investor relations overview

A Message from the President & CEO

I am pleased to report that we had a strong earnings year for 2018.  Net income was $3,823,456, or $1.57 per share, which was virtually identical to last year’s earnings of $3,833,719, or $1.56 per share.  Return on average assets was 0.95% and return on average equity was 9.75%, equaling or exceeding results from 2017.  2017 earnings were favorably impacted by adjustments to our deferred tax assets and liabilities as a result of the overhaul to the US tax code.  That adjustment resulted in a reduction of our income tax expense paid in that year. Lower nominal tax rates for corporations favorably impacted earnings for 2018. 

2018 proved to be a challenging year for the banking industry and a challenging year for The Andover Bank.  The Federal Reserve Bank increased short-term interest rates 9 times since 2015, and increased rates in all 4 quarters of 2018.  Despite these aggressive moves, long-term rates have steadily declined.  As a result, we are operating in an environment where short and long-term rates are essentially identical, putting pressure on our ability to reinvest deposits at an acceptable spread.  Additionally, we’ve experienced increased competition from banks, credit unions, and non-bank financial institutions as core deposits are in high demand to fund loans primarily outside of our market, and are considerably cheaper than wholesale borrowings.  This type of increased competition is normal during the late stages of an economic expansion and we expect these factors, along with a shift in our deposit mix from lower yielding deposits to higher yielding deposits, to negatively impact our earnings in 2019.  However, our business model has always taken economic cycles into consideration and has driven our conservative, common-sense approach to our risk management practices.  Because of this approach, we have performed extremely well through weaker economic times and feel we are very well positioned to handle any downturn in the economy. 

I’m happy to report the condition of our balance sheet is very strong.  Total assets declined by $15.5 million, or 3.8%, net loans grew $5.4 million, or 2.7%, deposits declined $4.6 million, or 1.4%, and borrowings declined $9.8 million, or 27.2%.  Total assets declined by choice as we decided strategically it would be prudent for the bank to not reinvest excess deposits and other maturing assets into lower yielding investments, but instead to pay down existing debt that became very expensive as a result of the short-term interest rate increases previously mentioned.  This contributed to the majority of shrinkage in assets.  The decline in deposits occurred primarily from larger “hot” deposits that flow to the financial institution that is paying the highest rate.  We understand these relationships well and compete for these deposits only when it is in our best interests to do so.  As these deposits exited the bank, we concentrated our efforts on core relationships that have been loyal to the bank over the years.  In fact, thanks to increased marketing efforts, we experienced growth in core deposits that have been so important to our strong deposit base.  The growth in loans came primarily from growth in our commercial portfolio, attributable mainly to loans to governmental bodies.  Consumer lending has been stable, at best, but we are cautiously optimistic for an increase in demand in 2019 to complement expected continued growth in the commercial portfolio.   

As previously mentioned, our conservative, common-sense approach to banking has helped us survive while many other community banks have disappeared.  A large part of our success is based on the soundness of our loan portfolio.  Our credit quality remains outstanding.  Total delinquency of 0.40% again remained considerably better than our peer group.  This is important because at some point in the not too distant future, the economy will turn, and credit problems will grow for all banks.  However, our vulnerability to credit cycles has historically been less than that of other small banks.  Poor credit quality is often the driving force behind banks losing their independence and I’m incredibly proud our of credit philosophy set forth by the board of directors and our discipline in administering the credit process.   

As a result of our solid earnings and healthy capital position, we continued our strong dividend performance with a total dividend declared for 2018 of $0.725 per share, for an increase of 1.40% over the $0.715 dividend declared for 2017.  I am pleased to report that this is the 36th consecutive year of paying a dividend, as this demonstrates the long-term financial strength of The Andover Bank. 

In my 32 years in the financial service industry, I know of one constant, and that is change.  Our traditional approach to community banking has been based on and around our branch network.  The branch was a community cornerstone vital to our relationship with our clients.  However, the once subtle drift from traditional banking methods to digital, remote methods is subtle no more.  The new world of banking is now driven by digital capabilities that threaten the very core of community banking.  Our competition that I mentioned earlier, driven by scale, tax advantages, and financial rules instituted after the crisis, among other things, are now better able to compete against our once superior, face-to-face driven model.  Banking has gone digital, and the bank, indeed any bank, has to embrace this change or face the consequence of obsolescence. Smartphones and digital platforms are driving the future of banking.  This is evidenced by the fact that last year more mortgage loans, one of our main product lines, were originated by non-bank lenders than banks in the United States. 

Management and the board of directors identified this trend many years ago and, as a result, began the journey to transform the bank from the “old world” traditional model to a new, hybrid one, based on ultimate client convenience.  You have seen the freshened, updated logo that we proudly unveiled recently.  However, this was just the last step in our transformation process that we have been working on since 2016.  I’m proud to report that we have updated our Mission Statement to better represent the work we have recently completed, instituted new service standards and client surveys, enhanced our product offerings and mobile technology, installed a Customer Relationship Management (CRM) system driving our enhanced marketing efforts, and unveiled our newly designed website and internet domain name change to a safer and more secure .Bank platform, all to better position ourselves to compete in this new digitally enhanced world that we live in today.  I feel strongly that these changes, combined with our strong traditional banking base, increase our ability to exceed client expectations and meet our main goal as a community bank:  independence.   

Community banking is a business philosophy built around local ownership and leadership, local decision-making with a long-term focus, a strong commitment to community involvement, and leading-edge technology needed in today’s competitive market.  A community bank is a collection of talented individuals who strive to make a lasting difference in the communities they serve. Due to this philosophy and our desire to continue strengthening the communities we serve, I’m excited to announce that we plan to increase your ownership opportunities through a Dividend Reinvestment Plan (DRIP) to be introduced later in 2019.  More details will be coming soon.  
It truly is an honor and a privilege to serve you, our shareholders, as your President & CEO.  Our continued success has been based on our business philosophies set forth by the board of directors, who provide exceptional guidance and foresight, our collection of talented individuals and greatest asset, our employees, and your loyalty in providing the necessary capital needed to serve the communities in which we operate.  Your continued confidence and support are greatly appreciated. 

Stephen E. Varckette
President and
Chief Executive Officer