,~~357~~314 153,621 ----------- ----------- Total liabilities and stockholders' equity $ 1,~~799~~778,~~001~~997 $ 1,823,233 =========== ===========

The accompanying notes are an integral part of the consolidated financial statements. 1 4 ANDOVER BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS -------------------------------------- (Unaudited)

THREE MONTHS ENDED ~~MARCH~~SIX 31MONTHS ENDED JUNE 30, JUNE 30, -------- -------- 2001 2000 2001 2000 ----------- ----------- ~~2001 2000~~ ----------- ----------- (In thousands, except per share amounts) Interest and dividend income: Loans $ 26,~~643~~172 $ 2122,~~302~~428 $ 52,815 $ 43,730 Investment securities 3,~~985~~788 3,~~280~~639 7,773 6,919 Mortgage-backed securities 1,~~866~~790 2,~~182~~258 3,656 4,440 Short-term investments 70164 1163 234 74 ----------- ----------- ----------- ----------- Total interest and dividend income 3231,~~564~~914 2628,~~775~~388 64,478 55,163 ----------- ----------- ----------- ----------- Interest expense: Deposits 11,~~527~~146 89,~~663~~052 22,673 17,715 Federal Home Loan Bank advances 54,~~465~~727 4,~~356~~590 10,192 8,946 Other borrowings ~~484~~194 12,~~250~~009 678 3,259 ----------- ----------- ----------- ----------- Total interest expense 1716,~~476~~067 1415,~~269~~651 33,543 29,920 ----------- ----------- ----------- ----------- Net interest and dividend income 15,~~088~~847 12,~~506~~737 30,935 25,243 Provision for loan losses 275 ~~200~~400 550 600 ----------- ----------- ----------- ----------- Net interest and dividend income after provision for loan losses 1415,~~813~~572 12,~~306~~337 30,385 24,643 ----------- ----------- ----------- ----------- Non-interest income (loss): Net gains from sales of assets held for sale and investments available for sale ~~173~~214 717 387 24 Mortgage banking income (loss), net 65 418 (~~112~~47) ~~424~~842 Other income 1,~~147~~353 ~~858~~962 2,500 1,820 ----------- ----------- ----------- ----------- Total non-interest income 1,~~208~~632 1,~~289~~397 2,840 2,686 ----------- ----------- ----------- ----------- Non-interest expense: Salaries and employee benefits 4,~~256~~063 3,~~696~~275 8,319 6,971 Office occupancy and equipment 953 810 1,~~039~~992 ~~850~~1,660 Data processing ~~851~~942 ~~648~~687 1,793 1,335 Professional fees ~~255~~283 ~~187~~322 538 509 Marketing ~~264~~194 ~~244~~280 458 524 Mortgage banking expense 57 25 98 48 Merger expense 1,052 -- 1,052 -- Amortization of goodwill 150 -- 300 -- Other operating expense 1,~~020~~172 ~~794~~801 2,151 1,572 ----------- ----------- ----------- ----------- Total non-interest expense 78,~~835~~866 6,~~419~~200 16,701 12,619 ----------- ----------- ----------- ----------- Income before income tax expense 8,~~186~~338 7,~~176~~534 16,524 14,710 Income tax expense 3,~~041~~310 2,~~620~~751 6,351 5,371 ----------- ----------- ----------- ----------- Net income $ 5,~~145~~028 $ 4,~~556~~783 $ 10,173 $ 9,339 =========== =========== =========== =========== Basic earnings per share $ 0.7775 $ 0.7175 $ 1.51 $ 1.46 =========== =========== =========== =========== Diluted earnings per share $ 0.7573 $ 0.6973 $ 1.47 $ 1.42 =========== =========== =========== =========== Weighted average shares outstanding - basic 6,~~704~~706,~~245~~904 6,~~434~~356,~~357~~172 6,721,703 6,395,264 Dilutive impact of stock options ~~191~~218,~~854~~946 ~~159~~171,~~158~~822 205,295 168,156 ----------- ----------- ----------- ----------- Weighted average shares outstanding - diluted 6,~~896~~925,~~099~~850 6,~~593~~527,~~515~~994 6,926,998 6,563,420 =========== =========== =========== ===========

The accompanying notes are an integral part of the consolidated financial statements. 2 5 ANDOVER BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY --------------------------------------------------------------- Year Ended December 31, 2000 and Six Months Ended June 30, 2001 (Unaudited)

ACCUMULATED TOTAL ADDITIONAL OTHER STOCK- COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE HOLDERS' STOCK CAPITAL EARNINGS STOCK INCOME (LOSS) EQUITY --------- ---------- --------- --------- ------------- --------- (In thousands) Balance at December 31, 1999 $ 653 $ 60,745 $ 71,924 $ -- $ (3,059) $ 130,263 Comprehensive income: Net income -- -- 20,182 -- -- 20,182 Other comprehensive income (loss): Unrealized holding gains arising during the period, net of taxes of $43,~~294~~758 -- -- -- -- 65,~~644~~734 65,~~644~~734 Realized losses included in net income, net of tax benefit of $268 -- -- -- -- (455) (455) --------- Total comprehensive income 26,371 Dividends declared and paid ($0.99 per share) -- -- (6,460) -- -- (6,460) Purchase of treasury stock -- -- -- (4,718) -- (4,718) Stock options exercised 1 (7) -- 264 -- 258 Stock issued for acquired institution 30 7,877 -- -- -- 7,907 --------- --------- --------- --------- --------- --------- Balance at December 31, 2000 684 68,615 85,646 (4,454) 3,130 153,621 Comprehensive income: Net income -- -- 510,~~145~~173 -- -- 510,~~145~~173 Other comprehensive income ~~(loss)~~: Unrealized holding gains arising during the period, net of taxes of $1,~~810~~612 -- -- -- -- 2,~~940~~719 2,~~940~~719 Realized gains included in net income, net of taxes of $4975 -- -- -- -- 83(107) 83(107) --------- Total comprehensive income 812,~~168~~785 Dividends declared and paid ($0.2754 per share) -- -- (13,~~802~~612) -- -- (13,~~802~~612) Stock options exercised -- (~~480~~509) -- ~~850~~1,029 -- ~~370~~520 --------- --------- --------- --------- --------- --------- Balance at ~~March~~June 3130, 2001 $ 684 $ 68,~~135~~106 $ 8892,~~989~~207 $ (3,~~604~~425) $ 65,~~153~~742 $ ~~160~~163,~~357~~314 ========= ========= ========= ========= ========= =========

The accompanying notes are an integral part of the consolidated financial statements. 3 6 ANDOVER BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS -------------------------------------- (Unaudited)

~~THREE~~SIX MONTHS ENDED, ~~MARCH~~JUNE 3130, ------------------------ 2001 2000 --------- --------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 510,~~145~~173 $ 49,~~556~~339 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses ~~275~~550 ~~200~~600 Net gains on sales of other real estate owned -- (14) Net (gains) losses from sales of investments available for sale (~~132~~182) --5 Net gains from sales of assets held for sale (41205) (729) Net losses from sales of premises and equipment 79 -- Depreciation and amortization ~~453~~904 ~~363~~741 Amortization of fees, discounts and premiums, net (~~137~~411) 22116 Deferred income taxes receivable 2,492 ~~968~~669 Amortization of goodwill ~~150~~300 -- (Increase) decrease in: Assets held for sale (621,~~589~~766) (~~531~~1,868) Accrued interest receivable ~~191~~702 (1,~~267~~504) Mortgage servicing assets ~~884~~1,550 ~~376~~754 Other assets ~~(48)~~425 (~~390~~8,713) Increase (decrease) in: Mortgagors' escrow accounts ~~136~~(340) ~~156~~(484) Accrued income taxes payable ~~428 1~~(2,~~288~~390) 333 Accrued expenses and other liabilities (~~389~~1,263) (~~1,019~~930) --------- --------- Net cash ~~provided~~used by operating activities 2(9,~~897~~382) ~~4,715~~(985) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment and mortgage-backed securities available for sale: Purchases --(10,213) (3955,~~983~~241) Proceeds from sales 47,~~136~~683 --7,507 Proceeds from maturities and redemptions 1017,300 --2,125 Principal repayments 26,~~363~~223 14,~~791~~509 Investment and mortgage-backed securities held to maturity: Proceeds from maturities and redemptions 8,500 1,~~000~~500 Principal repayments 47,~~181~~254 26,~~721~~711 Net change in FHLB stock -- (23,~~658~~843) Purchases of whole loans (1524,~~514~~357) (521,~~282~~079) Purchased and capitalized mortgage servicing assets (~~154~~656) (95611) Net (increase) decrease in loans 941,~~032~~553 (1165,~~900~~251) Premises and equipment (additions) dispositions, net (~~132~~420) (~~412~~1,052) Proceeds from sales of other real estate owned -- 5111 --------- --------- Net cash provided (used) by investing activities 2252,~~712~~867 (54124,~~813~~614) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 33,~~133~~686 29103,~~086~~436 Net (decrease) increase in other borrowings (~~1,736~~705) ~~(31~~1,~~565)~~126 Proceeds from issuance of FHLB advances 8085,000 ~~495~~870,000 Principal repayments of FHLB advances (~~146~~171,~~522~~577) (~~425~~828,~~020~~505) Treasury stock purchased -- (4,718) Dividends paid (13,~~802~~612) (13,~~546~~072) Stock options exercised ~~370~~520 -- --------- --------- Net cash (used) provided by financing activities (3656,~~557~~688) 61138,~~237~~267 --------- --------- Net ~~increase~~ (decrease) increase in cash and cash equivalents (1013,~~948~~203) 1112,~~139~~668 Cash and cash equivalents, at beginning of period 69,556 28,513 --------- --------- Cash and cash equivalents, at end of period $ 5856,~~608~~353 $ 3941,~~652~~181 ========= =========

Statement continued on next page. 4 7 ANDOVER BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) ------------------------------------------------- (Unaudited)

~~THREE~~SIX MONTHS ENDED, ~~MARCH~~JUNE 3130, -------------------~~----~~ 2001 2000 --------- --------- (In thousands) Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $1734,~~327~~916 $1430,~~547~~234 Income taxes ~~121~~6,249 ~~363~~4,368 Supplemental noncash investing and financing activities: Conversion of real estate loans to mortgage-backed securities held for sale or investments available for sale --22,205 24,~~005~~017 Transfer of loans to other real estate owned -- ~~158~~200

The accompanying notes are an integral part of the consolidated financial statements. 5 8 ANDOVER BANCORP, INC. AND SUBSIDIARIES NOTE TO CONSOLIDATED FINANCIAL STATEMENTS ----------------------------------------- 1) BASIS OF PRESENTATION Andover Bancorp, Inc.(the "Company" or "Andover") is the multi-bank holding company parent of Andover Bank (the "Bank") and Gloucester Bank & Trust Company ("Gloucester" or "GBT"). The unaudited consolidated financial statements of Andover Bancorp, Inc. and its subsidiaries presented herein, should be read in conjunction with the consolidated financial statements of the Company as of and for the year ended December 31, 2000. Andover Bank is a state-chartered savings bank with its headquarters located in Andover, Massachusetts. Gloucester Bank & Trust Company is a Massachusetts-chartered trust company with two banking offices located in Gloucester, Massachusetts. In the opinion of management, the unaudited consolidated financial statements presented herein reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation. Interim results are not necessarily indicative of results to be expected for the entire year. 2) MERGER AGREEMENT On June 11, 2001, Andover and Banknorth Group, Inc. ("Banknorth") announced that they had entered into an Agreement and Plan of Merger pursuant to which Andover will be merged with and into Banknorth. Under its terms, Andover shareholders will receive 2.27 shares of Banknorth stock for each share of Andover stock in a fixed stock exchange (with certain exceptions) plus cash in lieu of any fractional shares. The transaction is expected to close by year end, subject to Andover shareholder and regulatory approvals. Resulting from this pending merger, Andover has incurred merger costs of $1.1 million pre-tax through June 30, 2001. Operating data before merger expenses follow:

~~THREE~~Three ~~MONTHS~~Months ~~ENDED~~Six ~~MARCH~~Months ~~31,~~Ended ~~-----------------------------------------------------------------------------~~June 30, 2001 ~~2000~~Ended ~~-----------------------------------~~June ~~-----------------------------------~~30, ~~INTEREST~~2001 ~~AVERAGE INTEREST AVERAGE AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/ BALANCE PAID RATE(4) BALANCE PAID RATE(4)~~ ---------- -------- -~~-------~~ --------- -------- --~~-----~~ ~~ASSETS~~Net ~~Interest-earning~~income ~~assets:~~as ~~Short-term~~reported ~~investments~~ $ ~~4,828 $ 70~~ 5~~.88% $ 782 $ 11 5.66% Investment securities (1)(2) 236~~,~~627~~028 3,985 6.83 198,763 3,280 6.64 Mortgage-backed securities (1) 106,144 1,866 7.13 127,555 2,182 6.88 ---------- ------- ---------- ------ Total investments 347,599 5,921 6.91 327,100 5,473 6.73 ---------- ------- ---------- ------ Residential loans 822,602 14,435 7.12 747,495 12,827 6.90 Commercial real estate loans 285,850 6,348 9.01 207,765 4,513 8.74 Construction and land loans 91,401 2,302 $10~~.21 65~~,~~082~~173 ~~1,552~~Merger ~~9.59 ---------- ------- ---------- ------ Total real estate loans (1)(3) 1~~expense,~~199,853~~ ~~23,085~~net ~~7.80~~of ~~1,020,342~~tax ~~18,892~~947 ~~7.45~~947 ------~~----~~ ------- ~~----------~~Operating ~~------~~earnings Consumer loans (3) 87,276 1,843 8.56 62,679 1,285 8.25 ---------- ------- ---------- ------ Commercial and lease loans 47,437 1,082 9.25 26,042 582 8.99 Lease financing 34,689 633 7.40 29,998 543 7.28 ---------- ------- ---------- ------ Total commercial loans (3) 82,126 1,715 8.47 56,040 1,125 8.07 ---------- ------- ---------- ------ Total loans 1,369,255 26,643 7.89 1,139,061 21,302 7.52 ---------- ------- ---------- ------ Total interest-earning assets 1,716,854 32,564 7.69% 1,466,161 26,775 7.34% ------- ------ Allowance for loan losses (14,859) (11,399) Other assets 82,617 56,375 ---------- ---------- Total assets $15,~~784,612~~975 $111,~~511,137~~120 ======~~====~~ =======~~===~~ ~~LIABILITIES~~Operating ~~AND~~earnings ~~STOCKHOLDERS'~~per ~~EQUITY~~diluted ~~Interest-bearing~~share ~~deposits: NOW accounts~~ $ ~~143,444 $ 469 1~~0.~~33%~~86 $ ~~96,170 $ 196 0.82% Money market deposit accounts 107,059 807 3.06 96,839 680 2.82 Savings accounts 251,390 2,195 3.54 213,479~~ 1~~,747 3~~.2961 ~~Certificates~~Operating ofreturn ~~deposit~~on ~~568,186~~average ~~8,056~~assets ~~5.75 480,198 6,040 5.06 ---------- ------- ---------- ------ Total interest-bearing deposits~~ 1~~,070,079 11,527 4~~.37 886,686 8,663 3.93 ---------- ------- ---------- ------ Borrowed funds: Other borrowings 38,649 484 5.08 88,292 1,250 5.69 Federal Home Loan Bank advances 365,334 5,465 6.07 309,116 4,356 5.67 ---------- ------- ---------- ------ Total borrowed funds 403,983 5,949 5.97 397,408 5,606 5.67 ---------- ------- ---------- ------ Total interest-bearing liabilities 1,474,062 17,476 4.8134% 1~~,284,094 14,269 4~~.4726% ~~-------~~Operating ~~------~~return ~~Demand~~on ~~deposits~~average ~~138,162 86,926 Other liabilities 17,030 9,234 ---------- ---------- Total liabilities 1,629,254 1,380,254 Stockholders'~~ equity 155,358 130,883 ---------- ---------- Total liabilities and stock- holders' equity $1,784,612 $1,511,137 ========== ========== Net interest income $15,088 $12,506 ======= ======= Interest rate spread 214.~~88%~~97 214.~~87%~~22 ~~====~~Operating ~~====~~efficiency ~~Net~~ratio ~~yield on earning assets 3~~45.~~56%~~24 346.~~43% ==== ====~~86

6 9 ANDOVER BANCORP, INC. AND SUBSIDIARIES ANALYSIS OF NET YIELD ON EARNING ASSETS --------------------------------------- (Unaudited)

(1) Included in the average balance amounts are the corresponding components of the assets held for sale, available for sale and held to maturity. The yield has been calculated using interest income divided by the average balance of the amortized historical cost. (2) Included in the average balance and interest earned amounts is the stock in FHLB of Boston. (3) Interest on nonaccruing loans has been included only to the extent reflected in the statement of operations. However, the loan balances are included in the average balance outstanding. (4) The "Average Yield/Rate" calculation is based on an annualized basis reflecting 91 days in the second quarter of both years and 181 days in the year-to-date period of 2001 versus 182 days in the year to date period of 2000. 7 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2001 ---------------------------------------- PRELIMINARY NOTE IN REGARD TO FORWARD-LOOKING STATEMENTS. This quarterly report on Form 10-Q contains forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. We may also make written or oral forward-looking statements in other documents we file with the Securities and Exchange Commission ("SEC"), in our annual report to stockholders, in press releases and other written materials, and in oral statements made by our officers, directors or employees. Without limiting the foregoing, the words "believe", "estimate", "assume", "outlook", "should", "anticipate", "plan", "expect", "intend" and similar expressions which predict or indicate future events and which do not relate to historical matters are intended to identify forward-looking statements. You should not rely on forward-looking statements, because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the control of the Company. These expressed or implied important risks, uncertainties and other factors may cause the Company's actual results, performance or achievements to differ materially from those expressed or implied by such forward-looking statements. These factors include, without limitation, those set forth below under the caption "Certain Factors That May Affect Future Results". CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS. The following important factors, among others, could cause actual results, performance or achievements of the Company to differ materially from those expressed or implied by forward-looking statements made in this quarterly report on Form 10-Q or presented elsewhere by management from time to time, including future SEC filings. Defined terms used elsewhere in this quarterly report have the same meanings herein as therein. A number of uncertainties exist that could affect the Company's future operating results, performance or achievements including, without limitation, the Banks' continued ability to originate quality loans, fluctuation of interest rates, real estate market conditions in the Banks' lending areas, general and local economic conditions, the Banks' continued ability to attract and retain deposits, the Company's ability to control costs, new accounting pronouncements, and changing regulatory requirements. You should carefully review all of these factors, and you should be aware that there may be other factors that could cause these differences. This quarterly report also includes forward-looking statements about the consummation, anticipated timing, impact of and the actual exchange ratio of the pending merger with Banknorth Group, Inc. These forward-looking statements were based on information, plans and estimates at the date of this report and the Company does not promise to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes. RESULTS OF OPERATIONS GENERAL. Net income amounted to $5.0 million, or $0.73 per diluted share, for the quarter ended June 30, 2001 as compared to net income of $4.8 million, or $0.73 per diluted share, for the second quarter of 2000. The results for 2001 were positively impacted by the acquisition of Gloucester which was consummated on July 1, 2000. Andover's second quarter results for 2001 were reduced by pre-tax merger expenses of $1.1 million related to the pending merger with Banknorth Group, Inc. ("Banknorth"). The Company also recorded a charge to earnings of $40,000 which is reflected as a reduction of mortgage banking income during the second quarter of 2001. This charge resulted from declining mortgage interest rates causing a reduction in the estimated fair value of the mortgage servicing rights. In the second quarter of 2000, a credit to earnings was recorded as a result of a reduction in the valuation account totaling $250,000. Andover's annualized return on average assets totaled 1.13% for the second quarter of 2001 compared to 1.22% in the second quarter of 2000. The annualized return on average stockholders' equity decreased to 12.60% in the second quarter of 2001 from 14.60% in the second quarter of 2000. The operating return on average assets and average stockholders' equity totaled 1.34% and 14.97%, respectively, for the second quarter of 2001. NET INTEREST AND DIVIDEND INCOME. Net interest and dividend income totaled $15.8 million for the second quarter of 2001 as compared to $12.7 million for the same period in 2000. The 24.4% increase resulted primarily from a 12.2% increase in average earning assets as well as a higher net interest margin which was 3.70% in the second quarter of 8 11 2001 versus 3.35% in the second quarter of 2000. Growth in net interest and dividend income was enhanced in the second quarter of 2001 by the acquisition of Gloucester. PROVISION FOR LOAN LOSSES. The allowance for loan losses is established through a provision for loan losses charged to the statement of operations. The allowance is reduced by a credit for loan losses as well as loan charge-offs. Assessing the adequacy of the allowance for loan losses involves substantial uncertainties and is based upon management's evaluation of the amount required to meet possible loan losses after weighing various factors. Among the factors that management may consider are the quality of specific loans, risk characteristics of the loan portfolio generally, the level of nonaccruing loans, current economic conditions, trends in delinquencies, actual charge-off experience, and collateral values of the underlying security. Because the allowance for loan losses is based on various estimates, and includes a high degree of judgment by management, subsequent changes in any of the factors considered or in the general economic prospects of the borrowers may require changes in those estimates. In addition, regulatory agencies, as an integral part of the examination process, review the Banks' allowance and may require the Banks to provide additions to the allowance based on their assessment, which may differ from management's assessment. There was a provision for loan losses totaling $275,000 in the second quarter of 2001 and $400,000 in the comparable quarter in 2000. Management considered several factors in determining that a provision was needed in the second quarters of both 2001 and 2000. These factors include, without limitation, the level and mix of loan growth, the ratio of the allowance to total loans as well as charge-offs and recoveries. The slight increase in nonaccruing loans during the second quarter of 2001, particularly in commercial real estate loans, combined with net charge-offs of $45,000, contributed to the need for a loan loss provision in the current quarter. Taking all of the factors into consideration, management believes that the allowance for loan losses is adequate as of June 30, 2001. NON-INTEREST INCOME. Net gains from sales of loans, investments and mortgage-backed securities held for sale and available for sale totaled $214,000 in the second quarter of 2001 as compared to net gains of $17,000 in the second quarter of 2000. Mortgage banking income totaled $65,000 in the second quarter of 2001 versus mortgage banking income of $418,000 in the comparable quarter in 2000. The mortgage servicing assets are assessed for impairment on a quarterly basis. During the second quarter of 2001, mortgage interest rates declined, thereby decreasing the value of the servicing rights and resulting in the need for an addition to the valuation allowance in the amount of $40,000. The second quarter of 2000 was marked by a rise in mortgage interest rates, thereby increasing the value of servicing rights. This resulted in a credit to earnings due to a reduction in the valuation allowance of $250,000. It should be noted, however, that if mortgage interest rates decline from their current levels, it is possible that future provisions to the valuation allowance or servicing asset charge-offs may be necessary due to the mortgage prepayment risk inherent in the servicing portfolio. This mortgage prepayment risk is the result of loans repaying faster than expected, causing the fair value of the mortgage servicing asset to decline. Amortization expense totaled $626,000 and $628,000 respectively, for the quarters ended June 30, 2001 and 2000. Mortgage servicing asset charge-offs in the second quarter of 2001 were $60,000. There were no mortgage servicing asset charge-offs in the second quarter of 2000. Loans serviced for investors totaled $872.1 million and $954.2 million, respectively, at June 30, 2001 and 2000. Other income totaled $1.4 million in the second quarter of 2001 as compared to $962,000 in the second quarter of 2000 primarily due to a rise in deposit fee income resulting from higher account levels. NON-INTEREST EXPENSE. Non-interest expenses increased by $2.7 million, or 43.0%, to $8.9 million in the second quarter of 2001 from $6.2 million in the second quarter of 2000 as a result of operating a larger organization, as well as merger expenses relating to the Banknorth merger of $1.1 million pre-tax. The efficiency ratio (a ratio that measures operating expenses as a percentage of operating income) increased from 43.90% in the second quarter of 2000 to 51.33% in the comparable period of 2001. However, the operating efficiency ratio, which excludes the impact of the merger expenses, only increased to 45.24%. The increased costs were primarily due to higher general and administrative costs associated with operating GBT. The total operating expenses associated with GBT were approximately $740,000 in the second quarter of 2001. 9 12 Salaries and employee benefits, the largest component of non-interest expense, increased $788,000, or 24.1%, in the second quarter of 2001 to $4.1 million. This rise in expenses is due mainly to an increase in the number of employees from the GBT acquisition as well as staffing a new branch in Derry, New Hampshire. In addition, due to achieving certain profitability objectives in the second quarter of 2001, the Company accrued an additional $235,000 in discretionary incentive programs above the 2000 levels. Office occupancy and equipment expenses rose from $810,000 in the second quarter of 2000 to $953,000 for the three months ended June 30, 2001 mainly due to the addition of Gloucester's two branches and remote ATM's and their related operating costs. Data processing expenses increased from the second quarter of 2000 to the corresponding quarter in 2001 by 37.1% or $255,000, and totaled $942,000. This was primarily due to an increase in the number of loans and deposits serviced by the Banks as well as increased costs associated with alternative product delivery systems such as the internet, debit cards and automated services. As the size and complexity of the Company continues to increase, the information systems needed to support the Company will likely increase. The data processing expenses associated with GBT were approximately $155,000 in the second quarter of 2001. Professional fees decreased $39,000 to $283,000 in the second quarter of 2001 from $322,000 in the second quarter of 2000 due to decreased consulting fees. Marketing expenses decreased 30.7% to $194,000 for the second quarter of 2001 compared to 2000's second quarter due to decreased advertising in the newspapers as a result of the lower interest rate environment. Merger costs totaled $1.1 million pre-tax in the second quarter of 2001 related to the pending merger with Banknorth. This included $500,000 of investment banker fees. The total fee payable to the investment bankers could be in excess of $3.0 million but is contingent upon consummation of the merger. Amortization of goodwill amounted to $150,000 in the second quarter of 2001 resulting from the acquisition of Gloucester in 2000. This cost will continue to be incurred until the end of the current fiscal year. See "Recent Accounting Developments" for the changes in accounting for goodwill. Other operating expenses increased $371,000 or 46.3% from the second quarter of 2000 to $1.2 million in the corresponding quarter in 2001 due to the continued growth of the Company which impacts office supplies, printing expense and other general administrative costs. Gloucester's operations represented approximately $100,000 of the other operating expenses increase. Lastly, charitable contributions increased an additional $100,000 in the second quarter of 2001. INCOME TAX EXPENSE. The Company recorded an income tax expense of $3.3 million for the second quarter of 2001. By comparison, income tax expense for the second quarter of 2000 totaled $2.8 million. The net effective tax rates for the second quarters of 2001 and 2000 were 39.7% and 36.5%, respectively. The higher tax rate in 2001 was partly due to the nondeductability of the goodwill amortization and a portion of the merger expenses. FINANCIAL CONDITION Total assets at June 30, 2001 amounted to $1,779.0 million, for a decline of $44.2 million or 2.4% from $1,823.2 million at December 31, 2000. The decrease from December 31, 2000 was mainly attributable to the decline in the investment portfolio resulting from maturities and redemptions of callable securities, which in turn, allowed the Company to reduce its borrowed funds. LOANS. The following table shows the composition of the Company's loan portfolio at June 30, 2001 and December 31, 2000. The balances shown in the table are net of unadvanced funds and deferred loan origination fees and costs. 10 13 6/30/01 12/31/00 ---------- ---------- (In thousands) Real estate loans: Residential $ 793,375 $ 811,214 Commercial 296,809 284,419 Construction and land 76,954 89,922 ---------- ---------- Total real estate loans 1,167,138 1,185,555 ---------- ---------- Consumer loans 89,111 87,322 ---------- ---------- Commercial loans: Commercial and lease loans 51,643 47,828 Lease financing 31,551 35,476 ---------- ---------- Total commercial loans 83,194 83,304 ---------- ---------- Total loans $1,339,443 $1,356,181 ========== ========== Total loans decreased $16.7 million to $1,339.4 million at June 30, 2001. The modest decrease in loans experienced by the Company in the first six months of 2001 was due to the high level of refinancing activity experienced in 2001 compared to the first six months of 2000. This was the result of the long term interest rates dropping in the early part of 2001. Originations of all loan types are sensitive to a variety of factors including, without limitation, the interest rate environment, the capacity for borrowing, real estate values, current and anticipated economic conditions, and the competitive landscape. Due to the favorable interest rate environment in the first six months of 2001, residential loan originations totaled $125.2 million as compared to $59.2 million during the first six months of 2000. Residential loan balances decreased by $17.8 million during the first six months of 2001 primarily due to securitization and sale of 15-year and 30-year fixed rate loans, regular amortization and loan prepayments. Outstanding corporate loans, comprised of commercial real estate, commercial, construction and land loans and leases, totaled $457.0 million at June 30, 2001 versus $457.6 million at December 31, 2000. The balance of the corporate loan portfolio reflects the Company's efforts with respect to originations in this type of loan. However, the volumes of corporate loan originations are impacted by current real estate values, current and anticipated economic conditions and a customer's capacity for borrowing. Corporate loan originations totaled $79.8 million and $119.3 million, respectively, for the six months ended June 30, 2001 and 2000. The reduction over the prior year is primarily due to reduced demand. The loan balances outstanding do not reflect the full impact of the total origination volume due to loan prepayments and certain amounts that remain unadvanced as of June 30, 2001. Consumer loan balances remained relatively stable at $89.1 million and $87.3 million at June 30, 2001 and 2000, respectively. Strong levels of home equity lines of credit activity accounted for the modest growth in the first half of 2001. RISK ELEMENTS. The following table shows the composition of non-performing assets at June 30, 2001 and December 31, 2000: 6/30/01 12/31/00 ------- -------- (Dollars in thousands) Nonaccruing loans $2,044 $1,676 Other real estate owned 30 30 ------ ------ Total non-performing assets $2,074 $1,706 ====== ====== Total non-performing assets as a percentage of total assets 0.12% 0.09% At June 30, 2001, total impaired loans were $3.6 million. These loans did not require a related allowance at June 30, 2001. All of the $3.6 million in impaired loans have been measured using the fair value of the collateral method. During the six months ended June 30, 2001, the average recorded value of impaired loans was $3.0 million. At December 31, 2000, total impaired loans were $2.0 million. As of June 30, 2001, the Company has been monitoring a lease financing transaction in the amount of $750,000 that has experienced difficulties in the textile manufacturing industry. At the end of the second quarter of 2001, this lease is included in the accruing loan portfolio, however, the borrower has communicated that it is experiencing payment difficulties. The Company will continue to assess whether the lease should be restructured or placed on nonaccrual status in the third quarter of 2001. 11 14 NONACCRUING LOANS. Management places loans on nonaccrual status when loan payments are past due 90 days or more, regardless of collateral values. All previously accrued but uncollected interest is reversed against current period interest income when a loan is placed on nonaccrual status. Loans for which payments are less than 90 days past due are placed on nonaccrual status when concern exists as to the ultimate collectibility of the loan. Nonaccrual loans are generally not returned to performing status until the obligation is brought current and when concern no longer exists as to the collectibility of principal or interest. The following table shows the composition of nonaccruing loans at June 30, 2001 and December 31, 2000: 6/30/01 12/31/00 ------- -------- (Dollars in thousands) Residential real estate $ 514 $ 342 Commercial real estate 1,128 799 Construction and land -- -- Commercial and lease loans 316 382 Lease financing 36 100 Consumer 50 53 ------- ------- Total nonaccrual loans outstanding $ 2,044 $ 1,676 ======= ======= Allowance for loan losses $15,310 $14,640 ======= ======= Allowance for loan losses as a percentage of total loans 1.1% 1.1% RESTRUCTURED LOANS. A restructured loan is a loan in which management has modified the terms to provide a temporary reduction in the rate of interest below the prevailing market interest rates at the time of modification and, in most instances, an extension of payments of principal or interest or both due to the deterioration in the financial position of the borrower. Restructured loans are not returned to performing status until the obligation has performed for a reasonable period of time, its ultimate collectibility is no longer in doubt and the loan is at a market rate of interest. Restructured loans totaled $2.3 million at June 30, 2001. This loan was modified in the first quarter of 2001 and has been in full compliance with its modified terms. There were no restructured loans at December 31, 2000. ALLOWANCE FOR LOAN LOSSES. The following table summarizes the activity in the Company's allowance for loan losses for the three months and six months ended June 30, 2001 and 2000:

12 15 Management analyzes the adequacy of the allowance for loan losses on a quarterly basis. See "Results of Operations - Provision for Loan Losses". INVESTMENTS. At June 30, 2001, the Company's total investment portfolio amounted to $308.7 million, a decrease of $58.2 million from December 31, 2000. The decrease in the first half of 2001 was due to a reduction in the balances held in federal funds, maturities and redemptions of investments both held for and available for sale totaling $25.8 million as well as sales of investments available for sale in the amount of $7.7 million. Management continually evaluates its investment alternatives in order to properly manage the overall balance sheet mix. The timing of purchases, sales and reinvestment, if any, will be based on various factors including expectation of movements in market interest rates and loan demand. Notwithstanding these events, it is the intent of management to grow the earning asset base through loan originations, loan purchases or investment acquisitions while funding this growth through a mix of retail deposits, FHLB advances and other borrowings. The following table presents the composition and carrying values of the investment portfolio at June 30, 2001 and December 31, 2000: 6/30/01 12/31/00 -------- -------- (In thousands) SHORT-TERM INVESTMENTS $ 3,400 $ 29,300 ======== ======== INVESTMENTS AVAILABLE FOR SALE (AT MARKET): Common stocks $ 4,371 $ 3,494 -------- -------- U.S. government and federal agency obligations 60,457 73,691 Other bonds and obligations 139,686 140,457 -------- -------- Total bonds and obligations 200,143 214,148 -------- -------- GNMA mortgage-backed securities 25,796 29,387 FHLMC participation certificates 14,392 18,366 FNMA pass-through certificates 11,203 11,986 Collateralized mortgage obligations 16,686 11,774 -------- -------- Total mortgage-backed securities 68,077 71,513 -------- -------- Total investments available for sale $272,591 $289,155 ======== ======== INVESTMENTS HELD TO MATURITY (AT AMORTIZED COST): U.S. government and federal agency obligations $ --- $ 8,500 Other bonds and obligations 1,002 1,005 -------- -------- Total bonds and obligations 1,002 9,505 -------- -------- FNMA pass-through certificates 13,779 17,917 FHLMC participation certificates 10,666 12,207 GNMA mortgage-backed securities 1,324 1,573 Collateralized mortgage obligations 5,733 7,042 Other asset-backed securities 250 289 -------- -------- Total mortgage-backed securities 31,752 39,028 -------- -------- Total investments held to maturity $ 32,754 $ 48,533 ======== ======== Total investments $308,745 $366,988 ======== ======== The following table shows the gross unrealized gains and losses by major categories of securities at June 30, 2001: Unrealized Unrealized Gains Losses ---------- ---------- (In thousands) INVESTMENTS AVAILABLE FOR SALE: Common stocks $ 1,571 $ --- U.S. government and federal agency obligations 2,342 (30) Other bonds and obligations 4,059 (95) Mortgage-backed securities 1,702 (147) ------- ----- 13 16 Total investments available for sale $ 9,674 $(272) ======= ===== INVESTMENTS HELD TO MATURITY: Other bonds and obligations $ 14 $ --- Mortgage-backed securities 577 (24) ------- ----- Total investments held to maturity $ 591 $ (24) ======= ===== Total unrealized gains and losses $10,265 $(296) ======= ===== At June 30, 2001, the Company's net unrealized gain on investments available for sale amounted to $9.4 million, a fair value rise of $4.1 million from a $5.3 million net unrealized gain at December 31, 2000. At June 30, 2001, the Company's net unrealized gain on investments held to maturity totaled $567,000, for a fair value rise of $86,000 from $481,000 at December 31, 2000. The changes in the net unrealized gain on the total investment portfolio from year-end 2000 were primarily due to a decline in market interest rates during the first half of 2001, thereby causing the fair values to increase. DEPOSITS AND BORROWED FUNDS. Total deposits increased $33.7 million to $1,254.9 million at June 30, 2001 from $1,221.2 million at December 31, 2000. Aided by the disruption caused by large bank acquisitions and divestitures as well as the declines in the stock market returns, the Company has been successful in attracting new deposit relationships. Included in the certificates of deposit shown below were $15.0 million and $45.0 million of brokered certificates of deposit at June 30, 2001 and December 31, 2000, respectively. The following table shows the composition of the Company's deposits at June 30, 2001, and December 31, 2000: 6/30/01 12/31/00 ---------- ---------- (In thousands) Demand deposit accounts $ 164,069 $ 145,660 NOW accounts 178,598 151,168 Money market accounts 111,651 107,814 Savings accounts 266,305 246,812 Certificates of deposit 534,252 569,735 ---------- ---------- Total deposits $1,254,875 $1,221,189 ========== ========== During the first six months of 2001, the Company decreased its borrowed funds position. Federal Home Loan Bank advances decreased $86.6 million from December 31, 2000 to $330.7 million at June 30, 2001. Other borrowings decreased modestly to $18.2 million at June 30, 2001. This net decline of $87.3 million was partially offset by the growth in total deposits reflected above. The change in the liability mix was a significant factor in the increased net interest margin for the first six months of 2001. The following table shows the composition of the Company's borrowed funds at June 30, 2001 and December 31, 2000: 6/30/01 12/31/00 -------- -------- (In thousands) Cash management accounts $ 18,236 $ 17,460 Federal funds purchased -- 1,481 FHLB advances 330,700 417,277 -------- -------- $348,936 $436,218 ======== ======== LIQUIDITY. The goal of the Company's liquidity management process is to assess its funding requirements so as to efficiently meet the cash needs of borrowers and depositors, while also providing funds for attractive investment opportunities. Liquidity involves the Company's ability to raise or gain access to funds in order to fulfill its existing and anticipated financial obligations. The Company's primary source of funds is dividends from its bank subsidiaries. The Banks paid dividends to the Company in the amount of $4.0 million in the first six months of 2001. The Company made payments of dividends to stockholders in the amount of $3.6 million in the first half of 2001. In July, 2001, the Company declared a dividend in the amount of $1.8 million, payable in the third quarter of 2001. 14 17 The Banks have a diverse base of funding. Sources of liquidity include increasing customer deposits, borrowed funds, repayments, prepayments and amortization of the investment and loan portfolios as well as sales of securities in the investments available for sale portfolio. Sources of borrowed funds include funds purchased from other banks, customer repurchase agreements, the sale of securities under repurchase agreements and borrowings from the FHLB, of which both Banks are voluntary members. The Banks may also obtain funds from the discount window of the Federal Reserve Bank of Boston by pledging certain assets. Cash flows used by operations increased $8.4 million to $9.4 million in the first six months of 2001, as compared to $985,000 in the corresponding period of 2000 primarily due to an increase in assets held for sale. Cash flows provided by investing activities increased by $177.5 million to $52.9 million for the six months ended June 30, 2001, as compared to cash flows used of $124.6 million during the equivalent period last year. This increase was mainly attributable to a decrease in loans and fewer purchases of investments available for sale. Cash flows used by financing activities increased $195.0 million for the six months ended June 30, 2001 to cash flows used of $56.7 million. This compares to cash flows provided by financing activities of $138.3 million in the equivalent period in 2000. The financing activity decline was primarily due to a reduction in FHLB advances combined with a smaller increase in deposits. During fiscal year 2000, the Company repurchased 177,900 common shares in connection with its previously announced stock repurchase plan at a cost of $4.7 million. No shares were repurchased under the stock repurchase plan during the first half of 2001. Approximately 146,000 shares remain eligible for repurchase under the 5% program limitation however, due to the impending merger with Banknorth it is not anticipated that there will be further purchases under the stock repurchase plan. At June 30, 2001, the Company had home equity, reserve credit and commercial unadvanced lines of credit totaling $133.0 million. Outstanding commitments to originate loans totaled $96.7 million. Unadvanced portions of construction and land loans amounted to $41.8 million. Standby letters of credit were $3.5 million. Loans sold with recourse totaled $771,000. Management believes that its sources of liquidity are sufficient to meet these commitments if and as called upon. CAPITAL RESOURCES. The following table presents regulatory capital ratios under current regulatory and risk-based capital requirements as of June 30, 2001:

As of June 30, 2001, the most recent notification from the FDIC categorized the Banks as well capitalized under the prompt corrective action provisions. Therefore, the Banks are entitled to pay the lowest deposit premium possible. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Banks' primary source of revenue is net interest income, which is the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities. The Company seeks to manage its exposure to interest rate risk or market risk, through active monitoring and management of its interest rate risk exposure, which is inherent in its lending and deposit taking activities. Andover's Asset/Liability Management Committee (ALCO), who reports its findings to the Board of Directors on a quarterly basis, establishes the policies and procedures for managing both on and off balance sheet activities. The main objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on the Company's net interest income and to preserve capital, while adjusting the Company's asset/liability structure to obtain the maximum yield-cost spread on that structure. However, a sudden and substantial increase in interest rates may adversely impact earnings to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent, or on the same basis. 15 18 For further information regarding quantitative and qualitative disclosures about market risk, please refer to the Company's Annual Report on Form 10-K as of and for the year ended December 31, 2000 (the "2000 Annual Report"). There have been no material changes in the quantitative disclosures about market risk from those presented in the Company's 2000 Annual Report. RECENT ACCOUNTING DEVELOPMENTS. In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which establishes new accounting standards for goodwill acquired in a business combination. Amortization of goodwill would not be allowed in any circumstance. The carrying amount of goodwill would be reduced only if found to be impaired or associated with assets to be sold or otherwise disposed of. Goodwill would also be subject to new impairment test rules. An impairment loss would be recognized if the implied fair value of the goodwill was deemed to be less than its carrying amount. SFAS 142 is effective for all fiscal years beginning after December 15, 2001 with early application for goodwill and other intangible assets acquired after June 30, 2001. 16 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2001 -------------------------------------- RESULTS OF OPERATIONS GENERAL. Net income amounted to $10.2 million, $1.47 per diluted share, for the six months ended June 30, 2001, as compared to net income of $9.3 million, $1.42 per diluted share, in the corresponding period of 2000. The financial performance in the first six months of 2001 was positively impacted by an increase in the net interest and dividend income, offset by an increase in non-interest expenses. Andover's year-to-date results for 2001 were negatively impacted by pre-tax merger expenses of $1.1 million taken during the second quarter of 2001. In addition, a charge to earnings of $247,000 was recognized and is reflected as a reduction of mortgage banking income. Andover's annualized return on average assets was 1.15% for the first six months of 2001 as compared to 1.22% in the first six months of 2000. The annualized return on average stockholders' equity decreased to 13.01% in the first six months of 2001 from 14.30% in the comparable period of 2000. The operating return on average assets and average stockholders' equity totaled 1.26% and 14.22%, respectively, for the first six months of 2001. NET INTEREST AND DIVIDEND INCOME. Net interest and dividend income was $30.9 million for the six months of 2001, as compared to $25.2 million for the same period in 2000, an increase of 22.5%. The net yield on earning assets rose for the first six months of 2001 to 3.63% from 3.39% in 2000. This increase resulted from total earning assets increasing $218.8 million or 14.6% while interest bearing liabilities increased only $153.7 million or 11.7% for the first six months of 2001 over 2000's level, in part due to the acquisition of Gloucester. The Company was also aggressive in lowering its overall cost of funds, which in turn, allowed it to realize a higher net interest margin. PROVISION FOR LOAN LOSSES. There was a provision for loan losses of $550,000 in the first six months of 2001 and $600,000 in the comparable period of 2000. Several factors were used to determine that a provision was necessary in 2001. Among them were the level of charge-offs and recoveries and the mix and level of loan growth. Nonaccruing loans increased by 22.0% during the first six months of 2001 while overdue loans increased significantly over the same period. In addition, net loan charge-offs totaled $67,000 in the first six months of 2000 as compared to net recoveries of $120,000 in the first six months of 2001. NON-INTEREST INCOME. Andover recorded gains from sales of assets held for sale and investments available for sale totaling $387,000 and $24,000 in 2001 and 2000, respectively. Mortgage banking losses totaled $47,000 during the first six months of 2001 as compared to income of $842,000 in the corresponding period of 2000. This was primarily due to provisions of $247,000 taken in the first six months of 2001. The first six months of 2000 realized partial reversals in the valuation allowance on mortgage servicing assets, resulting in an increase to income and totaled $500,000. Total amortization amounted to $1.3 million for the first six months of both 2001 and 2000. There were charge-offs on mortgage servicing assets in the first six months of 2001 totaling $115,000 versus no charge-offs for the six month period ending June 30, 2000. Other income totaled $2.5 million and $1.8 million in the first six months of 2001 and 2000, respectively, primarily due to increased deposit fee income. The six months of 2001 includes a net loss of $79,000 from the sale of various equipment made obsolete in the consolidation of the data processing functions of Andover Bank and GBT. NON-INTEREST EXPENSE. Non-interest expenses increased 32.3% to $16.7 million in the first six months of 2001 primarily due to an increase in salaries and employee benefits and the recording of merger expenses. Salaries and benefits increased $1.3 million or 19.3% to $8.3 million as of June 30, 2001. The purchase of Gloucester contributed approximately $600,000 in increased salaries and benefits. In addition, increased costs incurred from staffing a new branch 17 20 in Derry, New Hampshire, company-wide merit increases and enhanced benefit plans contributed to the increased costs in 2001. Office occupancy and equipment increased 20.0% to $2.0 million in 2001 primarily resulting from the acquisition of Gloucester and the new branch opened in Derry, New Hampshire. Data processing expenses increased 34.3% to $1.8 million resulting from the Company's deposit growth, the acquisition of Gloucester and increased expenses relating to the newer product delivery channels. Professional fees increased 5.7% to $538,000 in 2001 from $509,000 in 2000 due to an increase in legal expenses. Marketing expenses decreased 12.6% to $458,000 primarily due to decreased advertising for discretionary promotions and direct mail solicitations. Merger costs of $1.1 million pre-tax were recorded and related to the previously announced merger with Banknorth. Amortization of goodwill was $300,000 for the first six months of 2001 and resulted from the acquisition of Gloucester in the third quarter of 2000. Other operating expenses increased 36.8% to $2.2 million primarily due to the acquisition of Gloucester as well as increased costs of running a larger, more geographically diverse company. INCOME TAX EXPENSE. The Company recorded an income tax expense of $6.4 million for the first six months of 2001 and $5.4 million for the first six months of 2000. This corresponds to an effective tax rate of 38.4% and 36.5% respectively, for the first six months of 2001 and 2000. The higher effective tax rate in 2001 was primarily due to the nondeductibility of the goodwill amortization and a portion of the merger expenses. 18 21 PART II - OTHER INFORMATION Page ---- ITEM 1 Legal Proceedings Not Applicable -- ITEM 2 Changes in Securities and Use of Proceeds Not Applicable -- ITEM 3 Defaults Upon Senior Securities Not Applicable -- ITEM 4 Submission of Matters to a Vote of Security Holders Not applicable -- ITEM 5 Other Information None -- ITEM 6 Exhibits and Reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K -- A Form 8-K was filed with the Securities and Exchange Commission on June 19, 2001. Information contained in the Form 8-K included the text of the Press Release issued by Andover Bancorp, Inc. on June 11, 2001 announcing the Agreement and Plan of Merger with Banknorth Group, Inc. dated as of June 11, 2001. 19 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ANDOVER BANCORP, INC. August 10, 2001 /s/ Gerald T. Mulligan ---------------------------- Gerald T. Mulligan President and Chief Executive Officer August 10, 2001 /s/ Joseph F. Casey ---------------------------- Joseph F. Casey Chief Financial Officer and Treasurer 20

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