SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarterly period ended March 31, 2002
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission File Number 000-23129
NORTHWAY FINANCIAL, INC
(Exact name of registrant as specified in its charter)
New Hampshire 04-3368579
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9 Main Street
Berlin, New Hampshire 03570
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(Address of principal executive offices) (Zip Code)
(603) 752-1171
(Registrant's telephone number, including area code)
No Change
(Former name, former address and former fiscal year, if changed since last year)
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 twelve (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 ninety (90) days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date. At April 30, 2002, there were
1,516,074 shares of common stock outstanding, par value $1.00 per share.
INDEX
NORTHWAY FINANCIAL, INC.
PART I. FINANCIAL INFORMATION PAGE
Item 1.
Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Income for the Three Months
Ended March 31, 2002 and 2001 (Unaudited)........................... 3
Condensed Consolidated Balance Sheets at March 31, 2002 (Unaudited)
and December 31, 2001............................................... 4
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2002 and 2001 (Unaudited)........................... 5
Notes to Condensed Consolidated Financial Statements (Unaudited).... 6
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 8
Item 3.
Quantitative and Qualitative Disclosures about Market Risk.......... 11
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings................................................... 12
Item 2.
Changes in Securities............................................... 12
Item 3.
Defaults Upon Senior Securities..................................... 12
Item 4.
Submission of Matters to a Vote of Security Holders................. 12
Item 5.
Other Information................................................... 12
Item 6.
Exhibits and Reports on Form 8-K.................................... 12
Signatures................................................................. 13
PART 1. FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements.
NORTHWAY FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months
Ended March 31,
(Dollars in thousands, except per share data) 2002 2001
-------------------------------------------------------------------------------
Interest and dividend income:
Loans $7,104 $8,258
Interest on debt securities:
Taxable 581 691
Tax-exempt 64 107
Dividends 58 105
Federal funds sold 47 20
Interest bearing deposits -- 1
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Total interest and dividend income 7,854 9,182
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Interest expense:
Deposits 1,850 3,319
Borrowed funds 685 762
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Total interest expense 2,535 4,081
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Net interest and dividend income 5,319 5,101
Provision for loan losses 225 225
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Net interest and dividend income after
provision for loan losses 5,094 4,876
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Noninterest income:
Service charges and fees on deposit accounts 309 289
Securities gains, net 246 33
Other 397 283
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Total noninterest income 952 605
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Noninterest expense:
Salaries and employee benefits 2,380 2,139
Office occupancy and equipment 763 731
Amortization of unidentifiable intangible assets 164 175
Other 1,082 996
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Total noninterest expense 4,389 4,041
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Income before income tax expense 1,657 1,440
Income tax expense 574 438
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Net income $1,083 $1,002
===================
Comprehensive net income $ 714 $1,110
===================
Per share data:
Earnings per common share $ 0.72 $ 0.65
Cash dividends declared $ 0.17 $ 0.17
Weighted average number of common shares 1,511,424 1,541,377
The accompanying notes are an integral part of these condensed consolidated
financial statements.
NORTHWAY FINANCIAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Mar. 31, Dec. 31,
(Dollars in thousands) 2002 2001
-------------------------------------------------------------------------------
(Unaudited)
Assets
Cash and due from banks and interest bearing deposits $ 13,867 $ 22,741
Federal funds sold 7,700 6,900
Securities available-for-sale 60,057 60,276
Loans held-for-sale 922 2,026
Loans 395,858 400,316
Less: allowance for loan losses 4,712 4,642
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Loans, net 391,146 395,674
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Other real estate owned -- 22
Accrued interest receivable 2,308 2,237
Deferred income tax asset, net 1,916 1,861
Premises and equipment, net 11,421 11,485
Unidentifiable intangible assets 7,915 8,080
Other assets 2,789 2,637
-----------------------
Total assets $500,041 $513,939
=======================
Liabilities and Stockholders' Equity
Liabilities:
Interest bearing deposits $337,182 $349,994
Noninterest bearing deposits 57,584 62,846
Securities sold under agreements to repurchase 7,933 8,155
Long-term Federal Home Loan Bank advances 48,028 48,028
Other liabilities 5,476 1,577
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Total liabilities 456,203 470,600
-----------------------
Stockholders' equity:
Preferred stock, $1.00 par value; 1,000,000
shares authorized; none issued -- --
Common stock, $1 par value; 9,000,000 shares
authorized; 1,731,969 issued at March 31, 2002
and December 31, 2001 and 1,512,824 outstanding
at March 31, 2002 and 1,511,324 outstanding at
December 31, 2001 1,732 1,732
Surplus 2,102 2,101
Retained earnings 46,781 45,955
Treasury stock, at cost (219,145 and 220,645
shares, respectively) (5,823) (5,864)
Accumulated other comprehensive loss, net of tax (954) (585)
-----------------------
Total stockholders' equity 43,838 43,339
-----------------------
Total liabilities and stockholders' equity $500,041 $513,939
=======================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
NORTHWAY FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months
Ended March 31,
(Dollars in thousands) 2002 2001
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Cash flows from operating activities:
Net income $ 1,083 $ 1,002
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 225 225
Depreciation and amortization 455 437
Deferred income tax expense 187 --
Write-down of other real estate owned -- 3
Gains on sales of securities available-for-sale, net (246) (33)
Amortization of premiums & accretion of discounts
on securities, net 56 6
Increase (decrease) in unearned income, net 12 (6)
Gain on sales of other real estate owned and other
personal property, net (4) (12)
Net decrease (increase) in loans held-for-sale 1,104 (398)
Net change in other assets and other liabilities 3,647 (141)
---------------------
Net cash provided by operating activities 6,519 1,083
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Cash flows from investing activities:
Proceeds from sales of securities available-for-sale 5,880 3,957
Proceeds from maturities of securities
available-for-sale 5,684 19,061
Purchase of securities available-for-sale (11,766) (15,304)
Loan originations and principal collections, net 4,100 3,589
Recoveries of previously charged-off loans 59 42
Proceeds from sales of and payments received on
other real estate owned 26 15
Proceeds from sales of and payments received on
other personal property 161 128
Additions to premises and equipment (226) (315)
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Net cash provided by investing activities 3,918 11,173
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Cash flows from financing activities:
Net decrease in deposits (18,074) (10,203)
Advances from FHLB -- 4,000
Net decrease in short-term FHLB advances -- (2,950)
Net increase (decrease) in securities sold under
agreements to repurchase (222) 2,391
Exercise of stock options 42 --
Purchases of treasury stock -- (637)
Cash dividends paid (257) (261)
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Net cash used in financing activities (18,511) (7,660)
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Net increase (decrease) in cash and cash equivalents (8,074) 4,596
Cash and cash equivalents at beginning of period 29,641 15,401
---------------------
Cash and cash equivalents at end of period $21,567 $19,997
=====================
Supplemental disclosure of cash flows:
Interest paid $ 2,761 $ 4,483
=====================
Taxes paid $ 70 $ --
=====================
Loans transferred to other real estate owned $ -- $ 24
=====================
Loans transferred to other personal property $ 132 $ 134
=====================
Carrying amount of held-to-maturity securities
transferred to available-for-sale $ -- $ 2,752
=====================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
NORTHWAY FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
(Unaudited)
1. Basis of Presentation.
The unaudited condensed consolidated financial statements of Northway
Financial, Inc. and its two wholly-owned bank subsidiaries (collectively, "the
Company") included herein have been prepared by the Company in accordance with
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP") have been condensed or omitted in accordance
with such rules and regulations. The Company, however, believes that the
disclosures are adequate to make the information presented not misleading. The
amounts shown reflect, in the opinion of management, all adjustments necessary
for a fair presentation of the financial statements for the periods reported.
The results of operations for the three month periods ended March 31,
2002 and 2001 are not necessarily indicative of the results of operations to be
expected for the full year or any other interim periods. The interim financial
statements are meant to be read in conjunction with the Company's audited
financial statements presented in its Annual Report on Form 10-K for the fiscal
year ended December 31, 2001.
In preparing financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the balance sheet and revenues and expenses for
the reported periods. Actual results could differ from these estimates. Material
estimates that are particularly susceptible to change relate to the
determination of the allowance for loan losses.
The year-end condensed consolidated balance sheet data was derived from
audited financial statements, but does not include all disclosures required by
GAAP.
2. Impact of New Accounting Standards.
On January 1, 2001, the Company adopted Stated of Financial Accounting
Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and hedging activities, including certain derivative
instruments embedded in other contracts, and requires that an entity recognize
all derivatives as assets or liabilities in the balance sheet and measure them
at fair value. If certain conditions are met, an entity may elect to designate a
derivative as follows: (1) a hedge of the exposure to changes in the fair value
of a recognized asset or liability or an unrecognized firm commitment, (2) a
hedge of the exposure to variable cash flows of a forecasted transaction, or (3)
a hedge of the foreign currency exposure of an unrecognized firm commitment, an
available-for-sale security, a foreign currency denominated forecasted
transaction, or a net investment in a foreign operation. SFAS No. 133 generally
provides for matching the timing of the recognition of the gain or loss on
derivatives designated as hedging instruments with the recognition of the
changes in the fair value of the item being hedged. Depending on the type of
hedge, such recognition will be either net income or other comprehensive income.
For a derivative not designated as a hedging instrument, changes in fair value
will be recognized in net income in the period of change. SFAS No. 133 allows
for a one-time change in the classification of securities in the investment
portfolio. Therefore, in conjunction with the adoption of SFAS No. 133, the
Company transferred all securities held-to-maturity to the available-for-sale
category at their market value of $2,731,000 as of January 1, 2001. In
connection with the transfer, the Company recorded in comprehensive income an
unrealized holding loss of approximately $13,000, net of tax effect. Under SFAS
No. 133, this transfer will not call into question the Company's intent to hold
other debt securities to maturity in the future. The adoption of SFAS No. 133
did not have any material impact on the Company's consolidated financial
statements.
SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, replaces SFAS No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
and rescinds SFAS No. 127, Deferral of the Effective Date of Certain Provisions
of FASB Statement No. 125. SFAS No. 140 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities. SFAS No. 140 provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. SFAS No. 140 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after March 31, 2001;
however, the disclosure provisions are effective for fiscal years ending after
December 15, 2000. The adoption of SFAS No. 140 has had no material impact on
the Company's consolidated financial statements.
SFAS No. 141, Business Combinations, improves the consistency of the
accounting and reporting of business combinations by requiring that all business
combinations be accounted for under a single method - the purchase method. Use
of the pooling-of-interests method is no longer permitted. SFAS No. 141 requires
that the purchase method be used for business combinations initiated after June
30, 2001. The adoption of this SFAS No. 141 has had no material impact on the
Company's consolidated financial statements.
SFAS No. 142, Goodwill and Other Intangible Assets, requires that
goodwill no longer be amortized to earnings, but instead be reviewed for
impairment. The amortization of goodwill ceases upon adoption of the statement,
which for most companies, was January 1, 2002. The adoption of SFAS No. 142 has
had no material impact on the Company's consolidated financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
The following discussion and analysis and the related condensed
consolidated financial statements relate to Northway Financial, Inc. and its two
wholly-owned subsidiaries, The Berlin City Bank and Pemigewasset National Bank
(collectively the "Company").
Forward-Looking Statements
Certain statements in this Form 10-Q are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements may include, but are not limited to, projections of
revenue, income or loss, plans for future operations and acquisitions, and plans
related to products or services of the Company. Such forward-looking statements
are subject to known and unknown risks, uncertainties and contingencies, many of
which are beyond the control of the Company. To the extent any such risks,
uncertainties and contingencies are realized, the Company's actual results,
performance or achievements could differ materially from anticipated results,
performance or achievements. Factors that might affect such forward-looking
statements include, among other things, overall economic and business
conditions, economic and business conditions in the Company's market areas,
interest rate fluctuations, the demand for the Company's products and services,
competitive factors in the industries in which the Company competes, changes in
government regulations, and the timing, impact and other uncertainties of future
acquisitions.
In addition to the factors described above, the following are some
additional factors that could cause our financial performance to differ from any
forward-looking statement contained herein; a) the current economic downturn
nation-wide and regionally, as well as a deterioration of local business
conditions, including termination of operations of a major employer in the
primary market area of the Berlin City Bank, b) a change in product mix
attributable to changing interest rates, customer preferences or competition; c)
a significant portion of the Company's loan customers are in the hospitality
business and therefore could be affected by weather conditions and/or high
gasoline prices; and d) the effectiveness of advertising, marketing and
promotional programs.
The words "believe," "expect," "anticipate," "intend," "estimate,"
"project," or the negative of such terms and other expressions which are
predictions of or indicate future events and trends and which do not relate to
historical matters identify forward-looking statements. Reliance should not be
placed on forward-looking statements because they involve known or unknown
risks, uncertainties or other factors, which may cause the actual results,
performance or achievements of the Company to differ materially from anticipated
future results, performance or achievements expressed or implied by such
forward-looking statements. The Company undertakes no obligation to publicly
update or revise any forward-looking statement, whether as a result of new
information, future events or otherwise.
Although the Company has attempted to list comprehensively the factors
which might affect forward-looking statements, the Company wishes to caution
investors that other factors may in the future prove to be important in
affecting the Company's results of operations. New factors emerge from time to
time and it is not possible for management to anticipate all of such factors,
nor can it assess the impact of each such factor, or combination of factors,
which may cause actual results to differ materially from forward-looking
statements.
Financial Condition
The Company's total assets at March 31, 2002 were $500.0 million
compared to $513.9 million at December 31, 2001, a decrease of $13.9 million.
Net loans, including loans held-for-sale, decreased $5.6 million to $392.1
million. Cash and cash equivalents decreased $8.1 million to $21.6 million as a
result of a decrease in vault cash as well as a decrease in Federal Reserve
uncollected balances. Deposits decreased $18.1 million primarily due to lower
DDA and time deposits. Total stockholders' equity increased $0.5 million from
$43.3 million at December 31, 2001 to $43.8 million at March 31, 2002. The
increase in stockholders' equity was a result of net income of $1.1 million
partially offset by an increase in accumulated comprehensive loss of $0.4
million and dividends paid of $0.3 million.
The Company maintains an allowance for loan losses to absorb future
charge-offs of loans in the existing portfolio. The allowance is increased when
a loan loss provision is recorded as an expense. When a loan, or portion
thereof, is considered uncollectible, it is charged against this allowance.
Recoveries of amounts previously charged-off are added to the allowance when
collected. At March 31, 2002 the allowance for loan losses was $4.7 million, or
1.19% of total loans, compared to $4.6 million, or 1.16% of total loans at
December 31, 2001. The allowance for loan losses is based on an evaluation by
each bank's management and Board of Directors of current and anticipated
economic conditions, changes in the diversification, size and risk within the
loan portfolio, and other factors. An analysis of the allowance for loan losses
for the three-month periods ended March 31, 2002 and 2001 is as follows:
Three Months
Ended March 31,
(Dollars in thousands) 2002 2001
------------------------------------------------------------------------------
Balance at beginning of period $4,642 $4,354
-----------------
Charge-offs (214) (161)
Recoveries 59 42
-----------------
Net charge-offs (155) (119)
Provision for loan losses 225 225
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Balance at end of period $4,712 $4,460
=================
Nonperforming loans totaled $1.0 million as of March 31, 2002, compared
to $1.4 million at December 31, 2001. The ratio of nonperforming loans to total
loans was 0.25% as of March 31, 2002 compared to 0.35% at December 31, 2001 and
the ratio of nonperforming assets to total assets was 0.21% as of March 31, 2002
compared to 0.30% at December 31, 2001.
Results of Operations
The Company reported net income of $1,083,000, or $0.72 per common
share, for the three months ended March 31, 2002, compared to $1,002,000, or
$0.65 per common share, for the three months ended March 31, 2001. The increase
in net income for the quarter is primarily attributable to higher net interest
income and noninterest income partially offset by higher noninterest expense.
The increase in per share net income reflects these factors as well as a
reduction of common stock outstanding as a result of stock repurchased by the
Company since March 2001. Net interest and dividend income for the three months
ended March 31, 2002 increased $218,000 to $5,319,000 compared to $5,101,000 for
the first quarter of the prior year.
Noninterest income increased $347,000 to $952,000 in the first quarter
of 2002 compared to $605,000 in the first quarter of 2001. The increase was
primarily due to an increase in securities gains and loan extension fees, as
well as an increase in the recognition of FAS125 servicing asset income.
Noninterest expense increased $348,000 to $4,389,000 for the quarter
ended March 31, 2002 compared to the $4,041,000 recorded during the same period
last year primarily due to significant increases in pension and employee
insurance plan expenses over the same period last year. In addition, the
Littleton branch acquisition, which occurred during the fourth quarter of 2001,
resulted in an increase in salaries and employee benefits as well as occupancy
and other expense.
Income Tax Expense
The Company recognized income tax expense of $574,000 and $438,000 for
the three months ended March 31, 2002 and 2001, respectively. The effective tax
rates were 34.6% and 30.4% for those respective periods. The increase in the
effective tax rate is due to the fact that during 2001 the Company obtained a
number of State of New Hampshire tax credits related to economic development
grants and carried a larger percentage of tax exempt securities and loans versus
the amount carried this year.
Liquidity
Liquidity risk management refers to the Company's ability to raise
funds in order to meet existing and anticipated financial obligations. These
obligations to make payment include withdrawal of deposits on demand or at their
contractual maturity, the repayment of borrowings as they mature, funding new
and existing loan commitments as well as new business opportunities. Liquidity
may be provided through amortization, maturity or sale of assets such as loans
and securities available-for-sale, liability sources such as increased deposits,
utilization of the Federal Home Loan Bank ("FHLB") credit facility, purchased or
other borrowed funds, and access to the capital markets. Liquidity targets are
subject to change based on economic and market conditions and are controlled and
monitored by the Company's Asset/Liability Committee.
At the subsidiary bank level, liquidity is managed by measuring the net
amount of marketable assets after deducting pledged assets, plus lines of
credit, primarily with the FHLB, which are available to fund liquidity
requirements. Management then measures the adequacy of that aggregate amount
relative to the aggregate amount of liabilities deemed to be sensitive or
volatile. These include core deposits in excess of $100,000, term deposits with
short maturities, and credit commitments outstanding.
Additionally, the parent holding company requires cash for various
operating needs including dividends to shareholders, the stock repurchase
program, capital injections to the subsidiary banks, and the payment of general
corporate expenses. The primary sources of liquidity for the parent holding
company are dividends from the subsidiary banks.
Management believes that the Company's current level of liquidity and
funds availability from outside sources is sufficient to meet the Company's
needs.
Capital
The Company's Tier 1 and Total Risk Based Capital ratios were 9.37% and
10.59%, respectively, at March 31, 2002. The Company's Tier 1 leverage ratio at
March 31, 2002 was 7.30%. As of March 31, 2002, the capital ratios of the
Company and Pemigewasset National Bank exceeded the minimum capital ratio
requirements of the "well-capitalized" category under the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"). Berlin City Bank's
capital ratios as of March 31, 2002 exceeded the minimum capital ratio
requirements of the "adequately-capitalized" category under FDICIA. This was the
result of the branch acquisition during the fourth quarter of 2001, which caused
Total Risk Based Capital to fall below the "well-capitalized" level.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Since December 31, 2001, there have been no material changes in the
Company's quantitative and qualitative disclosures about market risk. A fuller
description of the quantitative and qualitative disclosures about market risk
was provided by the Company on pages 8 through 18 of the Company's 2001 Annual
Report to Stockholders filed as Exhibit 13 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2001.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Amended and Restated Articles of Incorporation of Northway
Financial Inc. (incorporated by reference to Exhibit 3.1 to
Registration Statement No. 333-33033).
3.2 By-laws of Northway Financial Inc. (incorporated by reference
to Exhibit 3.2 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997).
4 Form of Certificate representing the Company Common Stock
(reference is also made to Exhibits 3.1 and 3.2) (incorporated
by reference to Exhibit 4 to Registration Statement No.
333-33033).
(b) The Company did not file any Reports on Form 8-K during the quarter
ended March 31, 2002
SIGNATURES
Pursuant to 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.
NORTHWAY FINANCIAL, INC.
May 14, 2002 BY: \S\ William J. Woodward
------------------------
William J. Woodward
President & CEO
(Principal Executive Officer)
May 14, 2002 BY: \S\ Richard P. Orsillo
------------------------
Richard P. Orsillo
Senior Vice President & CFO
(Principal Financial and
Accounting Officer)