UNITED STATES
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, 2005
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
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(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
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(Registrant's telephone number, including area code)
No Change
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(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 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 by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date. At April 22, 2005,
there were 1,507,574 shares of common stock outstanding, par value $1.00 per
share.
INDEX
NORTHWAY FINANCIAL, INC.
PART I. FINANCIAL INFORMATION PAGE
Item 1.
Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2005
(Unaudited) and December 31, 2004.........................................3
Condensed Consolidated Statements of Income for the Three Months
Ended March 31, 2005 and 2004 (Unaudited).................................4
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2005 and 2004 (Unaudited).................................5
Notes to Condensed Consolidated Financial Statements (Unaudited)..........6
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................10
Item 3.
Quantitative and Qualitative Disclosures About Market Risk...............13
Item 4.
Controls and Procedures..................................................14
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings........................................................15
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds..............15
Item 3.
Defaults Upon Senior Securities..........................................15
Item 4.
Submission of Matters to a Vote of Security Holders......................15
Item 5.
Other Information........................................................15
Item 6.
Exhibits ................................................................15
Signatures...................................................................17
PART 1. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements.
NORTHWAY FINANCIAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Mar. 31, Dec. 31,
(Dollars in thousands) 2005 2004
----------------------------------------------------------------------------------------------------------------
(Unaudited)
Assets:
Cash and due from banks and interest bearing deposits 12,036 $ 13,794
Federal funds sold - 10,975
Securities available-for-sale 100,227 101,133
Federal Home Loan Bank stock 5,515 5,515
Federal Reserve Bank stock 365 365
Loans held-for-sale 680 311
Loans, net before allowance for loan losses 464,991 474,706
Less: allowance for loan losses 5,312 5,204
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Loans, net 459,679 469,502
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Premises and equipment, net 13,605 13,701
Other real estate owned 10 -
Core deposit intangible 2,711 2,949
Goodwill 10,152 10,152
Other assets 10,942 10,021
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Total assets $615,922 $638,418
=======================
Liabilities and stockholders' equity:
Liabilities
Interest bearing deposits $373,074 $396,690
Noninterest bearing deposits 71,774 78,669
Short-term borrowings 20,994 11,268
Long-term debt 96,620 98,620
Other liabilities 4,205 3,661
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Total liabilities 566,667 588,908
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Stockholders' equity
Preferred stock, $1.00 par value; 1,000,000 shares authorized; none issued - -
Common stock, $1.00 par value; 9,000,000 shares authorized; 1,731,969 issued
at March 31, 2005 and December 31, 2004 and 1,507,574 outstanding
at March 31, 2005 and 1,503,574 outstanding at December 31, 2004 1,732 1,732
Surplus 2,064 2,075
Retained earnings 53,051 52,484
Treasury stock, at cost (224,395 shares at March 31, 2005 and 228,395 shares at
December 31, 2004) (5,968) (6,090)
Accumulated other comprehensive loss, net of tax (1,624) (691)
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Total stockholders' equity 49,255 49,510
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Total liabilities and stockholders' equity $615,922 $638,418
=======================
The accompanying notes are an integral part of these condensed consolidated financial statements.
NORTHWAY FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months
Ended Mar. 31,
(Dollars in thousands, except per share data) 2005 2004
------------------------------------------------------------------------------
Interest and dividend income:
Loans $ 6,705 $ 6,625
Interest on debt securities:
Taxable 1,009 643
Tax-exempt 30 31
Dividends 73 47
Federal funds sold 16 25
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Total interest and dividend income 7,833 7,371
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Interest expense:
Deposits 811 812
Borrowed funds 1,085 1,015
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Total interest expense 1,896 1,827
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Net interest and dividend income 5,937 5,544
Provision for loan losses 75 150
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Net interest and dividend income after
provision for loan losses 5,862 5,394
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Noninterest income:
Service charges and fees on deposit accounts 540 445
Securities gains, net 71 459
Gain on sales of loans, net 49 39
Other 327 353
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Total noninterest income 987 1,296
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Noninterest expense:
Salaries and employee benefits 2,883 3,000
Office occupancy and equipment 972 962
Amortization of core deposit intangible 238 238
Other 1,519 1,408
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Total noninterest expense 5,612 5,608
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Income before income tax expense 1,237 1,082
Income tax expense 414 353
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Net income $ 823 $ 729
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Comprehensive net (loss) income $ (110) $ 743
========================
Per share data:
Basic earnings per common share $ 0.55 $ 0.49
Earnings per common share assuming dilution $ 0.54 $ 0.49
Cash dividends declared $ 0.17 $ 0.17
Weighted average number of common shares 1,504,018 1,499,574
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 Mar. 31,
(Dollars in thousands) 2005 2004
------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 823 $ 729
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 75 150
Depreciation and amortization 582 601
Gains on sales of securities available-for-sale, net (71) (459)
Loss on sale, disposal and write-down of premises and equipment 1 -
Amortization of premiums and accretion of discounts on securities, net 13 36
Decrease in unearned income, net (59) (65)
Amortization of discount on loans acquired 37 26
Loss on sales of other real estate owned and other personal property, net - 2
(Increase) decrease in loans held-for-sale (369) 116
Net change in other assets and other liabilities 357 1,049
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Net cash provided by operating activities 1,389 2,185
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Cash flows from investing activities:
Proceeds from sales of securities available-for-sale 1,848 5,854
Proceeds from maturities of securities available-for-sale 2,049 6,955
Purchases of securities available-for-sale (4,477) (5,339)
Purchases of Federal Home Loan Bank stock - (150)
Loan originations and principal collections, net 9,409 (6,491)
Recoveries of previously charged-off loans 124 65
Proceeds from sales of and payments received on other personal property 104 145
Additions to premises and equipment (249) (314)
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Net cash provided by investing activities 8,808 725
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Cash flows from financing activities:
Net decrease in deposits (30,511) (12,939)
Net increase in overnight FHLB Advances 11,475 95
Net decrease in securities sold under agreements to repurchase (1,749) (295)
Advances from FHLB - 20,000
Repayment of FHLB Advances (2,000) -
Exercise of stock options, net of tax benefit 111 -
Cash dividends paid (256) (255)
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Net cash (used in) provided by financing activities (22,930) 6,606
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Net (decrease) increase in cash and cash equivalents (12,733) 9,516
Cash and cash equivalents at beginning of period 24,769 31,085
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Cash and cash equivalents at end of period $12,036 $ 40,601
===================
Supplemental disclosure of cash flows:
Interest paid $ 1,731 $ 1,848
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Taxes paid $ - $ 100
===================
Loans transferred to other real estate owned $ 10 $ -
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Loans transferred to other personal property $ 226 $ 159
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Amount due to broker for pending securities purchases $ - $10,082
===================
The accompanying notes are an integral part of these condensed consolidated financial statements.
NORTHWAY FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
1. Basis of Presentation
The unaudited condensed consolidated financial statements of Northway
Financial, Inc. and its wholly-owned subsidiaries, The Berlin City Bank and The
Pemigewasset National Bank of Plymouth, New Hampshire (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,
2005 and 2004 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, 2004.
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. The
Company believes that the most critical accounting policies, which are those
that are most important to the portrayal of the Company's financial condition
and result of operations and require management's most difficult, subjective and
complex judgments, relate to the determination of the allowance for loan losses,
the impairment analysis of goodwill and core deposit intangibles, determination
of the expense and liability related to the Company's pension plan, and
determination of mortgage servicing rights.
The year-end condensed consolidated balance sheet data was derived from
audited financial statements, but does not include all disclosures required by
GAAP.
2. Stock-Based Compensation
As of March 31, 2005, the Company has a stock-based employee
compensation plan which is described more fully in its Annual Report on Form
10-K for the fiscal year ended December 31, 2004. The Company accounts for this
plan under the recognition and measurement principles of the Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under this plan had an
exercise price equal to the market value of the underlying common stock on the
date of the grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of Statement of Financial Accounting Standards ("SFAS 123R"), Share
Based Payment, to stock-based employee compensation.
($000 Omitted, except per share data)
Three Months
Ended Mar. 31,
2005 2004
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Net income As reported $823 $729
Deduct: Total stock-based employee compensation
expense determined under fair value based methods
awards, net of related tax effects - -
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Pro forma $ 823 $ 729
===== =====
Earnings per common share As reported $0.55 $0.49
Pro forma $0.55 $0.49
Earnings per common share (assuming dilution) As reported $0.54 $0.49
Pro forma $0.54 $0.49
3. Impact of New Accounting Standards.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"), in an effort to expand upon and
strengthen existing accounting guidance that addresses when a company should
include in its financial statements the assets, liabilities and activities of
another entity. In December 2003, the FASB revised Interpretation No. 46, also
referred to as Interpretation 46 (R) ("FIN 46(R)"). The objective of this
interpretation is not to restrict the use of variable interest entities but to
improve financial reporting by companies involved with variable interest
entities. Until now, one company generally has included another entity in its
consolidated financial statements only if it controlled the entity through
voting interests. This interpretation changes that, by requiring a variable
interest entity to be consolidated by a company only if that company is subject
to a majority of the risk of loss from the variable interest entity's activities
or entitled to receive a majority of the entity's residual returns or both. The
Company is required to apply FIN 46, as revised, to all entities subject to it
no later than the end of the first fiscal year or interim period ending after
March 15, 2004. However, prior to the required application of FIN 46, as
revised, the Company shall apply FIN 46 or FIN 46 (R) to those entities that are
considered to be special-purpose entities as of the end of the first reporting
period ending after December 15, 2003. The adoption of this interpretation did
not have a material effect on the Company's consolidated financial statements.
In December 2003, the FASB issued SFAS No. 132 (revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement Benefits - an
amendment of SFAS No. 87, SFAS No. 88 and SFAS No. 106" ("SFAS No. 132 (revised
2003)"). This Statement revises employers' disclosures about pension plans and
other postretirement benefit plans. It does not change the measurement or
recognition of those plans required by SFAS No. 87, "Employers' Accounting for
Pensions," SFAS No. 88, "Employers' Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination Benefits," and SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions."
This Statement retains the disclosure requirements contained in SFAS No. 132,
"Employers' Disclosures About Pensions and Other Postretirement Benefits," which
it replaces. It requires additional disclosures to those in the original
Statement 132 about assets, obligations, cash flows and net periodic benefit
cost of defined benefit pension plans and other defined benefit postretirement
plans. This Statement is effective for financial statements with fiscal years
ending after December 15, 2003 and interim periods beginning after December 15,
2003. Adoption of this Statement did not have a material impact on the Company's
consolidated financial statements.
In December 2003, the American Institute of Certified Public
Accountants ("AICPA") issued Statement of Position 03-3 ("SOP 03-3") "Accounting
for Certain Loans or Debt Securities Acquired in a Transfer." SOP 03-3 requires
loans acquired through a transfer, such as a business combination, where there
are differences in expected cash flows and contractual cash flows due in part to
credit quality be recognized at their fair value. The excess of contractual cash
flows over expected cash flows is not to be recognized as an adjustment of
yield, loss accrual, or valuation allowance. Valuation allowances cannot be
created nor "carried over" in the initial accounting for loans acquired in a
transfer on loans subject to SFAS 114, "Accounting by Creditors for Impairment
of a Loan." This SOP is effective for loans acquired in fiscal years beginning
after December 15, 2004, with early adoption encouraged. The Company does not
believe the adoption of SOP 03-3 will have a material impact on the Company's
financial position or results of operations.
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123R"). This Statement revises FASB Statement No.
123, "Accounting for Stock Based Compensation" and supersedes APB Opinion No.
25, "Accounting for Stock Issued to Employees," and its related implementation
guidance. SFAS 123R requires that the cost resulting from all share-based
payment transactions be recognized in the financial statements. It establishes
fair value as the measurement objective in accounting for share-based payment
arrangements and requires all entities to apply a fair-value based measurement
method in accounting for share-based payment transactions with employees except
for equity instruments held by employee share ownership plans. This Statement
was effective for the Company as of the beginning of the first interim or annual
reporting period that begins after June 15, 2005. However since the issuance of
SFAS 123R the SEC has delayed the effective date. The new effective date for the
Company is January 1, 2006. The Company does not believe the adoption of this
Statement will have a material impact on the Company's financial position or
results of operations.
4. Pension Benefits.
The following summarizes the net periodic benefit cost for the three months
ended March 31:
2005 2004
---- ----
Service cost $134 $118
Interest cost 86 76
Expected return on plan assets (91) (72)
Amortization of prior service cost (21) (21)
Recognized net actuarial loss 34 41
Amortization of transition asset - -
Special recognition of prior service costs - -
---- ----
Net periodic benefit cost $142 $142
==== ====
The Company previously disclosed in its consolidated financial
statements for the year ended December 31, 2004 that it expected pension plan
contributions to be $745,000 in 2005. During the first quarter 2005, the Company
contributed $295,000 to the pension plan and anticipates contributing an
additional $450,000 on or about December 31, 2005.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
----------------------------------------------------------------------
The following discussion and analysis and the related condensed
consolidated financial statements relate to 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 can be identified by the use of the words "expect,"
"believe," "estimate," "will" and other expressions which predict or indicate
future trends and which do not relate to historical matters. Forward-looking
statements may include, but are not limited to, expectations regarding the
impact on net income of withdrawing from the indirect automobile lending line of
business, projections of revenue, income or loss, expectations for impact of new
products on noninterest income and expense, 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. The Company's actual results could differ materially
from those projected in the forward-looking statements as the result of, among
other factors, changes in interest rates, changes in the securities or financial
markets, a deterioration in general economic conditions on a national basis or
in the local markets in which the Company operates, including changes in local
business conditions resulting in rising unemployment and other circumstances
which adversely affect borrowers' ability to service and repay our loans,
changes in loan defaults and charge-off rates, reduction in deposit levels
necessitating increased borrowing to fund loans and investments, the passing of
adverse government regulation, changes in assumptions used in making such
forward-looking statements, as well as those factors set forth in the Company's
Annual Report on Form 10-K for the year ending December 31, 2004, and in the
Company's other filings with the Securities & Exchange Commission. These
forward-looking statements were based on information, plans and estimates at the
date of this Form 10-Q, 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.
Financial Condition
The Company's total assets at March 31, 2005 were $615,922,000 compared
to $638,418,000 at December 31, 2004, a decrease of $22,496,000. Net loans,
including loans held-for-sale, decreased $9,454,000 to $460,359,000. This was
due primarily to a decrease in indirect consumer loans, the result of our
decision to exit this line of business effective during the third quarter of
2004. The decrease in indirect consumer loans was partially offset by increases
in both residential mortgage loans and direct consumer loans. Cash and cash
equivalents decreased $12,733,000 to $12,036,000 compared to $24,769,000 at
December 31, 2004, due primarily to a decrease in federal funds sold.
Deposits decreased $30,511,000 to $444,848,000 from $475,359,000 at
December 31, 2004 due to a decrease in all deposit categories except savings
deposits. Some of this decrease is attributable to short-term deposits held by
municipal depositors at year-end that were withdrawn during the first quarter of
2005. Short-term borrowings increased $9,726,000 due to an increase in overnight
FHLB advances. Long-term Federal Home Loan Bank advances decreased $2,000,000 to
$76,000,000 from $78,000,000 at December 31, 2004 due to the maturity of one
advance. Total stockholders' equity decreased $255,000 to $49,255,000 at March
31, 2005 from $49,510,000 at December 31, 2004 due primarily to the recording of
an additional comprehensive loss associated with securities available-for-sale
of $933,000 as well as dividends paid of $256,000 which were partially offset by
net income of $823,000.
The Company maintains an allowance for loan losses to absorb
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, 2005 the allowance for loan losses was $5,312,000, or
1.14% of total loans, compared to $5,204,000, or 1.10% of total loans at
December 31, 2004. 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. The composition of the allowance for loan
losses for the three-month periods ended March 31, 2005 and 2004 is as follows:
Three Months
Ended Mar. 31,
(Dollars in thousands) 2005 2004
---------------------------------------------------------------------
Balance at beginning of period $5,204 $5,036
------------------
Charge-offs (91) (194)
Recoveries 124 65
------------------
Net charge-offs 33 (129)
Provision for loan losses 75 150
------------------
Balance at end of period $5,312 $5,057
==================
Nonperforming loans totaled $2,981,000 as of March 31, 2005, compared
to $2,867,000 at December 31, 2004. The ratio of nonperforming loans to loans
net of unearned income was 0.64% as of March 31, 2005 compared to 0.60% at
December 31, 2004. Nonperforming assets, which include nonperforming loans,
other real estate owned and other chattels owned, totaled $3,197,000 as of March
31, 2005, compared to $2,949,000 at December 31, 2004. The ratio of
nonperforming assets to total assets was 0.52% as of March 31, 2005 compared to
0.46% at December 31, 2004.
Results of Operations
The Company reported net income of $823,000, or $0.55 per common share,
for the three months ended March 31, 2005, compared to $729,000, or $0.49 per
common share, for the three months ended March 31, 2004, an increase of $94,000,
or 12.9%.
Net interest and dividend income for the first quarter increased
$393,000, or 7.1%, to $5,937,000 compared to $5,544,000 for the first quarter of
2004. This was the result of an increase of 12 basis points in the net interest
margin as well as a $23,119,000 increase in average earning assets. These
improvements were due in part to the fact that during the second quarter of
2004, the Company deployed a leverage strategy which resulted in an increase in
mortgage backed securities of $20,000,000, which was funded by intermediate term
FHLB advances at an attractive spread. Further, amortization from the indirect
automobile line of business was redeployed into higher yielding residential
mortgage loans and commercial loans.
The provision for loan losses decreased $75,000 to $75,000 for the
first quarter of 2005 compared to $150,000 for the first quarter of 2004. The
provision for loan losses is based upon a review of the adequacy of the
allowance for loan losses, which is conducted on a quarterly basis. This review
is based upon many factors including the risk characteristics of the portfolio,
trends in loan delinquencies, and an assessment of existing economic conditions.
In addition, various regulatory agencies, as part of their examination process,
review the banks' allowances for loan losses and such review may result in
changes to the allowance based on judgments different from those of management.
Noninterest income decreased $309,000 to $987,000 in the first quarter
of 2005 compared to $1,296,000 in the first quarter of 2004 due primarily to a
decrease in net securities gains. Net securities gains decreased $388,000 to
$71,000 in the first quarter of 2005 compared to $459,000 for the same period
last year. During 2004, the Company recorded securities gains as the result of
the sale of corporate bonds and equity securities. Service charges and fees on
deposit accounts increased $95,000 due principally to increases in overdraft fee
income. Other noninterest income decreased $26,000 due to the recording of a
loss on the cash surrender value of life insurance of $39,000 compared to a gain
of $49,000 for the same period last year. This was partially offset by an
increase in the commission on alternative investment products of $60,000 and an
increase in debit card income of $39,000 compared to a year ago.
Noninterest expense increased $4,000 to $5,612,000 for the quarter
ended March 31, 2005, compared to the $5,608,000 recorded during the same period
last year. Included in noninterest expense for the first quarter of 2005 is
approximately $150,000 of one-time expenses associated with moving the Company's
proof and item processing and data processing to the Berlin facility. This move
will streamline back room operations. Salaries and employee benefits decreased
$117,000 to $2,883,000 for the first quarter of 2005 compared to $3,000,000 for
the first quarter 2004. Salaries and employee benefits for 2005 include $87,000
of one-time expenses resulting from separation expenses associated with
relocation of proof operations and data processing from West Plymouth to Berlin.
Excluding these one-time expenses, salaries and benefits have decreased $204,000
compared to the same period last year. This decrease was due primarily to three
factors: i) a decrease in salaries expense and the related payroll taxes and
benefits, ii) a decrease in the expense relating to the liability of deferred
compensation on a Supplemental Employee Retirement Plan, and iii) an increase in
deferred loan origination costs related to FAS 91, which has the effect of
reducing salary expense. Other noninterest expense increased $111,000 over the
prior year due in large part to the one-time expenses associated with moving
proof and item processing and data processing.
Comprehensive Loss
The Company reported a comprehensive net loss of $110,000 for the
quarter ended March 31, 2005 compared to a comprehensive net income of $743,000
for the quarter ended March 31, 2004. Comprehensive income includes net income
plus or minus other items required to be reported directly in the equity section
of the balance sheet without having been recognized in the determination of net
income. These other components include the unrealized holding gains and losses
on available-for-sale securities and any adjustments recognized in accordance
with the Company's accounting for pensions as an additional liability not yet
recognized as net periodic benefit costs.
For the quarter ended March 31, 2005, the Company increased its
unrealized loss on available-for-sale securities by $933,000, net of tax. When
deducted from the quarterly net income of $823,000 the result is a comprehensive
net loss of $110,000. For the quarter ended March 31, 2004, the Company had
increased its unrealized gain on available-for-sale securities by $14,000. When
added to net income of $729,000, the result was comprehensive net income of
$743,000.
The major factor contributing to the increase in the unrealized loss on
available-for-sale securities for the quarter is the current interest rate
environment, which resulted in the reduction of the valuation of the Company's
bond portfolio. In accordance with FAS 115, the negative adjustment to
comprehensive income of $933,000 is not expected to impact net income as the
Company has the ability and intent to hold available-for-sale securities until
cost recovery occurs.
Income Tax Expense
The Company recognized income tax expense of $414,000 and $353,000 for
the three months ended March 31, 2005 and 2004, respectively. The effective tax
rates were 33.5% and 32.6% for those respective periods.
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, that 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, Northway Financial, Inc. 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 Northway Financial,
Inc. are dividends from its subsidiary banks and reimbursement for services
performed on behalf of the banks.
Management believes that the Company's current level of liquidity and
funds available from outside sources is sufficient to meet the Company's needs.
Capital
The Company's Tier 1 and Total Risk Based Capital ratios were 12.32%
and 14.57%, respectively, at March 31, 2005. The Company's Tier 1 leverage ratio
at March 31, 2005 was 8.72%. As of March 31, 2005, the capital ratios of the
Company and the subsidiary banks exceeded the minimum capital ratio requirements
of the "well-capitalized" category under the Federal Deposit Insurance
Corporation Improvement Act of 1991.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Since December 31, 2004, 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 24 and 25 of Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2004 and is incorporated by
reference as Exhibit 19 of this report.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
As required by Rule 13a-15 under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), the Company's management conducted an
evaluation with the participation of the Company's Chief Executive Officer and
Chief Financial Officer, regarding the effectiveness of the Company's disclosure
controls and procedures, as of the end of the last fiscal quarter. In designing
and evaluating the Company's disclosure controls and procedures, the Company and
its management recognize that any controls and procedures, no matter how well
designed and operated, can provide only a reasonable assurance of achieving the
desired control objectives, and management necessarily was required to apply its
judgment in evaluating and implementing possible controls and procedures. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that they believe the Company's disclosure controls and procedures are
reasonably effective to ensure that information required to be disclosed by the
Company in the reports it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. We intend to continue to
review and document our disclosure controls and procedures, including our
internal controls and procedures for financial reporting, and we may from time
to time make changes to the disclosure controls and procedures to enhance their
effectiveness and to ensure that our systems evolve with our business.
(b) Changes in internal controls.
There were no changes in the Company's internal controls over financial
reporting identified in connection with the Company's evaluation of its
disclosure controls and procedures that occurred during the Company's last
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds- 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
Exhibit Number Description of Exhibit
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).
10.1 Employment Agreement for William J. Woodward (incorporated by
reference to Exhibit 10.1 to the Company's Annual Report on Form
10-K for the year ended December 31, 1997).
10.2 Employment Agreement for Fletcher W. Adams (incorporated by
reference to Exhibit 10.2 to the Company's Annual Report on Form
10-K for the year ended December 31, 1997).
10.3 Amendment to the Employment Agreement for William J. Woodward.
(incorporated by reference to Exhibit 10.3 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1998).
10.4 Amendment to the Employment Agreement for Fletcher W. Adams.
(incorporated by reference to Exhibit 10.4 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1998).
10.5 Northway Financial, Inc. 1999 Stock Option and Grant Plan
(incorporated by reference to Exhibit 4.1 to Registration
Statement No. 333-83571 dated July 23,1999).
10.7 Form of Key Employee Agreement (incorporated by reference to
Exhibit 10.8 to the Company's Annual Report on Form 10-K for the
year ended 1999).
10.8 Supplemental Executive Retirement Plan. (incorporated by reference
to Exhibit 10.8 to the Company's Annual Report on Form 10-K for
the year ended December 31, 2003).
11 Statement re Computation of per share earnings
19 Company's quantitative and qualitative disclosure about market
risk as discussed in the Company's Annual Report of Form 10-K for
the fiscal year ended December 31, 2004.
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 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 9, 2005 BY:/S/William J. Woodward
------------------------------------
William J. Woodward
President & CEO
(Principal Executive Officer)
May 9, 2005 BY:/S/Richard P. Orsillo
------------------------------------
Richard P. Orsillo
Senior Vice President & CFO
(Principal Financial and Accounting
Officer)
INDEX OF EXHIBITS
Exhibit Number Description of Exhibit
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).
10.1 Employment Agreement for William J. Woodward (incorporated by
reference to Exhibit 10.1 to the Company's Annual Report on Form
10-K for the year ended December 31, 1997).
10.2 Employment Agreement for Fletcher W. Adams (incorporated by
reference to Exhibit 10.2 to the Company's Annual Report on Form
10-K for the year ended December 31, 1997).
10.3 Amendment to the Employment Agreement for William J. Woodward.
(incorporated by reference to Exhibit 10.3 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1998).
10.4 Amendment to the Employment Agreement for Fletcher W. Adams.
(incorporated by reference to Exhibit 10.4 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1998).
10.5 Northway Financial, Inc. 1999 Stock Option and Grant Plan
(incorporated by reference to Exhibit 4.1 to Registration
Statement No. 333-83571 dated July 23,1999).
10.7 Form of Key Employee Agreement (incorporated by reference to
Exhibit 10.8 to the Company's Annual Report on Form 10-K for the
year ended 1999).
10.8 Supplemental Executive Retirement Plan. (incorporated by reference
to Exhibit 10.8 to the Company's Annual Report on Form 10-K for
the year ended December 31, 2003).
11 Statement re Computation of per share earnings
19 Company's quantitative and qualitative disclosure about market
risk as discussed in the Company's Annual Report of Form 10-K for
the fiscal year ended December 31, 2004.
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002